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Published by the Consumer and Community Affairs Division

May 2007

Financial Access
and Insurance:
A Preliminary
Description of
Factors that Affect
Immigrants
Index
Around the District Page 1

Ways to Work: Putting Working Families Behind the Wheel
and Heading toward a Stronger Financial Future Page 11

Financial Access and Insurance: A Preliminary
Description of Factors that Affect Immigrants Page 2

Gift Cards – Facts and Cautions Regarding a Widely Used
Financial Product Page 14

CEDA: Celebrating 40 Years of Building Community
Partnerships to Improve Lives Page 8

Statewide CDFI Launches Midwest Expansion to Meet
Nonprofit Capital Needs: IFF Closes First Loans in
Wisconsin, Missouri, and Iowa Page 17

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Advisor
Alicia Williams
Managing Editor
Michael V. Berry
Assistant Editor/Production Manager
Mary Jo Cannistra
Contributing Editor
Jeremiah Boyle
Compliance Editor
Steven W. Kuehl
Economic Research Editor
Robin Newberger

Financial Access for Immigrants:
New Market Opportunities
Moline, IL
June 21, 2007
The Consumer and Community Affairs division of the Federal Reserve Bank
of Chicago will hold a conference entitled, “Financial Access for Immigrants:
New Market Opportunities.” This conference, cosponsored by The Latino
Connection and Black Hawk College, is being held at The Mark of the Quad
Cities on Thursday, June 21, 2007, and will explore the experience of the
many immigrants to the Quad Cities area in accessing and obtaining financial
services, including: savings and checking accounts, loans, business credit, credit
cards, and remittance services, as well as other issues surrounding the financial
access of immigrants, such as employment, housing, education, and social
services. The speakers for this event will be area bankers, academics, regulatory
specialists, immigrant leaders, and business representatives.
This event is geared toward bankers, employers of immigrant workers,
researchers and academics interested in immigrant and working-poor issues,
public and private agencies serving immigrants and low-income workers, and
other financial institutions involved in serving immigrant populations in the area.
We hope you will be able to join us for this important discussion. To register, or
for more information, visit www.chicagofed.org/community_development, or
contact Barbara Sims at (312) 322-8232.

Community Development in Rural Wisconsin
Stevens Point, WI
June 27, 2007
The Federal Reserve Bank of Chicago will partner with Community Bankers of
Wisconsin, CAP Services/WISCAP, University of Wisconsin – Stevens Point,
and the Wisconsin Housing and Economic Development Authority (WHEDA)
to host a conference on “Community Development in Rural Wisconsin.” The
conference will be held at the Holiday Inn Stevens Point Convention Center
on Wednesday, June 27, 2007. Topics discussed will include the Community
Reinvestment Act (CRA), and its implications for rural America; Midwest
agriculture and rural development issues; and sessions on community
development, economic opportunities, and financial education.
For registration and more information, visit www.chicagofed.org/community_
development, or contact Barbara Sims at (312) 322-8232.

Economic Development Editor
Harry Pestine

Visit the Web site of the Federal Reserve Bank of Chicago at:

Around the District

Illinois
CCLF receives Community Reinvestment Award

The Chicago Community Loan Fund’s (CCLF) executive
director, Calvin L. Holmes, was among those honored
with a Community Reinvestment Award from the
Woodstock Institute, at its 2007 Community Reinvestment
Reception on April 24, for his commitment to revitalizing
neighborhoods across the region.
CCLF is a local nonprofit lender that finances affordable
housing and community development activities benefiting
low- and moderate-income communities in Chicago.
For more information, visit www.cclfchicago.org or contact
CCLF at (312) 252-0440.

Indiana
Indianapolis lands 425 new Telecom jobs

Mayor Bart Peterson, Governor Mitch Daniels, Indiana
state legislators, and AT&T executives recently
announced a landmark deal that will bring 425 new
telecommunications jobs to Indianapolis.
The State of Indiana and City of Indianapolis worked in
partnership to successfully land the company’s call center,
defeating competitors in other states. AT&T will locate
a new call center at its Indianapolis headquarters. The
expansion is part of an initiative AT&T announced last
September involving the relocation of customer service
positions that had previously been outsourced.
For more information, visit www.indygov.org/eGov/Mayor/
PR/home.htm.

Iowa
$24.3 million awarded to communities across Iowa

On March 8, 2007, Michael Tramontina, interim director of
the Iowa Department of Economic Development (IDED),
announced the awarding of over $24 million from two
federal initiatives for communities across Iowa. The two
federal programs are the Community Development Block
Grant and HOME Investment Partnership. According to
IDED, these program funds will be awarded to 82 projects

across the state for purposes such as community facilities,
services, and infrastructure improvements, as well as the
creation or rehabilitation of affordable housing across
Iowa.
These funds also leverage more than $41 million in
local investments and provide nearly 600 construction
jobs across the state, said Tramontina. These grants are
funded through the U.S. Department of Housing and
Urban Development (HUD). According to IDED, in the last
25 years, HUD, through such grants, has funded 3,269
programs in 650 cities and counties, and provided more
than $873 million in funding in Iowa.
For more information, visit www.iowalifechanging.com or
call Iowa Department of Economic Development at (515)
242-4733.

Michigan
New MSHDA loan program for college graduates

The Michigan State Housing Development Authority
(MSHDA) created the Graduate Purchase Assistance
(GPA) program—a loan program designed specifically for
college graduates.
The GPA program offers a 30-year fixed rate conventional
loan to eligible college graduates.
For further information, visit www.michigan.gov/mshda.

Wisconsin
Port of Milwaukee award highlights its economic
development potential

On April 4, the Port of Milwaukee received a “Pacesetter
Award” from the U.S. Department of Transportation’s St.
Lawrence Seaway Development Corp. for increasing traffic
by almost 100 percent from 2005 to 2006. This was the
second largest increase on the Seaway. The award also
called attention to renewed focus on the fresh water ports
of the Great Lakes region as economic development
drivers.
For more information, visit www.city.milwaukee.gov.

Profitwise News and Views

May 2007



Research Review

Financial Access and Insurance:
A Preliminary Description of Factors that Affect Immigrants

By Robin Newberger

Introduction
Providing financial services to immigrants is a growing
business for bankers, and a growing area of study for
policymakers and researchers. While still an emerging
field, most of the attention to financial access thus far
has tended to focus on core banking products such as
bank account ownership, mortgage loans, and services
that immigrants tend to use more often than native-born,
such as wire transfers, that banks must market more
aggressively than in the past to attract (some) immigrant
groups. Insurance is another financial tool that, like
accounts and mortgages, helps households accumulate
and maintain assets, deal with unexpected financial
contingencies, avoid a bad credit rating (a common
result, after a medical crisis, among households having
inadequate or no health insurance), and otherwise have
an opportunity to participate in the financial mainstream.
Yet insurance has received comparatively little attention
in discussions about immigrants who do not or cannot
take full advantage of common financial products and
services. As is the case with many other financial products,
proportionately fewer immigrants have property/casualty,
life or health insurance than the native-born.
This article reports on participation rates by immigrants
and examines some factors that influence access to
health, property/casualty and life insurance. Although
these types of insurance have distinct purposes, the
discussion focuses on common barriers. An understanding
of the issues impacting immigrants’ decision to purchase
insurance may be important for insurers and insurance
brokers trying to reach (new) immigrant markets, as well
as for consumers and advocates whose mission is to
help people build and preserve their assets. Insurers and
consumer advocates have for many years (correctly) taken
the position that, like core bank products, insurance is
essential to financially stable households. Accordingly, it



Profitwise News and Views

May 2007

is important to understand factors that limit access to this
basic financial product.
Both banks and insurers are interested in immigrant
market trends. The number of immigrant households
is projected to increase from 35 to 42 million between
2000 and 2020 and will account for approximately onethird of all new households over this period.1 Immigrants
are already an important segment of the U.S. automobile
market: Hispanics will represent 20 percent of the total
used car market by 2010.2 Immigrants are also wellrepresented among business owners: about 10 percent
of immigrants are self-employed versus nine percent of
the native-born.3 In addition, the immigrant population is
dispersed across the United States, making access to
coverage an issue not just for a handful of places or states,
but for communities across the country.
The first section of this article presents data from various
surveys that quantify the use of automobile, home owner,
health, and life insurance among immigrants. The second
section discusses factors that affect coverage, first
summarizing findings from a handful of (health insurance)
studies, and next briefly reviewing various policies and
practices in the insurance industry that may also influence
access. The main sources of information for this article are
national surveys, trade publications, research studies on
insurance, and interviews with industry experts.

