Full text of Profitwise News and Views (Federal Reserve Bank of Chicago) : Spring 2003

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Spring 2003

High Profile
Predatory Lending Cases
Also in this issue:

Finding the Intersection Between Compliance
and New Markets Page 6
FLLIP’s “Your Money & Your Life”
Financial Education Program Reports High Marks
after First Year Page 8
CEDA Community Development Fund ATM
Demonstration Project Page 11
Financial Institutions and Participation in Individual
Development Account Programs Page 12

From the Editor
Dear Reader:
Welcome to Profitwise News and Views, your resource for consumer and community
and economic development news and opinions in the Seventh Federal Reserve District.
Formerly, the Chicago Fed’s Consumer and Community Affairs division published two
separate journals, Profitwise and Economic Development News & Views. The primary
focus of Profitwise was consumer issues such as predatory lending, credit scoring, and
identity theft. Economic Development News & Views focused on issues such as small
business lending, labor trends, and tax incentives to assist underserved communities.
Recognizing the interrelated nature of all economic development activities, we combined
the two publications into one. We now bring both of these subject areas under one roof.
Profitwise News and Views welcomes story ideas, suggestions, and letters from bankers, community organizations and other subscribers. It is mailed (either electronically or via U.S. mail) at no charge to state member
banks, financial holding companies, bank holding companies, government agencies, non-profit organizations,
academics, and community economic development professionals. You may subscribe by writing to:
Profitwise News and Views
Consumer and Community Affairs Division

Our new format will provide relevant news from around the Seventh Federal Reserve
District, and our regular and feature articles will cover economic development news,
consumer issues, compliance topics, our research activities, and a timely and informative
calendar of events.
As always, we welcome your comments and suggestions. Readers interested in
submitting material for publication should contact us at CCA-PUBS@chi.frb.org for
submission guidelines.
Sincerely,

Federal Reserve Bank of Chicago
230 S. LaSalle Street
Chicago, IL 60604-1413
CCA-PUBS@chi.frb.org

Michael V. Berry
Managing Editor

The material in Profitwise News and Views is not
necessarily endorsed by, and does not necessarily
represent views of the Board of Governors of the
Federal Reserve System or the Federal Reserve
Bank of Chicago.
Advisor
Alicia Williams
Managing Editor
Michael V. Berry
Compliance Editor
Steven W. Kuehl
Research Editor
Sherrie Rhine
Economic Development Editor
Harry Pestine
Contributing Editor
Jeremiah Boyle
Production Coordinator
Kathleen Toledano
Production Associate
Mary Jo Cannistra

Visit the website of the Federal Reserve Bank of Chicago at:

Around the District
Illinois

Michigan

State creates Investment and Development Authority

Michigan posts large decrease in unemployment

Illinois is the fourth state to embrace an innovative community
development program that joins government and private
sector financial institutions to serve low-income communities. On January 7, outgoing Illinois Governor George Ryan
signed the law creating the Illinois Investment and Development
Authority that will be responsible for establishing a community development financial institution program to work
with private sector lenders who will target financial services
to under-served markets.

According to the U.S. Department of Labor’s Bureau of
Labor Statistics (BLS), Michigan reported the largest
year-over-year decrease in initial claims for unemployment
insurance benefits of any state — down by 21,899 to 1,203.
The most recent report covers the period of November
2001 to November 2002.

For more information on the Illinois Investment and
Development Authority, see the press release at
www.communitycapital.org/policy/cdfi_coalition.html.

Indiana
Reality of poor differs from government’s perception
According to a recent article in the Hoosier Times, the
Indiana Community Action Association, which represents
24 agencies in the state, believes that a reality gap exists
between what the U.S. government classifies as poor and
the basic dollar figure it takes to subsist.
The article cites a “Basic Family Needs Budget” released
by the Indiana Economic Development Council in September
2001. According to the budget, a single parent with two
children making the official government poverty threshold
income of $14,150 needs to make $27,947 or $13,797
more to meet basic needs.
The Indiana Economic Development Council’s “A Basic
Need Budget for Indiana Families” may be found on the
Web at www.iedc.org.

To view the BLS report, including a complete breakdown
of initial claims and mass layoff notices issued under the
Worker Adjustment and Retraining Notification Act, visit the
Bureau’s web site at www.bls.gov/mls/home.htm.

Wisconsin
State law seen restricting municipal
development activities
Twelve Wisconsin cities that have generated more than
$1 billion in economic growth through tax increment
financing (TIF) are unable to undertake more TIF borrowing
under current law. The state’s tax increment financing law
includes two caps, and if both are exceeded, a city cannot
create any new Tax Increment Districts.”
The affected cities are: Appleton, Baraboo, Beaver Dam,
Beloit, Cudahy, De Pere, Kaukauna, LaCrosse, Marinette,
Sheboygan, Wausau, and Whitewater. Economic development
professionals and elected officials in these and other cities
in Wisconsin are concerned that this provision of state law
will handcuff their ability to use this important economic
development and job creation tool.
For more on the issue and a breakdown of Wisconsin cities’
TIF districts, visit the archives at the Wisconsin Alliance of
Cities web site at www.wiscities.org.

Iowa
Iowa Bankers Association takes aim at state’s title
insurance laws.
Iowa is unique in that state law prohibits homebuyers from
purchasing title insurance. Iowans are forced to use Iowa
Title Guaranty for mortgage lender coverage. The Iowa
Bankers Association (IBA) believes Iowa’s current real estate
process may not be competitive in today’s marketplace.
Changing current Iowa law is a legislative priority.
For more information on IBA’s legislative agenda, contact
the IBA at (800) 532-1423.
Profitwise News and Views

Spring 2003

1

COMPLIANCE CONNECTION

Predatory Lending Series
The issue of predatory lending continues to affect communities
throughout the nation as deceptive and abusive lending practices
remain in credit markets. Predatory lending was last highlighted in
our Winter 2000 edition.1 That issue focused on the Mortgage
Credit Access Partnership program’s continuing role in ensuring
fairness in mortgage lending. This edition of Profitwise News and
Views (PNV) launches a series of articles that will re-examine
the issue of predatory lending within the home mortgage market.
This installment provides an overview of efforts to address predatory
lending through litigation. Further PNV editions will provide information on efforts among the states in the Seventh Federal Reserve
District to address the problem, and a nonprofit’s experience with
counseling the victims of predatory lending.

By Steven W. Kuehl

High Profile
Predatory Lending
Cases
his article provides an update on litigation to address
predatory lending. The Federal Trade Commission (FTC)
has been a leader in the fight against deceptive and abusive
mortgage lending and has consistently waged a vigorous
enforcement effort to eradicate predatory practices by lenders.
The National Association of Attorneys General (NAAG)
has also been a major force combating predatory lending
through a combined and coordinated effort by state officials.
Further, some cases have been settled through a joint effort
of the governmental agencies and private plaintiffs’ counsel.
In the past year, over $784 million in consumer redress was
obtained for deceptive lending practices. Following are
summaries of the highest profile cases.

T

2

Profitwise News and Views

Spring 2003

Household Finance
In a historic settlement that will reshape mortgage lending
practices, lender Household Finance Corp. agreed with
state regulators to change its lending practices–and to
pay up to $484 million in consumer restitution nationwide
for alleged unfair and deceptive lending practices in the
“subprime” market.2 “This is the largest direct restitution
amount ever in a state or federal consumer case,” said
Iowa Attorney General Tom Miller.

Attorneys general and financial regulators from 19 states
and the District of Columbia began coordinating their efforts
after identifying a pattern of complaints from borrowers.
Many consumers claimed Household charged interest rates
far higher than promised, and misrepresented points and
pre-payment penalties. They also complained of deception
about costly, often unnecessary insurance policies, and that
loan fees were often misrepresented or not explained at
all. In many of the cases, borrowers’ monthly payments
jumped dramatically [compared with prior payment schedules],
and some consumers were put at risk of losing or did lose
their homes. The multi-state investigation alleged that
Household violated numerous provisions of state consumer
fraud acts and financial regulations by misrepresenting
loan terms and failing to disclose material information
to borrowers.
State regulators said Household cooperated in the case
when the states presented their concerns, working quickly
with the investigators to craft a remedy to the practices
identified by the states. The settlement includes Household
International, Inc. (the parent company), Household Finance
Corp., Beneficial Finance Corp., and Household Realty Corp.
Household is based in Prospect Heights, Illinois.
Under the settlement, Household agreed to:
■ Pay up to $484 million in restitution to consumers

nationwide, depending on how many states participate
■ Limit prepayment penalties on current and future

home loans to only the first two years of a loan
■ Ensure that new home loans actually provide a benefit

to consumers prior to making the loans
■ Limit up-front points and origination fees to 5 percent
■ Reform and improve disclosures to consumers
■ Reimburse states to cover the costs of the investigations

into Household's practices
■ Eliminate “piggyback” second mortgages.