Coverage Rates for the Foreign- and Native-born
A limited amount of data is available on the private
insurance participation rates of immigrants. A few national
data sets collect basic information on the ownership of
health, life, and home owner insurance among the foreignborn. Table 1 summarizes this information. In the absence
of national data on automobile insurance coverage among
the foreign-born, Table 1 also includes the results of a
local survey (Los Angeles) of foreign-born Hispanics.

Table 1. Private Insurance Coverage
Foreignborn (%)
1

Auto insurance
3
Home owner insurance
4
Health insurance
5
Life insurance

71
53
48
37

Naturalized
citizens
(%)
n.a.
68
56
45

Nativeborn (%)
2

86
74
61
61

1 Tomas Rivera Policy Institute, 2005. Study covers Latinos
in Los Angeles. 87 percent of native-born Latinos have auto
insurance. Responses to this question are not contingent on
automobile ownership.
2 Insurance Research Council, Press Release June 28, 2006.
This percentage is for the entire U.S. population.
3 American Housing Survey, 2005. Contingent upon owning
a home, 90 percent of the foreign-born have home owner
insurance, as do 92 percent of naturalized citizens and 94
percent of the native-born.
4 Current Population Survey. March 2006 Supplement.
Immigrants 18 and older. About a quarter of naturalized
citizen adults receive public health insurance, as do about 15
percent of noncitizens and 27 percent of native-born adults.
5 Survey of Income and Program Participation, month 36,
wave 9. January 9, 2004. Heads of household.

The lowest rates of coverage among immigrants are for
private health and life insurance. In addition, coverage is
consistently lowest among noncitizens. About 41 percent
of noncitizens have private health insurance, compared
to 56 percent of naturalized citizens and 61 percent of
the native-born. Thirty percent of noncitizens have life
insurance compared to 45 percent of naturalized citizens
and 61 percent of the native-born. With respect to
property/casualty insurance, there are sizeable differences
in automobile and home ownership insurance rates,
although the data are driven by underlying differences in
car and home ownership rates—prerequisites to having
auto and home owner insurance. About 78 percent of
immigrants own cars compared to 86 percent of the
native-born,4 and about 53 percent of immigrants own
homes compared to 70 of the native-born.5
A less direct way to compare coverage rates is through
expenditure data on home owner, vehicle, health, and life
insurance. Because of the poor quality of responses to
insurance expenditure questions,6 consumer expenditure
data is most useful for capturing general differences
in insurance usage between demographic groups. For
example, the Consumer Expenditure Survey for 2004
shows that more Hispanic households (the survey does not
collect information on country of birth) spend nothing on

auto, home, life, and health insurance compared to nonHispanic White households; but for those who do report
expenditures on insurance, Hispanics spend a slightly
higher amount of their annual incomes on auto and home
owner insurance than non-Hispanic Whites. They spend a
proportionately lower amount on health and life insurance.

Factors that Affect Coverage for the Foreign-born
Socioeconomic Factors and Type of Employment
A limited number of studies, focusing exclusively on
health insurance, seek to explain differences in coverage
rates between immigrants and the native-born. They
tend to support the idea that what matter the most are
socioeconomic factors and the nature of the jobs that
many immigrants occupy (rather than being an immigrant
per se), at least among documented immigrants.
For example, using data from Los Angeles, Goldman
et al. (2005) find that having lower family income, less
education, fewer assets, and working in an industry that
is less likely to offer health benefits largely explain the
difference in coverage between documented immigrants
and the native-born.7 Another study by Prentice et al.
(2005) using the same Los Angeles data finds that after
adjusting for socioeconomic status, naturalized citizens are
not significantly different from native-born citizens in their
ability to gain or maintain insurance.8 Capps, Kenney, and
Fix (2003) also emphasize the role of jobs in explaining
the discrepancy in health coverage for citizen children of
non-citizen parents. Much of the coverage gap between
citizen children whose parents are not citizens and those
whose parents are citizens stems from the significantly
lower rate of employer-sponsored insurance among
children in mixed-status families. 9
These studies also agree that immigrants without
‘documented’ or citizenship status are less likely to
have health insurance. Goldman et al. (2005) show
that undocumented
immigrants have lower rates
....immigrants have
of health coverage after
controlling for a wide array
lower rates of health
of socioeconomic factors.
coverage after controlKu and Waidman (1999)
also find that citizen status
ling for a wide array of
and language proficiency
socioeconomic factors.
have a significant impact
on insurance coverage.
Prentice et al. (2005) find that, compared to citizens,
undocumented and legal residents have shorter insured
periods and are significantly less likely to gain insurance
even when other factors affecting health insurance
coverage are held constant.

Profitwise News and Views

May 2007



Responses from focus group participants reinforce
the idea that certain demographic and socioeconomic
characteristics are associated with auto, home, and life
insurance coverage. A 2005 study of Latinos in Los
Angeles (sponsored by Allstate) found that consumers
who are older, have higher incomes, and have more
education are more likely than their counterparts to
have both property/casualty and life insurance.10 English
proficiency and time in the U.S. are also associated with
degree of coverage. About 80 percent of Latinos who had
lived in the U.S. more than two decades had car insurance,
compared to about 40 percent of those who had lived in
the U.S. less than ten years. About 70 percent of those
with more than 30 years of residence reported having
home or renter’s insurance, compared to 22 percent of the
foreign-born with less than ten years of residence. About
60 percent of third-or-later-generation Latinos reported
having life insurance, compared with about 30 percent of
foreign-born Latinos.

Industry Norms and Practices
Another set of potential influences on insurance use
relates to industry norms and procedures. A preliminary
scan of underwriting practices, pricing policies, and
marketing strategies reveals that a small number of
industry provisions limits coverage for immigrants without
citizenship or Social Security numbers. In addition, issues
related to the neighborhoods where many immigrants live
create their own hurdles to accessing insurance, although
these environmental factors do not only affect immigrants.
Even if it is not the intent of insurance companies to avoid
immigrants, industry experts acknowledge that more work
is needed to serve Hispanics and low- and moderateincome families,11 as well as African American, Chinese,
and South Asian consumers.12

Underwriting Guidelines
The underwriting process, that of identifying and
calculating the risk of loss from policyholders, can affect
the type and cost of coverage that carriers make available
to many immigrants. In the case of private health and life
insurance, foreign birth can directly affect the decision
to offer coverage. For example, a study of Texas health
insurers found that nearly half of the companies surveyed
set strict residency or citizenship standards for the sale of
a health policy.13 Life insurance applications generally ask
applicants to indicate their place of birth and the extent
of their foreign travel. Life insurance companies are also
subject to anti-money laundering laws under the Bank
Secrecy Act and are required to file Suspicious Activity
Reports for transactions of at least $5,000 (including
payout amounts).14 As a practical matter, the agents