“Owning a home to raise your family in is at the core of
the American Dream,” said then Illinois Attorney General
Jim Ryan. “But because of the alleged deceptive practices
in this case, many consumers found that dream turning
into a financial nightmare. The states involved are working
together to protect our nation's families.”
Iowa Attorney General Miller said the historic settlement
resulted from a crucial and unique partnership between
state financial regulators and state Attorneys General.
“Someday, I hope we will look back on this as a turning
point in lending to low- and moderate-income Americans
when there is a home at stake,” he said. “The settlement is
unprecedented, both in its amount and in the reform contained in the restrictions it places on questionable lending
practices in the future. It is our intention that other lenders

will have to live with the same reforms that are spelled out
in this settlement.”
The settlement was contained in consent decrees and filed
in respective state courts throughout the country by the
end of 2002. In Illinois, the complaints and consent
decrees were filed on December 16, 2002 in the Circuit
Court of Cook County. Each state must now design its own
restitution plan, since some of the lending practices varied
significantly from state to state. The details of the settlement and the process by which consumers can apply for
restitution are being finalized and will be announced at a
later date.
Consumers should not contact state attorney general or
financial regulator offices at this time. Restitution plans for
each state will be formulated, and then states and a settlement administrator will inform consumers about restitution
terms and procedures under the settlement. According to
the Office of the Illinois Attorney General, distribution of
funds should begin by early third quarter 2003.

Citigroup Inc.
In March 2001, the FTC sued Associates First Capital
Corporation and Associates Corporation of North America
(Associates). The FTC alleged violations of the Federal Trade
Commission Act through deceptive marketing practices
that induced consumers to refinance existing debts with
home loans carrying high interest rates, costs, and fees,
and purchase high-cost credit insurance.3 The FTC also
alleged violations of several other federal laws, including
the Truth in Lending Act, Fair Credit Reporting Act, and
Equal Credit Opportunity Act, and with using unfair tactics
in collecting loan payments.
Associates was one of the nation’s largest “subprime”
lenders. In 1999, the total dollar amount of all outstanding
loans in Associates’s U.S. consumer finance portfolio was
approximately $30 billion. Citigroup acquired Associates in
November 2000, and merged Associates’s consumer
finance operations into its subsidiary, CitiFinancial Credit
Company. Both Citigroup Inc. and CitiFinancial Credit
Company, Citigroup's consumer finance arm, were named
as defendants.
On September 19, 2002, the FTC announced that it settled
with Citigroup regarding the charges against Associates.
In the largest consumer protection settlement in FTC history,
Citigroup Inc. will pay $215 million to resolve FTC charges
that Associates engaged in systematic and widespread
deceptive and abusive lending practices.
“The Commission will not tolerate the fleecing of subprime
borrowers through deceptive lending practices such as the
packing of unwanted credit insurance on consumers’ loans,”
said Timothy J. Muris, Chairman of the FTC. “As a result of
this settlement, as many as two million consumers will

Profitwise News and Views

Spring 2003

3

receive significant monetary relief in the form of cash
refunds or reduced loan balances. I am pleased that
Citigroup has agreed to remedy the grave injury caused by
Associates and that Citigroup has announced new measures
at CitiFinancial aimed at preventing these kinds of problems.
If fully implemented, these are positive steps in an industry
that for too long has been plagued by deception and abuse.”
The settlement will provide $215 million in redress to consumers who bought credit insurance in connection with
loans made by Associates between December 1, 1995
and November 30, 2000. The class action settlement will
provide an additional $25 million to consumers whose
mortgage loans were refinanced, or “flipped," by Associates
during the same time period. Together, these settlements
will provide $240 million in consumer redress for Associates
borrowers. “Redress means that all of the settlement funds
will be disbursed back to consumers who purchased credit
insurance without knowing they were purchasing credit
insurance,” said Rolando Berrelez, Assistant Director of the
FTC Midwest Region.
The federal district court in Atlanta (which is the court presiding over the FTC’s case) has preliminarily approved the
settlement pending final approval by the California state
court of the class action and certification of the proposed
settlement class. The California court is presiding over the
class action and has given preliminary but not final approval.
FTC attorneys expect the California court to issue final
approval unless objectors to the class action succeed.
The FTC’s settlement also requires CitiFinancial to provide
annual reports to the FTC detailing its practices with respect
to the sale and marketing of credit insurance and other
add-on products, and the progress and status of steps
taken to improve these practices. In addition, for three
years, CitiFinancial must maintain documents relating to
the sale and marketing of loans, credit insurance, and
add-on products, and steps taken to improve these practices.