Profitwise News and Views

May 2007

and brokers of these firms who have direct contact with
customers are responsible for obtaining relevant customerrelated information. Most health and life insurance
companies in the U.S. also require a Social Security
number for individual coverage, although a handful of
companies accept Individual Tax Identification Numbers
instead.
Foreign birth is not explicitly considered in the underwriting
of property and casualty insurance.15 However, other
factors incidental to being an immigrant, such as living
in a neighborhood
with a high rate of
....homeowners in
ethnic concentration,
predominantly minority
may influence the
neighborhoods are less
underwriting decision.16
For example, a 1997
likely to have private
study by the Urban
home insurance, more
Institute found that home
owners in predominantly
likely to have policies
minority neighborhoods
that provide more limited
are less likely to have
private home insurance,
coverage in case of a loss,
more likely to have
and likely to pay more
policies that provide more
for comparable policies.
limited coverage in case
of a loss, and likely to pay
more for comparable policies.17 The debate associating
race and coverage is ongoing.
The use of credit scores in the underwriting process is
another practice that may make insurance less available
or more costly to some immigrants. A growing number of
insurance companies use credit-related insurance scores
to help them decide whether to accept an applicant for
automobile and home owner insurance, and sometimes
to set a price for coverage. Insurance scoring takes into
account payment histories, bankruptcies, number of credit
accounts in use, amount of outstanding debt, length of
credit history, and other financial practices as a way to
predict the likelihood of having an accident and filing a
claim.18 While credit-based insurance scores do not take
one’s ethnic group or nationality into consideration, people
with “thin” credit files, for whom companies cannot find
a meaningful credit history, may be viewed negatively
by insurance companies (although this is not always the
case). A consumer can also be given a bad credit score
– resulting in higher auto or home owner insurance rates –
because of the absence of positive factors, including a real
estate secured loan or the absence of credit information.19
In addition, a Social Security number is often needed to
obtain an insurance bureau/credit score.

Pricing and Ratings Territories
The price of insurance is another factor that potentially
reduces coverage among certain immigrants. The nominal
prices of automobile, home owner, and health insurance
rose by more than 25 percent, 45 percent, and 84 percent
respectively between 2000 and 2006, compared to
inflation of 17 percent over the period. Life insurance
premiums have declined since 2000.20

Table 2. Average Annual Expenditures on Property/
Casualty Insurance
2000
2001
2002
2003
2004
2005
2006

Automobile ($)
689
723
784
869
844
863
867

Home owner ($)
508
536
593
668
693
711
736

Source : www.iii.org/media/presentations/pcoverview

Table 3. Average Annual Worker Contribution to
Health Insurance Premium
2000
2001
2002
2003
2004
2005
2006

Single Coverage ($)
336
360
468
504
564
612
624

Family Coverage ($)
1620
1788
2136
2412
2664
2712
2976

Source: Employer Health Benefits 2006 Annual Survey

Immigrants may face even higher prices for property/
casualty insurance if they lack a track record of insurance
history in the U.S. Stability of residency and prior
insurance coverage are common considerations in pricing
decisions. Prices may also be higher for customers who
buy fewer policies. Some companies that sell home
owner, auto, and liability coverage will take 15 to 20
percent off of the premium if they can sell more than a
single policy.21 Immigrants may also face higher prices
if they live in neighborhoods with higher traffic density,
a higher number of multi-family dwellings, or lower per
capita income. Drivers from lower-income neighborhoods
can pay between $50 to over $1,000 more per year for
auto insurance premiums than those living in higherincome neighborhoods.22 Home owners in lower-income
neighborhoods can pay as much as $300 more for home

insurance than those in higher-income neighborhoods.23
High prices can negatively impact the decision to purchase
insurance. The primary reason people go without health
insurance – including the nonpoor – is the high cost of
coverage.24 There are similarities to the property/casualty
arena. Differences in average automobile insurance costs
across neighborhoods (within a single metropolitan area)
have large and negative impacts on car ownership rates.25

Marketing and Distribution
What immigrants know about insurance, the knowledge
level of the person who explains it to them, and who is
available to sell it to them are other factors that may
affect participation in the insurance system. For many
immigrants, their primary source of information about
insurance is the ethnic networks that surround them.26
Immigrants who come from families with little experience
with insurance in their home countries may therefore
be at a particular disadvantage. The socioeconomic
characteristics of a person’s neighborhood also appear
to be related to one’s level of knowledge about insurance.
The lower the income level of a neighborhood often means
lower professionalism on the part of insurance agents. Yet
the lower the income level of a neighborhood, in general
the more education about insurance is needed.
A number of carriers and agents have already begun
to respond to the changing demographics of the U.S.
Many companies have adapted their marketing and
distribution strategies to win a greater share of multicultural customers.27 Recognizing that more recent
immigrants tend to prefer a one-on-one, face-to-face
visit with an agent, and that people are most comfortable
doing business with agents
who are from their own
Recognizing that more
communities, a number
recent immigrants
of companies have begun
recruiting and training ethnic
tend to prefer a oneand bilingual agents,28 and
on-one, face-to-face
have developed culturally
sensitive advertising
visit with an agent....,
materials. Insurance
a number of companies
companies have also
have begun recruiting
situated agencies close
to ‘mom and pop’ shops
and training ethnic
where neighborhood
and bilingual agents.
residents conduct their
regular business. In addition
to insurance, agencies offer diverse services like tax
preparation, notary, and vehicle registration.29 Some have
adopted multi-tiered distribution systems where they

Profitwise News and Views

May 2007



market their products both through independent brokers
and captive agents. Some larger companies have bought
up independent ethnically-owned smaller agencies. Some
companies have also developed elaborate segmentation
schemes based on socioeconomic status, time since
migration, and country of origin of Hispanic immigrants,
and designed special services to serve each segment.
The number of ethnic and culturally diverse agents varies
across place and product lines. Anecdotal evidence
suggests that in some places, like Southern California, the
Hispanic market is saturated with ethnic agents. In other
places, long-standing arrangements between carriers
and agents often discourage the hiring and training of
less experienced agents. Companies do not want to
dilute existing franchises, and they continue to renew the
contracts of agents who already generate a solid book
of business. Reaching immigrant customers is an even
greater challenge for life insurance agents, particularly
those who sell investment- and account-based products.
The life insurance distribution system is increasingly
integrated with the financial sector, yet immigrants are less
likely to own even the most entry-level financial products
such as checking and savings accounts.

in particular, but address the environmental factors in
neighborhoods with high concentrations of minorities
and immigrants. As more companies publicly identify
the immigrant market as a path for business growth, the
success (or failure) of strategies to win these customers
will likely contribute new insights into the factors that
affect access to insurance.

Notes
1. 2003. U.S. Housing Market Conditions. U.S. Department
of Housing and Urban Development. www.huduser.org/
periodicals/ushmc/spring03.
2 2006. Autobytel’s Spanish Automotive Portal Gives Latino
Online Car Buyers Tools, Content and Online Car-Buying
“En Espanol.” PR Newswire Association LLC. Accessed
January 19, 2006, from www.prnewswire.com/cgi-bin/
stories.pl?ACCT=104&STORY=/www/story/07-202004/0002213519&EDATE=.
3 Batalova, Jeanne, and Dixon, David. 2005. Foreign-born SelfEmployed in the United States. Migration Information Source.
www.migrationinformation.org/Feature/display.cfm?id=301.

Conclusion
While much has been written about the factors that affect
immigrants’ use of bank accounts, more work is needed to
understand the issues that affect immigrants’ purchase of
insurance, particularly property/casualty and life insurance.
More work is also needed to determine the steps that
can be taken to overcome barriers to insurance access
where they exist. The
The most comprehensive strategies suggested by the
information in this article
and effective strategies
range from developing
new underwriting criteria
to deal with barriers
for assessing the risk, to
to insurance may not
encouraging immigrants
to open bank accounts
focus on immigrants in
and take advantage of
particular, but address
alternative means to
establish a credit history.
the environmental
A handful of companies
factors in neighborhoods
have already developed
with high concentrations new products aimed at the
immigrant market, including
of minorities and
mortgage insurance on
immigrants.
loans to borrowers with
Income Tax Identification
30
Numbers and health insurance to holders of Mexican
and Guatemalan consular-issued identification cards. 31
The most comprehensive and effective strategies to deal
with barriers to insurance may not focus on immigrants



Profitwise News and Views

May 2007

4 2004. Survey of Income and Program Participation, month 36,
wave 9. January 9.
5 2005. American Housing Survey.
6

In the Consumer Expenditure Survey of 2004, nearly 34
percent of non-Hispanic Whites who say they own a car
report no expenditures on automobile insurance.

7 Goldman, Dana, Smith, James P., and Sood, Neeraj. 2005.
Legal Status and Health Insurance among Immigrants. Health
Affairs, Volume 24, Number 6.
8 Pebley, Anne R., Prentice, Julia C., and Sastry, Narayan. 2005.
Immigration Status and Health Insurance Coverage: Who
Gains? Who Loses? American Journal of Public Health, Vol.
95, No. 1. January.
9 Capps, Randolph, Fix, Michael, and Kenney, Genevieve.
2003. Health Insurance Coverage of Children in Mixed-Status
Immigrant Families. Snapshots of America’s Families III, No.
12, the Urban Institute, November.
10 Lee, Jongho, Ph.D., Torres, Celina, and Wang, Yin. 2005.
Living in the Present, Hoping for the Future: Latinos and
Insurance, A Los Angeles Case Study. www.trpi.org/PDFs/
insure.pdf.
11 Whitney, Sally. 2005. Best’s Review Survey: Scratch an
Interest Group, Find a New Insurance Customer. Best’s
Insurance News. April.
12 Green, Meg. 2005. Market Expansion. Best’s Review, May.

13 2006. Underwriting Guidelines Used in Texas: A Review of

22 Fellowes, Matt. 2006. From Poverty, Opportunity: Putting the

Health Insurance Underwriting Guidelines Used in Texas

Market to Work for Lower Income Families. The Brookings

Summary Findings – Parts I and II. Accessed on February 27,

Institution Metropolitan Policy Program. http://media.

2006, from www.opic.state.tx.us/page.php?p_sub_page_

brookings.edu/mediaarchive/pubs/metro/pubs/20060718_

id=9.

povop.pdf.

14 2005. Insurance Companies Required to Establish AntiMoney Laundering Programs and File Suspicious Activity
Reports. FinCENnews Press Release. www.fincen.gov/
newsrelease10312005.pdf.
15 One circumstance in which immigrant status may directly
affect access to property/casualty insurance is in the case
of “drivers certificates” issued to immigrants without Social
Security numbers. Many insurance companies do not insure
certificate holders.
16 2006. Independent Insurance Agents and Brokers of
America. Accessed on May 16, 2006, from www.iiaba.net/
TC/Consumer/Auto/autoinsurance101.htm.
17 Galster, George, Wissoker, Douglas A., and Zimmerman,
Wendy. 1997. Testing for Discrimination in Home Insurance.
Urban Institute. www.urban.org/url.cfm?ID=307555.
18 2006. Credit Based Insurance Scores: What Consumers
Need to Know. American Insurance Association. www.aiadc.
org/AIAdotNET/docHandler.aspx?DocID=290558.
19 2007. Credit Scoring Questionnaire to Assist the National
Insurance Task Force Research Subcommittee. www.cejonline.org/Questionnaire.pdf.
20 2006. Life Insurance Premiums Expected to Decline by 4
Percent in 2007, Says the Insurance Information Institute. The

23 Ibid.
24 Lessem, Ann et al. 2002. Uninsured Texans: Attitudes
toward Coverage. Public Policy Research Institute, Texas
A&M University. January. Also, Facts on Health Care Costs.
National Coalition on Health Care.
25 Ong, Paul. 2001. Car Ownership and Welfare-to-Work.
Journal of Policy Analysis and Management, Vol. 21, Issue 2.
26 Lee, Jongho, Ph.D., Torres, Celina, and Wang, Yin. 2005.
Living in the Present, Hoping for the Future: Latinos and
Insurance, A Los Angeles Case Study. www.trpi.org/PDFs/
insure.pdf.
27 Zolkos, Rod. 2005. Cultural Competency Is Key to Success
with Ethnic Groups. Business Insurance Industry Focus.
February.
28 Zolkos, Rod. 2005. Cultural Competency Is Key to Success
with Ethnic Groups. Business Insurance Industry Focus.
February. Also, 2004. Best’s Review. September.
29 2005. Best Insurance News. April 22.
30 In January 2004, Mortgage Guaranty Insurance Corporation
introduced the first mortgage insurance program for ITIN
holders.
31 This product is offered by Blue Cross of California, whose

Consumer Insurance Guide. Insurance Information Institute.

parent WellPoint Inc. is the nation’s largest health insurer.

Accessed on January 17, 2007, from http://info.insure.com/

2005. BusinessWeek. July 18.

life/iii_premiums.htm.
21 2005. Insurance Institute of Indiana: Auto Insurance. www.
insuranceinstitute.org/pdfs/factbook04-05/Chap1.pdf.

Robin Newberger is a business economist in the
Consumer Issues Research Unit of the Federal
Reserve Bank of Chicago. Ms. Newberger is currently
working on research related to insurance and assetpreservation for minority, immigrant, and other urban
consumers. She earned a B.A. from Columbia
University, a Masters in Public Policy from the John F.
Kennedy School of Government at Harvard University,
and holds the Chartered Financial Analyst designation.

Profitwise News and Views

May 2007



Economic Development

CEDA: Celebrating 40 Years of Building
Community Partnerships to Improve Lives
By Mary Jo Cannistra

Introduction
After President Lyndon Johnson declared an
“unconditional war on poverty”1 in 1964, the Economic
Opportunity Act2 was drafted, and numerous
organizations quickly formed to wage battle in
communities around the country. The Community and
Economic Development Association of Cook County,
Inc. (CEDA)3 was one such group. Established in 1966,
CEDA began at the grassroots level – in schools,
churches, storefronts, and community centers. It is now
one of the largest private nonprofit organizations in the
U.S., with over 200 offices throughout Cook County.
With a staff of 700, over 4,500 volunteers, and more
than 40 programs, it serves 230,000 clients per year
with a budget of over $100 million.
CEDA is a development organization that seeks out
current research and follows demographic trends. Its
structure allows flexibility
to adapt to constantly
CEDA is “helping
changing needs in its
to reduce poverty
target communities.

and improve the
quality of life among
individuals, families, and
communities throughout
Chicago and its suburbs.”

Most community-based
solutions to povertyrelated issues involve
layers of support
systems, collaboration,
and teamwork. CEDA
has built a network of
services, which are
Robert L. Wharton,
provided in part by four
President/CEO, CEDA
subsidiary corporations:
Community Nutrition Network, Senior Services
Association, CEDA Community Development Fund, and
the Economic Development Association.
CEDA provides programs and services in child and
family development, health and nutrition, financial and



Profitwise News and Views

May 2007

economic development, emergency services, energy
conservation, employment and job training, housing, and
education, as well as senior-oriented programs. According
to Robert L. Wharton, CEDA President/CEO, CEDA is
“helping to reduce poverty and improve the quality of life
among individuals, families, and communities throughout
Chicago and its suburbs. CEDA is building partnerships in
the community to help achieve our mission.”