First Alliance Mortgage Company
First Alliance Mortgage Company (FAMCO), a debtor in
bankruptcy, agreed on February 25, 2002 to a settlement
of predatory lending charges that could provide nearly
18,000 borrowers with as much as $60 million dollars in
4
compensation. The suit was brought by the FTC; the
states of Arizona, California, Florida, Illinois, Massachusetts,
and New York; the AARP; and private attorneys for class
action plaintiffs and for individual plaintiffs with unfair
lending claims. The agreement settles charges that FAMCO
and its chief executive officer violated federal and state
laws in making home mortgage loans to customers.
Allegations against FAMCO were that it marketed its loans
through a sophisticated campaign of telemarketing and
direct mail solicitations. FAMCO targeted its loans to the
“subprime” market, which includes homeowners with poor

4

Profitwise News and Views

Spring 2003

credit ratings who may not be able to qualify for conventional
loans. Consumers who visited FAMCO's loan offices in
response to the solicitation were subjected to a lengthy
sales presentation known as the “Track.” The allegations
asserted that the “Track” presentation misled consumers
about the existence and amount of loan origination fees
and other fees that FAMCO charged–which amounted to
10 percent to 25 percent of the typical loan. Allegations
also included misleading consumers about increases in the
interest rate and the amount of monthly payments on
adjustable rate mortgage (ARM) loans, and failure to provide a required disclosure booklet that explains how these
loans work.
The settlement, including the bankruptcy liquidation plan
which implements the settlement, was approved by the
district court on September 9, 2002, and became final and
effective on November 19, 2002. The FTC's Redress Fund
Administrator began distributing approximately $44 million
to borrowers on December 18, 2002. An additional distribution
is expected to take place in 2003 as creditor claims against
the bankruptcy estate are resolved, outstanding litigation
settled, and expected tax refunds received.

Mercantile Mortgage Company, Inc.
The complaint charges that Mercantile Mortgage Company,
Inc. (Mercantile), through its lending officers, engaged in
numerous deceptive and other illegal practices to induce
consumers to borrow from Mercantile.5 A significant number
of Mercantile’s loans were 15-year loans requiring a large
lump-sum “balloon” payment at the end of the term, usually
80 percent of the loan amount. According to the complaint,
Mercantile misled borrowers by misrepresenting or concealing the balloon payment. In addition, the complaint
alleges that, in many instances, Mercantile failed to disclose
the balloon payment on the Home Ownership and Equity
Protection Act (HOEPA) disclosures, as required by HOEPA,
or failed to provide the HOEPA disclosures at all.
The complaint also alleges that Mercantile made misrepresentations about the key terms of its loans, including the
interest rate, monthly payment, and prepayment penalty,
and that Mercantile violated both the Truth in Lending Act
and the FTC’s Credit Practices Rule. The complaint also
contains an allegation from the U.S. Department of Housing
and Urban Development (HUD) that Mercantile violated
the Real Estate Settlement Procedures Act by giving and
receiving illegal kickbacks for referring loans. In accordance
with the complaint, on July 18, 2002, the FTC, HUD, and
the State of Illinois announced that Mercantile agreed to
settle charges that it deceived borrowers about the terms
of their loans.

The settlement required the company to make a $250,000
payment for consumer redress and create a program to
offer refinanced loans on favorable terms to certain borrowers with balloon loans. “Many consumers who were
deceived will be able to get a free refinance,” stated Allison
Brown, an FTC attorney who worked on the case. “These
consumers will get 30-year fixed rate loans, and they will
feel secure knowing that their payment will remain level
over the life of the loan.”

Conclusion
As federal and state officials continue to examine and take
legal action regarding the problem of predatory lending, they
will be policing the practices of a growing subprime marketplace. Subprime lenders produced a record $60 billion
in mortgages during the third quarter of 2002 and likely

will produce a record breaking $220 billion for calendar
year 2002. In 2001, the industry produced $180 billion in
residential subprime loans, also a record.6 Regulators
have in the past year obtained record settlement amounts
to redress the victims of predatory lending. They have crafted
settlements with an eye toward setting better standards
for the subprime mortgage lending industry. Prime examples
of these higher standards are: improved disclosures to consumers, particularly regarding credit insurance and up-front
points and origination fees; and limiting prepayment penalties
to only the first two years of a loan.
Financial education serves as a strong antidote to predatory
lending practices and various concerned agencies have
made available free publications specifically for homeowners
and potential homebuyers. Suggested references follow.