Celebrating 40 Years of Helping Cook County
Residents
During the week of September 25-28, 2006, CEDA
celebrated 40 years of serving its community with a
county-proclaimed “CEDA Week,” sponsored by Harris
Bank and Washington Mutual. The week began with
a press conference during which the State of Illinois
announced that CEDA will receive a portion of a $1
million federal grant to reduce home energy service
disconnections. Illinois is one of four states that will
receive the Residential Energy Assistance Challenge
Option Program (REACH)4 grant in 2006. REACH will
target Low-Income Home Energy Assistance Program
(LIHEAP)5 beneficiaries, those at highest risk of losing
service as a result (in part) of recent utility cost increases.
CEDA also provided a bus tour to several of its offices
for its supporters and others to learn first hand of the
group’s local impact. Among the stops on the tour was a
‘weatherization’ demonstration in a home on the near west
side of Chicago. The CEDA Weatherization Program6 is
the largest of its kind in the U.S. The program has served
4,200 home owners in suburban Cook County and the city
of Chicago. The program provides resources to qualified
Cook County residents to improve home safety and
energy efficiency. Persons with disabilities, the elderly,
and families with children under five years of age receive
priority.

The tour also included the Oak Lawn Women, Infants
& Children (WIC)7 facility. Margaret Saunders, CEDA
WIC Director, stated, “Healthy children have the best
opportunities to succeed and to become self-sufficient.”
WIC is funded by the U.S. Department of Agriculture
and is a supplemental nutrition program whose focus is
on healthy diets for mothers and children. The program
provides nutrition education and counseling, breastfeeding support, nutritious foods, and referrals to other
services. As the second largest WIC program in Cook
County, CEDA serves over 32,000 clients monthly in their
17 Chicago area clinics.
Finally, the group visited
the Dudley Beauty School
CEDA’s Revolving Loan
of Illinois, a borrower under
Program provides
CEDA’s Small Business
Loan Program.8 CEDA
low-interest loans to
serves as a liaison between
establish or grow small
local governments and
businesses that create
loan recipients to promote
business development.
jobs.
CEDA also works with local
bankers and loan applicants
looking to create jobs and provide growth opportunities
for their employees. Of particular interest to CEDA are
businesses located in areas of high unemployment, and
women- and minority-owned businesses with the potential
to create jobs. With CEDA’s help, founders Joe and Eunice
Dudley turned a dilapidated police station into a successful
business and job training center.

Overview of CEDA Lending Programs
CEDA’s Revolving Loan Program provides low-interest
loans to establish or grow small businesses that create
jobs. Typical uses of the loan funds include working
capital needs and expansion. Three loan programs are
offered for business expansion or capital improvements
– two are offered by CEDA, and the third is offered
by the Community Development Fund (CDF), a CEDA
affiliate that provides capital, economic development
services, financial literacy, and technical assistance to
small businesses in suburban Cook County and the City of
Chicago. 9
Since 1983, CEDA has made $9.3 million in low-interest
loans to small businesses through the Revolving Loan
Fund, leveraging $70 million from private sources, and
creating 950 new jobs. For every $20,000 in assistance
that CEDA provides, a new job must be created, which a
low-income resident of Chicago or South Suburban Cook
County must fill.

CEDA Head Start Programs
Early Head Start and Head Start10 are comprehensive
child and family development programs designed to build
fundamental learning skills required to succeed in school,
as well as social skills. Through 30 centers in suburban
Cook County, CEDA Head Start currently serves 2,877
pre-school children and their families. Parents can also
enroll their children in the Half-Day School Year or Before/
After School programs.
Teen Parent Services (TPS)11 is a state-funded
program focused on helping pregnant teens and teen
parents stay in school or return to school to earn their
high school diploma or GED equivalent. TPS assists
eligible participants with the costs of books, childcare,
transportation, GED classes, uniforms, and other schoolrelated expenses. In addition, this program provides family
case management and information regarding childcare,
medical care, immunizations, housing, domestic violence,
and literacy programs.
In 2003, CEDA surveyed residents of Robbins and Ford
Heights, Illinois, and found that availability of ATMs was
their highest priority financial services need.12 In response,
CEDA placed the first ATMs in these communities.
By placing the ATMs in police stations, the goal was
for users to feel safe when using the ATM. Recently,
the Ford Heights model was replicated by Wisconsin
law enforcement. In addition, community development
projects have stemmed from this initiative, providing new
businesses and jobs for the community.
The ATM initiative has led to stronger support by financial
institutions—institutions that are key in filling the financial
void in impoverished regions
within Cook County. CEDA
Since 1983, CEDA has
realizes that certain financial
made $9.3 million in
and program initiatives are
better suited for specific
low-interest loans
areas, and they continue to
to small businesses
research and fill these niches.

through the Revolving
Loan Fund, leveraging
$70 million from private
sources, and creating
950 new jobs.

In December 2006, CEDA
Northwest Self-Help Center,
Inc., opened a resale shop
in Des Plaines, Illinois. With
4,000 square feet of retail
space, this shop sells gently
used merchandise such as
apparel, accessories, furniture,
housewares, linens, and toys. The shop’s revenue provides
additional funding to help CEDA carry out its mission.

Profitwise News and Views

May 2007



Looking Toward the Future
CEDA’s visibility within the community is the key to
its success. It has thus strategically established eight
Community Development Agencies (CDAs) to serve as
its hubs for community networking and outreach. CEDA’s
CDAs are currently working with community members and
businesses to identify strategic locations for community
development ventures, such as strip malls and truck stops.

Notes
1 2007. War on Poverty. Encyclopedia of American History.
Accessed on March 7, 2007, from www.answers.com/topic/
war-on-poverty.
2 Ibid.
3 2007. Community and Economic Development Association of
Cook County, Inc. (CEDA). www.cedaorg.net.

Undeniably, poverty has spread from Chicago to the inner
suburbs. Gentrification and immigration displaces the
poor from some city neighborhoods. Dispersal of Chicago
Housing Authority residents has produced cultural and
economic instability. The need for services in a number of
CEDA’s programs has grown over the years, arising from
these and many other trends. Striving to evolve within the
community, CEDA hopes to provide additional services and
explore more innovative services and technologies over the
next four years.

4 2007. U.S. Department of Health and Human Services.

CEDA’s current plans include new initiatives in affordable
housing, bridging the digital divide, filling human service
gaps, economic development ventures, supporting
small business expansion, and creating a capital fund in
partnership with financial institutions.

7 2007. Food & Nutrition Service (FNS USDA). Women, Infants,

According to Wharton, “CEDA, Inc., continues to seek
solutions to poverty by consulting members of the
community first. We believe that the more people included
in the process will allow for a stronger outcome.”
CEDA is a member of the National Congress for
Community Economic Development, the National
Association of Community Action Agencies, the National
Community Action Foundation, and the Illinois Community
Action Association. Additional information regarding CEDA
is available at www.cedaorg.net.

Administration for Children and Families. Accessed on March
7, 2007, from www.acf.hhs.gov/ebrochure/residentialenergy.
htm.
5 2007. U.S. Department of Health and Human Services
LIHEAP Clearinghouse. Low-income Energy News. Accessed
on March 7, 2007, from http://liheap.ncat.org.
6 2007. CEDA. www.cedaorg.net/www2/EnergyConservation.
html#top.
and Children. Accessed on March 7, 2007, from www.fns.
usda.gov/wic.
8 2007. CEDA. www.cedaorg.net/www2/EconDS.html.
9 2007. CEDA Economic Development Services. CEDA
Community Development Fund. www.cedaorg.net/www2/
EconDS.html.
10 2007. CEDA. www.cedaorg.net/www2/CFDS.html.
11 2007. CEDA. www.cedaorg.net/www2/CFDS.html#top.
12 2003. Federal Reserve Bank of Chicago. CEDA Community
Development Fund ATM Demonstration Project. Profitwise
News and Views. Spring. www.chicagofed.org/community_
development/spring_2003_profitwise_news_and_views_
ceda.cfm.