Notes

Home Mortgages: Understanding the Process
and Your Right to Fair Lending. Looking for the
Best Mortgage: Shop, Compare, Negotiate
www.federalreserve.gov/consumers.htm
www.fdic.gov/consumers/looking/index.html

1

See www.chicagofed.org/profitwise/2000/pwJan00.pdf.

2

The settlement was announced on October 11, 2002 in Chicago.
For more details, see www.naag.org/issues/20021011multi-household.php.

Consumer Protection At Home
www.ftc.gov/bcp/menu-home.htm
Financial Literacy Resources Directory
www.occ.treas.gov/ftp/advisory/2001-1a.pdf
Adjustable-Rate Mortgages
www.ots.treas.gov/pagehtml.cfm?cat
Number=28
Predatory Lending
www.hud.gov/local/fl/buying/
predatorylending.cfm
Sound too good to be true?
It may be a bad loan
www.cityofseattle.net/civilrights/documents/
Predatory-Lending-Brochure-02.pdf
A Guide to Predatory Lending
www.ag.state.nv.us/agpubs/pred_lend.pdf
How to Spot Predatory Lending–
Your Rights as a Borrower
www.newyork.bbb.org/predatory_lending/
predatory_lending.html

3

See www.ftc.gov/opa/2001/03/associates.htm.

4

See www.ftc.gov/opa/2002/03/famco.htm.

5

See www.ftc.gov/opa/2002/07/mercantilediamond.htm.

6

See Paul Muolo, Subprime Market as Hot as Prime, National
Mortgage News, December 9, 2002, Vol. 27; No. 12; Pg. 1.

Steven W. Kuehl is the consumer regulations director
for the Consumer and Community Affairs Division at the
Federal Reserve Bank of Chicago. Mr. Kuehl conducts
seminars, workshops and frequently writes on matters dealing with consumer banking regulations. Mr. Kuehl served as a
senior examiner on consumer regulations compliance and the
Community Reinvestment Act with the Federal Reserve
Bank of Chicago, and later managed a technical advisory
service program targeted to banks in the Seventh Federal
Reserve District. Prior to joining the Fed, he was an examiner
for the Office of Thrift Supervision. Mr. Kuehl earned a B.S.
in Finance and Economics from Carroll College and a Juris
Doctor degree from Chicago Kent College of Law.

Predatory Lending Prevention
www.dre.ca.gov/predatory2.htm

Profitwise News and Views

Spring 2003

5

COMPLIANCE CONNECTION

Research Methodologies Identify Deal Flow

Finding the Intersection
Between Compliance and
New Markets
By Mari Gallagher

an banks “do the right thing” and make money? Metro
Chicago Information Center (MCIC) held two events
on December 6, 2002, to help answer that question1. The
first event, hosted by the Federal Reserve Bank of Chicago,
was a half-day Community Banking Forum attended by 100
community banking representatives interested in the relationship between the Community Reinvestment Act (CRA)
and new market opportunities. The second event took place
later that day in Rogers Park and drew over 40 community
development practitioners, nonprofit and for-profit lenders,
and city planning representatives to exchange advice and
learn about MCIC’s latest research tools and techniques
for quantifying community needs and market dynamics.

C

Featured at both events was market profiling work conducting by MCIC for TELACU Community Capital (TCC),
a certified community development financial institution (CDFI)
serving small businesses in Orange and Los Angeles Counties
in California, one of the most dynamic lending markets in
the country.
TCC retained MCIC in April 2002 to conduct a phone
survey and market analysis of small businesses in Spanish
and English. The survey produced 400 properly completed
surveys2. The results of the survey and market analysis are
helping TCC and its financial partners assess the viability
and needs of its target market. It is also helping them
identify deal flow in three distinct markets:
■ The micro-business market, with annual company rev-

enues of $100,000 or less, an important but high-risk
segment of TCC’s traditional portfolio. Armed with strong
market data, TCC will now be able to identify sustainable
businesses more quickly. This segment comprised
11 percent survey respondents.
■ The small-but-stable business market, with annual

company revenues of $100,000 to $1 million. This segment
comprised 56 percent of survey respondents and is the
anchor of TCC’s long-term portfolio strategies.
6