Mary Jo Cannistra is the assistant manager in the
Consumer and Community Affairs division of the
Federal Reserve Bank of Chicago. She is responsible
for managing overall production in the division. Ms.
Cannistra holds a B.A. in business management from
DePaul University, and has received certificates in
management from Northwestern University and Lake
Forest Graduate School of Management.

10

Profitwise News and Views

May 2007

Economic Development

Title

Ways
Author to Work: Putting Working Families Behind the Wheel and
Heading toward a Stronger Financial Future
By Tom Waldron

T

akara Kyles made her life work, but it wasn’t easy.
The 25-year-old Milwaukee resident managed to
hold down a job as a certified nursing assistant
and take care of her four young children. And Kyles did it
all without a car. She had tried to buy one but had been
turned down because of a credit history checkered with
outstanding medical debts.
With no car, Kyles relied on a van service to get to work,
which cost $35 per week. Grocery store trips required
a bus ride – not easy with four children – or a lift from a
friend or relative. The most inconvenient part was arriving
home after her evening shift ended at 11 p.m. and waiting
for an hour for her day care provider to send the kids home
with a van service.
Her life grew considerably easier in March when she
secured a loan through the Milwaukee-based Ways to
Work program and purchased a reliable used car for
$4,300. Having a car shaves 80 minutes from her daily
commute to work and allows her to pick up the kids at day
care herself. That means more family time together and an
earlier bedtime for everybody.
“My life is definitely starting to get easier,” says Kyles,
who is now saving to purchase her first home. “Now that I
have a car, it gives me more time with my kids, and it gives
me more sleeping time. Grocery shopping is a lot easier.
Having a car has been a big help.”
For nearly 23 years, Ways to Work has been helping lowwage working adults like Kyles gain mobility and establish
financial independence.
The nonprofit bases its work on a straightforward
proposition: that it can help low-income working families
advance economically by providing them with affordable
credit. To date, the program has assisted more than
25,000 families with loans totaling more than $40 million.
In some cases, Ways to Work, which receives support
from foundations, the federal government, and the private

sector, is the only affordable (auto loan) alternative to
predatory lenders whose interest rates can climb well
above 20 percent.
The demand for cars is strong in many areas of the country
where public transportation fails to meet the needs of
working families. Long commutes make it hard to get to
work on time and take workers away from their families
and homes. Using a Ways to Work loan to purchase a
reliable vehicle makes it easier for workers to hold down a
job, advance into better-paying jobs in different locations,
or pursue additional education or training.
Other programs around the country provide vehicles at no
cost to low-wage workers. Ways to Work has embraced
a different model – making affordable loans to workers.
Eligible borrowers must prove that they have been unable
to receive credit from mainstream lenders. A key goal is to
move successful borrowers into the financial mainstream
through taking out a loan or opening a credit card account.
“We firmly believe in the value of making loans for cars, not
in just giving cars away,” said Jeffrey E. Faulkner, president
of Ways to Work. “We carefully screen our applicants to
make sure they can afford the loan. The act of paying it
back helps them develop sound financial habits, and it
also begins their work of building a payment history that
will eventually allow them to take advantage of greater
financial opportunities.”

Roots in Welfare Reform
Ways to Work began in 1984 in Minneapolis as a
modest initiative of the McKnight Foundation designed
to assist families who were being forced off welfare due
to new eligibility rules. Before its launch, Carol Berde, a
McKnight foundation official, met with welfare recipients
to determine what they needed most to build financial
security. She was surprised at an answer that came up
repeatedly. What the women wanted was access to lowcost loans they could use to buy basics such as affordable

Profitwise News and Views

May 2007

11

cars or other things they needed to hold jobs. Without
reliable transportation, the women had difficulty staying
employed.

the high cost of eating out for lunch. The counselor also
pointed out the high, sometimes hidden costs, of running
up credit card debt.

The foundation began making loans, at no interest, to
low-income families, most of whom used the money to
purchase used cars.

“[The counseling] was very helpful,” Kyles said. “It gave
good tips and pointers that helped me cut down on
spending. And it touched on everything I was trying to do
financially.”

The foundation tracked its loans and found they were
helping borrowers move into better jobs, easing stress
and helping them find better child care arrangements. The
positive results led the foundation to expand the program
to a dozen sites in Minnesota.
In 1996, the McKnight Foundation undertook a
partnership with the Alliance for Children and Families to
expand the program nationally. As part of the agreement,
the foundation contributed more than $1 million to
establish loan programs.
The program changed its name in 1998 to Ways to Work
and was incorporated as a new nonprofit organization in
partnership with the Alliance for Children and Families,
a Milwaukee-based nonprofit organization representing
more than 370 child- and family-serving and economic
empowerment organizations.
Ways to Work also began to receive increasing support
from the private, nonprofit and public sectors. McKnight
made a $5 million grant, and Bank of America contributed
$8 million in low-interest debt capital, which allowed for
major program expansion.
In a key step, the U.S. Department of the Treasury
certified Ways to Work Inc. as a Community Development
Financial Institution and provided a $2 million grant. During
this period, the John S. & James L. Knight Foundation
contributed about $2 million to help expand the program.
Ways to Work also has received significant financial
support from the U.S. Department of Transportation,
including more than $17 million in matching funds from
the Job Access Reverse Commute program of the Federal
Transit Authority. Other key funders have included the
Packard and Annie E. Casey Foundations and United
Ways across the country. Their support has allowed Ways
to Work to continue to expand its network of offices and
today it operates in 45 offices in 21 states.

Stressing Financial Literacy
A key focus of Ways to Work is financial literacy, and as
part of the loan process, Ways to Work requires applicants
to assess their financial situation. Counseling sessions
stress the importance of a good credit rating and review
steps for repairing credit.
In Kyles’ case, the counselor stressed the importance of
budgeting and offered basic tips focused, for example, on

12

Profitwise News and Views

May 2007

Connected to each Ways to Work office is a communitybased loan committee that assesses an applicant’s ability
to repay a loan. Local banks or credit unions make the
loans, and the local service agency that hosts the Ways to
Work program in each community guarantees it.
Ways to Work borrowers may receive up to $4,000 at no
more than 8 percent interest with a two-year payment
term. Nearly all Ways to Work loans are used to buy
vehicles. A small number of customers use their loans
for other work-related expenses, such as books and
calculators for course work, carpenter’s tools, or a health
care uniform.
After the loan is made, Ways to Work loan officers stay in
contact with borrowers and step in to help them cope with
problems that threaten repayment. Thanks to its handson approach, Ways to Work has enjoyed a repayment
rate of more than 87 percent over the past 12 years
– from borrowers who by definition have been deemed
noncreditworthy by traditional lenders.
Dolores Broussard, a loan officer for Ways to Work in
Lafayette, Louisiana, stays in close contact with her clients
while they repay their loans.
“Even if they’re not behind, we try to send out thank you
cards, birthday cards, just to show them some support,”
says Broussard. There’s a practical aspect to the outreach
as well. By staying in close touch, loan officers can insure
that they have up-to-date contact information so they can
reach borrowers if the need arises.
Broussard takes pleasure in seeing how owning a reliable
car improves her clients’ lives. “When you reach a certain
age and you haven’t achieved some of the things you want
to achieve, transportation is such a barrier. My clients talk
about how it’s almost degrading to have to ask people to
take them places, even close friends or relatives. I see the
pain and rejection in their faces.”

Solid Results
Looking to assess how well it meets its goals, Ways
to Work commissioned an independent evaluation
that was released in late 2006. Prepared by OMG
Center for Collaborative Learning in Philadelphia, the
evaluation found that Ways to Work loans were leading to
significantly higher take-home pay for borrowers, better
job attendance, and a higher quality of life.

Most noticeably, the evaluators found that the take-home
pay of Ways to Work borrowers increased by an average of
41 percent, growing from about $11,900 to about $15,300.
About 90 percent of borrowers reported that their loans
had improved their quality of life by allowing them, for
example, to spend more time with family and friends. And
about 90 percent of borrowers said their loans helped
them to keep their job or to move into a better one.
The evaluation also showed that Ways to Work was
meeting another of its goals—helping its borrowers move
into the mainstream financial market. Two-thirds of all
borrowers reported that they had obtained some type of
conventional financial services since receiving their loan,
such as opening a bank or credit card account or taking
out a bank loan.
A typical Ways to Work borrower:
• An African American woman
• Single with fewer than three children
• Has more than a high school education
• Above age 30
“The findings from the evaluation make clear that owning
an affordable car can make an enormous difference in
a low-income family’s life and economic prospects,” said
Peter B. Goldberg, the CEO of Ways to Work. “Income

went up significantly as did the families’ quality of life.
We were encouraged by the results. These loans are
undoubtedly worthwhile investments.”
That’s certainly how Trenes Hebert sees it. Without a
car, she and her husband Andy used to take taxis to their
restaurant jobs or their children’s schools. When they did
the math, the couple in Lafayette, Louisiana, saw that the
taxis were eating up a sizeable chunk of their income.
Instead they decided to buy a dependable used car. A
used car dealer wanted a $2,500 down payment, which
the couple could not afford. By contrast, the Lafayette
Ways to Work office, hosted by The Family Tree, worked
with the Heberts and offered an affordable loan, which
allowed them to purchase a used car.
“It’s benefited my husband and kids a lot, getting us to
work more cheaply, and getting the kids to things like
doctors’ appointments,” says Trenes Hebert. “It’s saved us
a lot of money and time.”
A copy of the Ways To Work evaluation is available at
www.waystowork.com/documents/Evaluations/WtW_
reference_book.pdf.
For information on Community Reinvestment Act (CRA)
eligibility for lending or investing in programs like Ways
To Work, contact the Federal Reserve Bank of Chicago’s
Community Affairs division via e-mail at cedric@chi.frb.org,
or by calling (312) 322-8232.

Tom Waldron is a senior associate at The Hatcher
Group, and has written extensively about a range of
issues affecting low-wage workers, including health
insurance, transportation, automobile insurance,
and the Earned Income Tax Credit. Mr. Waldron is
a graduate of Yale University, and co-author of the
national report “Working Hard, Falling Short: America’s
Working Families and the Pursuit of Economic
Security” for the Working Poor Families Project.

Profitwise News and Views

May 2007

13

Consumer Issues

Gift Cards – Facts and Cautions Regarding a Widely Used Financial Product

By Helen Mirza

Introduction
Gift cards have grown in popularity for many reasons.
They are a convenient option for any occasion requiring
a gift, and a step up from giving cash. Some receivers (or
observers) may consider a gift card an impersonal gesture,
but the cards are practical in that the receiver obtains
something he/she will likely use.
The above considerations aside, the gift card business
is booming. The National Retail Federation estimated
that $25 billion was spent on gift cards during the 2006
holiday season alone.1 In 2004, according to writer Bruce
Mohl of the Boston Globe, total gift card sales for the
entire year were forecast at $55 billion. Thus an estimate
of gift card sales for the entire year of 2006 would exceed
$100 billion.
TowerGroup, a research and advisory service for the
financial services industry, collects and projects estimates
of gift card sales, and has estimated a total of $67 billion
in 2005, $82 billion in 2006, and projected sales of $97
billion in 2007.2

History of Gift Cards
For many decades, people have been able to obtain gift
certificates from individual retailers. The certificate is valid
only at a particular store, and if the recipient did not use
up the entire certificate on his first purchase, he would
either be issued a new certificate for the balance or a
store credit to be used later. While such certificates always
had a certain popularity, they were most appropriate
for individual recipients who lived near and would likely
frequent the issuing store. The issuing store also knew that
a certain number of the certificates issued would never
be redeemed. Many certificates had an expiration date.
Some were issued for a small fee to the giver and some
had a redemption fee to the user. Most stores were glad
to issue them, however, because a certain percent of them
represented pure profit if never redeemed.

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Profitwise News and Views

May 2007

Later, gift certificates for most retailers were replaced by
gift cards. These cards are machine readable and can be
loaded with a particular amount of credit to be designated
either at the time the card is created or at the time the card
is purchased. By using sequential numbering, card issuers
can keep track of the inventory of such cards, as well as
the balance outstanding. It is not necessary to reissue
these stored value cards if the gift amount is not used in
full; the value declines by the amount used each time the
card is presented for payment.
A more recent development is the issuance of stored value
cards by large credit card companies or banks. These
cards can be used virtually anywhere credit cards are
accepted, but carry fees to generate a profit to the issuer,
who is not the retailer.

Fees and Expiration Periods
There are often the following fees: (1) an initial handling or
issuing fee; (2) a dormancy fee levied on a monthly basis,
which results in a gradual decrease in the value of the
card; or (3) less frequently, a fee upon redemption. Further,
these cards usually have an expiration date upon which the
entire balance is forfeited to the issuer. Some individual
retailers that issue gift cards also often invoke fees and
expiration dates.
Sometimes the expiration date is not indicated to the
customer nor noted on the card. As a result, the customer
may try to use the card and discover that it has expired.
Another common restriction is that some cards do not
allow cash refunds for any remaining portion of the value,
regardless of how small. Thus the customer has to either
forfeit the balance or buy an additional item or items to
realize the full value of the card.
Receivers of gift cards have an additional option if they
are unable or unwilling to use a card. There is a primarily
Internet-based resale market for gift cards.

Theft of Gift Cards and/or Their Contents
Unfortunately, thieves have learned how to defraud the
card holders and issuers. A typical gift card scam works
this way: a retailer places a number and variety of gift
cards out on a rack in the store; a thief writes down the
card numbers for several cards and then calls the store to
see if they have been sold, pretending to be the customer
asking how much the card still has on it. Sometimes the
answer is that that particular card has not yet been issued.
But if the answer is that there is a balance, the thief then
uses the number to buy something over the Internet using
the card’s number and stating the value of the card. The
Internet retailer can then get the same information about
the card that was issued (the date and amount issued) and
allows redemption of the card’s value for purchase of his
products. Thieves also use fraudulent credit card numbers
(that they have obtained from legitimate holders in various
ways) to buy the cards over the Internet.
Since gift cards and stored value cards are not usually
registered to an individual purchaser, they can also be
easily stolen. Since there is usually no record of who
purchased the card, whoever has possession of it can
use it without detection. Some stores do urge customers
to access their Web site and register cards in their name,
offering at least some protection against theft. However,
checking the cards against a registry is not yet common.
Victims of gift card theft generally lose the entire value
of the card and have no recourse against the issuer or
retailers where they are used fraudulently.

State Law Response to Fees and Expiration

As a result of the recent wave of state consumer
protections and the accompanying publicity, some stores
have honored expired cards upon customer request.
Another incentive for honoring cards that have expired
is the fact that patrons often spend more than the face
value of the card. Acceptance of expired cards is not
universal, however, and some retailers, absent explicit, new
guidelines, do not honor them.