Profitwise News and Views

Spring 2003

■ The ready-to-take-off business market, companies with

annual revenues of $1 million or more. This segment comprised 33 percent of respondents, many of whom indicated
only loose ties to banks. TCC sees this segment as an untapped opportunity for new bank referrals and partnerships.
Approximately half of all survey respondents intend to
pursue capital or credit in the next three years for business
expansion, new technology, and other uses, and 53 percent
expressed interest in receiving a follow-up call from TCC.
The findings also suggested that most respondents do not
have strong ties with traditional lenders.
“This is an excellent example of a research study that
generates valuable, strategic information for banks, notfor-profit lenders and community development practitioners,”
said MCIC senior researcher and consultant Mari Gallagher.
“Pooled surveys are a cost effective way to address multiple
user needs and broader public policy issues.” While the TCC
study did not originate as a pooled survey, banks are finding
value in the findings, especially data and cross tabulations
generated from probing questions on small business attitudes
about and experiences with specific, traditional lenders.

Building a Business Pipeline
Based on the survey findings, MCIC developed a formula
for identifying additional small business prospects within
the original sample of 8,500 businesses that fit TCC’s risk
tolerance band. “Because the original sample was developed with such care, the data just kept getting better and
better the more we drilled down,” said Riddle. In addition to
business profiles by size, MCIC also developed special
sub-profiles, such as Latino and women-owned businesses.
Prospects for each target category include company name,
CEO, detailed business data, and tract designation (low,
moderate, middle, and upper income). “We have a special
commitment to lend to viable but under-banked businesses
in low-to-mod income tracts.” Riddle continued, “Now we
know exactly where those businesses are.”

With nonprofit and for-profit lenders asking how to locate
and reach their customers, new opportunities emerge for a
broader group of change agents to collaborate on market
information and intervention strategies.

Leveraging These Findings Further
TCC’s parent, The East Los Angeles Community Union
(TELACU), was also able to build off this foundation of
work. TELACU is a nonprofit community development
corporation founded in 1968 to address economic
inequality. Today, the TELACU umbrella includes a family
of for-profit and nonprofit companies that comprise more
than $400 million in assets. Together they are one of the
most prominent and catalyzing forces in the Latino banking, real estate, community development, education, and
philanthropic communities.
TELACU retained MCIC in August of 2002 to develop a
small business profile suited to New Markets Tax Credits
(NMTC) opportunities based on quantitative, third party
data and analysis, NMTC project criteria, and TELACU’s
community development mission and impact goals.
TELACU’s objectives were to:
■ Assess NMTC market demand
■ Develop a “pipeline” of immediate NMTC business targets
■ Leverage existing community development and

locations. Only seven percent mentioned the need to get
cash faster.
The 2002 Metro Survey also asks detailed questions on
practices concerning checking and savings accounts,
IRAs, mutual funds, wire transfers, home ownership, and
other indicators and can be sorted by race, income, and
custom geography. An accompanying CD-ROM contains
the new 2000 Chicago Ward map, a comprehensive list of
publications available for download, and a variety of Metro
Survey tabulations. Additionally, users may link directly to
MCIC websites mcic.org and the interactive data and
mapping website mcfol.org.
MCIC has initiated discussions with Chicago area banks
and other entities concerned with small business lending
about conducting a study, similar to the TCC study, in the
six-county Chicago metro area.

Notes

MCIC is a nonprofit research and consulting firm founded
in 1990 by the MacArthur Foundation and the Chicago
Community Trust.

1

The survey results have a sampling error of ±4.9 percent
at the 95 percent confidence level.

2

alternative lending partnerships and investments.
Industries considered suited to expansion were more
heavily weighted than those deemed less likely to successfully expand, particularly where expansion might require land,
building, and equipment acquisition. This refined sample
was then manually reviewed record-by-record. Industries
that might be considered volatile or not suited to NMTC
opportunities were excluded. MCIC identified 226 ideal
candidates for the NMTC program in select areas of Los
Angeles and Orange Counties located in eligible tracts.
Combined, their average gross annual revenue is $2,263,786
and the median is $1,600,000.

Financial Services Needs in the Chicago Metro Area

For more information on standard or custom Metro Survey
tables or MCIC’s research and consulting services in the
financial services sector, call Mari Gallagher, Senior Consultant
and Director of Communications, at (312) 580-2591.
Mari Gallagher is a senior consultant with the Metro Chicago
Information Center. Ms. Gallagher previously directed the
Emerging Neighborhood Markets Initiative, a two-year
Chicago pilot project spearheaded by Social Compact.
Ms. Gallagher earned an M.A. from the University of Illinois,
School of Urban Planning and Policy, and a B.A. in Political
Science from DePaul University.

The Community Banking Forum also featured MCIC findings from its recently released 2002 Metro Survey. The
survey asked 3,000 households in the six-county area
about their attitudes and practices regarding financial
services, among other topics.
The study found that, during the past 12 months, 37 percent
of Chicago respondents used a currency exchange to purchase money orders, compared to 23 percent in the metro
area, 18 percent in suburban Cook County, and 11 percent
in the collar counties. When divided by income and race,
distinctions become greater. Low-income households represent 51 percent of all Chicago respondents that use
currency exchanges to purchase money orders. Thirty-six
percent said the reason was more convenient hours and
Profitwise News and Views

Spring 2003

7

ECONOMIC DEVELOPMENTS

FLLIP’s “Your Money & Your Life”
Financial Education Program
Reports High Marks after
First Year
By Steven G. Anderson and Dory Rand

articipants in the Financial Links for Low-Income
People (FLLIP) coalition’s Your Money & Your Life
financial education program achieved significant knowledge
gains and gave the FLLIP curriculum and instructors high
marks, according to a new report.

P

Professor Steven G. Anderson, Professor Min Zhan, and
Jeff Scott of the School of Social Work, University of Illinois
at Urbana-Champaign, issued the report as part of an
ongoing two-year evaluation of FLLIP’s Financial Education
Program (FEP) and Individual Development Account
(IDA) program.
FLLIP is a statewide coalition of banks, credit unions,
advocates, government agencies, bank regulators, adult
educators, private industry and sponsors of IDA programs
dedicated to expanding financial education and assetbuilding opportunities for low-income people in Illinois.
While government agencies, bankers, employers, community
and consumer groups, nonprofit leaders and others recognize the need for financial education, and many have
begun to implement programs, program evaluation is rare.1
Federal Reserve researchers note that “demonstration of
program effectiveness is critical to maintaining the current
level of interest in and resources devoted to financial
literacy education.”2
FLLIP’s financial education program and its ongoing
evaluation are unique.
■ FLLIP includes sites that combine IDAs with financial

education, as well as sites that solely provide financial
education.3 Both IDA and FEP participants receive training
in the same core curriculum that allows for comparison
of the IDA and FEP sites.
■ The Your Money & Your Life curriculum, developed by

University of Illinois Extension and the FLLIP coalition,
stresses the active engagement of participants in learning

8

Profitwise News and Views

Spring 2003

activities. It is written at a fifth-grade level and in a manner
that takes into account the often limited educational
attainment of program participants.4
■ FLLIP employs a decentralized strategy of program

development and training delivery. Instructors in FLLIP’s
nonprofit partner organizations receive four days of curriculum training as well as guidance on how to administer
the evaluation.
During the first year of the program, FLLIP instructors
gathered demographic and financial information from
participants and administered pre- and post-training
knowledge surveys.5 In addition, participants who completed
training were asked 12 questions designed to assess their
satisfaction. The FLLIP evaluation also analyzed the marketing and implementation of the FLLIP programs.
The report documents that participants in both the FEP
and IDA programs have significant financial knowledge
deficiencies.6 On average, only 63.4 percent of the pretraining survey items were answered correctly. Given that
nearly all survey questions are true-or-false, this ratio is
slightly better than might be expected by chance. IDA participants (who were more likely to be employed, have higher
income, be more highly educated, have checking and savings
accounts, be married, and be older) scored higher than
FEP participants before and after completing the course.
Questions on the pre-training survey were grouped to
provide indices of participant understanding across several
financial education dimensions:
■ Predatory lending and poor financial practices
■ Public7 and work-related benefits
■ Saving and investing
■ Basic banking practices
■ Credit use and interest rates.

Knowledge deficiencies were found on each of these
financial management dimensions. The lowest knowledge
levels were found for public and work-related benefits and
for savings and investing.

of the trainer as ‘excellent’ or ‘good.’ Excellent ratings were
high with 85.7 percent of participants rating trainer performance and 78.1 percent rating the quality of training
as ‘excellent.’

FLLIP graduates demonstrated significant knowledge
gains.8 The average number of correct responses for all
FLLIP graduates increased almost 15 percent to 78.3
percent on the post-training survey. Significant gains were
found in each of the five knowledge areas included in the
surveys, with the largest gains occurring in knowledge
about public and work-related benefits.

The second year of the evaluation will measure the effectiveness of FLLIP’s efforts to help participants make longterm changes in their financial behavior. It will also evaluate
FLLIP’s efforts to increase recruitment and retention.