Federal Law Response
“The Federal Trade Commission (FTC) recently
brought charges against Darden Restaurants, Inc.,
which owns several popular restaurant chains,
alleging that it engaged in deceptive practices in
advertising and selling its gift cards. Darden agreed
to a settlement and will restore fees that have been
deducted from consumers’ gift cards and disclose fees
or expiration dates in future gift card sales. This is the
agency’s second law enforcement action involving
allegedly deceptive gift card practices. [The first action
pertained to K-Mart stores.]
According to the FTC’s complaint, Darden’s
advertisements represented that consumers could
redeem the cards to buy goods or services at its
restaurants equal to the card’s monetary value.
However, Darden did not disclose ‘dormancy fees’
that would be deducted after a certain period of
time. Typically, the firm deducted $1.50 per month in
dormancy fees after a period of either 15 or 24 months
had passed from the date of purchase.

Many states have passed laws restricting the use of fees
and expiration dates in relation to gift and stored value
cards. Consumer groups have expressed misgivings about
card issuers that do not inform users about fees and
expirations.

In many instances, the Commission alleged, consumers
did not learn of the fee until they attempted to use
their gift cards and learned that they had little or no
remaining value. Disclosures on the cards were in fine
print or obscured by other information.

“California and a handful of states prohibit retailers from
letting the cards expire, and Tennessee is among several
states that restrict gift card fees,” says Martiga Lohn
of Associated Press.3 Minnesota is also considering
legislation, which would require expiration dates and
other terms to be displayed prominently on the front of
the cards, require retailers to honor gift cards indefinitely,
and prohibit dormancy fees. The proposal would also
allow consumers to get cash back for small balances
under $5.4 According to the National Conference of State
Legislatures, 25 states or more have ‘strengthened’ their
consumer laws regarding gift and stored value cards.5
Some states – notably Connecticut, Montana, and Rhode
Island – prohibit all fees and expiration dates.6

The settlement requires Darden to disclose any
automatic fee or expiration date clearly and
prominently in future advertising, at point of sale,
and on the card. It also prohibits the company from
collecting any fee on cards activated before the order
is final. Darden has already restored all previous
charges.
‘The FTC works to make sure consumers have the
facts they need to make smart decisions, no matter
what they’re buying,’ said Lydia Parnes, director of the
FTC’s Bureau of Consumer Protection. ‘When it comes
to gift cards, issuers can’t gloss over key information.
They must clearly and prominently disclose fees and
restrictions that affect the use of their gift cards.’” 7

Profitwise News and Views

May 2007

15

The Federal Reserve System has also taken steps to
understand and focus on current and emerging issues
concerning stored-value cards and other prepaid products.
On November 12, 2004, a roundtable discussion was held
at the Federal Reserve Board of Governors in Washington,
D.C. This discussion was part of an ongoing program to
discuss payments system developments and barriers to
innovation with a range of parties, and was hosted by the
Federal Reserve System’s Payments System Development
Committee (PSDC).8 This initiative not only considered
the consumer issues, but also the business and evolving
technological aspects of these systems, as well as the
ramifications for the payments systems infrastructure in
the U.S.
More information on the PSDC and the Federal Reserve
System’s roundtable on stored value cards is available at
www.federalreserve.gov/paymentsystems/storedvalue/
default.htm.

Notes
1 Lohn, Martiga. 2006. Associated Press. November 22.
As quoted on Minnesota Public Radio. http://minnesota.
publicradio.org.
2 Riley, Brian. 2007. TowerGroup. January, p.2. www.
towergroup.com.
3 Lohn, Martiga. 2006. Associated Press. November 22.
As quoted on Minnesota Public Radio. http://minnesota.
publicradio.org.
4 Ibid.
5 2006. National Conference of State Legislatures. As quoted
by Phillip Ewing. October 17. www.stateline.org/live/details/
story?contentId=149457.
6 Ibid.
7 2007. More Gift Card Issues. Pratt’s Letter. April 9.
8 2004. A Summary of the Roundtable Discussion on
Stored-Value Cards and Other Prepaid Products. www.
federalreserve.gov/paymentsystems/storedvalue/default.htm.

Helen Mirza is a community affairs program director
for the state of Iowa at the Federal Reserve Bank
of Chicago. She is a supervising examiner with
experience as examiner-in-charge for both safety and
soundness and compliance examinations, as well
as a fair lending specialist and instructor. Ms. Mirza
graduated summa cum laude from Marymount College
with a degree in English and Secondary Education and
is also a graduate of John Marshall Law School. Ms.
Mirza is licensed to practice law in Illinois.

16

Profitwise News and Views

May 2007

In Brief
Statewide CDFI Launches Midwest Expansion to Meet Nonprofit Capital
Needs: IFF Closes First Loans in Wisconsin, Missouri, and Iowa

T

he Illinois Facilities Fund (IFF), a statewide community
development financial institution (CDFI) in Illinois, is
expanding to serve nonprofit organizations in the greater
Milwaukee area, Missouri, Iowa, and Indiana.
Created in 1990, the nonprofit IFF provides belowmarket capital financing up to $1 million for nonprofit
organizations that serve low-income or special-needs
populations. Its expansion comes after 17 years of
serving nonprofits throughout the State of Illinois, helping
organizations buy land and buildings, renovate, construct,
maintain, and repair facilities, and buy equipment and
vehicles.
What defines an IFF loan?
IFF’s lending approach offers investment opportunities
for banks.
Long-term
loans

The IFF standard loan is up to 15
years.

New or highrisk niches

IFF lends to faith-based agencies,
charter schools, and for equipment
and maintenance.

Leasehold
improvements

IFF will make loans against leases.

Small loans

IFF loans start at $10,000. Many
banks cannot cover their costs on
small loans without charging
disproportionate fees.

No Loan-ToValue
limitations

IFF does not use appraised value to
determine loan amount.

Minimal equity
contribution

IFF requires a minimum contribution
of 5 percent of total project costs.

Collateral
release

IFF requires only real estate
collateral for real estate loans.

By closing its 500th loan in December – for a Milwaukee
charter school – the IFF’s total lending reached $150
million. Working on its own and in collaboration with
traditional lenders and other CDFIs, the IFF is a vital
source of affordable capital for nonprofits across the

Federal Reserve Bank of Chicago’s region that lack access
to traditional commercial sources to fully meet their needs.
Research by IFF staff finds that nonprofits in its expansion
states are planning for growth as they work to address
needs similar to those in Illinois. Organizations in urban
areas, for example, are grappling with public education
issues, community health, and homelessness, while
agencies in rural communities struggle with barriers to
capital due to shrinking and aging populations.

Recent projects on which the IFF has collaborated with banks:
Chicago Family Health Center on Chicago’s far south east side is building a
new health center and making renovations to an existing facility. MB Financial
provided $3.4 million in construction and permanent financing in conjunction
with an IFF second-position loan for $1 million.
Home of the Sparrow in McHenry, Illinois, completed construction of a two-story
addition with four individual living units, and renovated an existing shelter.
Its long-time bank, Crystal Lake Bank & Trust, referred the agency to the IFF
for a more affordable financing solution. The IFF provided a 15-year loan for
$245,000.
Regional expansion is part of the IFF’s strategic plan, and
it is well-positioned to serve a larger nonprofit population.
Its loan portfolio has experienced three years of record
growth while maintaining exceptionally low default rates,
and the organization has built assets in excess of $100
million. Strong banking relationships remain vital to IFF’s
success. As it does in Illinois, the IFF seeks investments
and shared lending positions from traditional lenders in
Wisconsin, Missouri, Iowa, and Indiana to meet its mission.
For more information on the IFF, visit www.iff.org, or call
toll-free (866) 629-0060.

Profitwise News and Views

May 2007

17

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