FLLIP FEP sites experienced challenges recruiting and
retaining participants. The FEP dropout rate was approximately 40 percent. Dropouts in the IDA sites, where
participants have strong incentives to remain, were lower.
As a result of lessons learned from the evaluation, FLLIP
produced a recruitment and retention toolkit, provided
additional guidance to instructors on evaluation, developed
new marketing tools, and changed the way it contracts
with partner organizations. (FLLIP now uses performancebased contracts.)
FLLIP FEP partners have experimented with improving
incentives available to FEP participants. For example,
offering participants calculators, notepads, pens, and folders
for materials was seen by some community partners as
worthwhile. One FEP site’s graduates received incentives
($5 deposit and waiver of minimum balance fees) to open
savings accounts with a local bank. However, a clear
understanding of how these and other incentives affect
retention is a challenge for those interested in the
continuing development of financial education programs.
The training content, style of delivery, trainer preparation,
and trainer presentation received high marks from FLLIP
participants who completed training.9 Almost all participants
rated both the quality of the training and the performance

Researchers will conduct telephone interviews with a random
sample of participants six to twelve months after completion
of the FLLIP course to determine its longer-term effects.
The telephone interviews will cover some of the subject
matter taught in the course (to gauge long-term learning),
as well as questions such as whether participants have
paid down debts, opened bank accounts, started saving,
or changed other financial behaviors.
The second year of the evaluation will also include additional pre- and post-training knowledge surveys, more
extensive analysis of the learning that may be attributable
to the training, and analysis of knowledge levels according
to selected participant characteristics, such as educational
level. FLLIP also plans to increase incentives and opportunities for FEP graduates to open savings or checking
accounts with mainstream financial institutions.
It is our hope that the evaluation results will contribute to
the identification of best practices and policies that connect
families and individuals with the tools they need to survive
and, perhaps, to thrive, in Illinois’s vibrant and complex
financial marketplace.10
FLLIP launched the two-year pilot program in partnership
with the Illinois Department of Human Services. The
National Center on Poverty Law, a nonprofit organization
based in Chicago, coordinates the coalition and administers
the pilot program.11

Notes
1

S. Braunstein and C. Welch, Financial Literacy: An Overview

child care and transportation assistance and can count class

of Practice, Research and Policy, Federal Reserve Bulletin
(November 2002), p.449 (www.federalreserve.gov/pubs/

hours toward their “work activity” requirement.
4

bulletin/2002/1102lead.pdf).
2

Ibid., 456.

3

Participants at IDA and FEP sites face dramatically different

incomes at or below 200 percent of the poverty level. Data from
FLLIP applications indicates that 35.4 percent of participants
receive TANF benefits. Just under half of all program participants
have checking accounts, and only 40 percent have savings

incentives for program involvement. Those participating at the

accounts. Nearly half of program participants have not attended

IDA sites receive $2 in match from the program for each $1 they

college, and one-fourth have not completed high school or

save for identified savings purposes, up to a maximum of $2,000

received a GED.

in matched funds. In contrast, participants at sites not offering
IDAs generally receive few, if any, tangible incentives. One

Program eligibility rules require that all FLLIP participants have

5

The application, survey questions, executive summary, and full

exception is that Temporary Assistance for Needy Families

report are posted on the FLLIP Web site at

(TANF) recipients who attend training at the FEP sites receive

www.povertylaw.org/advocacy/fllip/fllip.cfm.

Profitwise News and Views

Spring 2003

9

6

7

Overall, 30 FLLIP sessions were completed during the first year

8

While complete pre- and post-training knowledge survey data

of the program, with 300 participants beginning and 179

only were available for 86 FLLIP participants at the time of this

completing the FEP core curriculum.

report, knowledge gains for this group are encouraging.

Unlike most financial education curricula, Your Money & Your Life
includes a chapter on public benefits that can help low-income
people make ends meet as well as information about asset limits
for program eligibility and direct deposit options available to
recipients of public assistance.

9

All participants who completed training were asked 12 questions
designed to assess participant satisfaction. First year satisfaction
data are available for 105 participants.
Braunstein at 457.

10

See Economic Development News & Views, Fall 2001

11

For more information on FLLIP or for a complete list of
FLLIP’s funders, supporters and nonprofit partner agencies,
please visit www.povertylaw.org.
Steven G. Anderson is assistant professor, School of Social
Work, University of Illinois at Urbana-Champaign and lead
researcher on the FLLIP evaluation. For more information,
contact him at sandersn@uiuc.edu or (217) 244-5242.
Dory Rand is a staff attorney and FLLIP Coordinator at the
National Center on Poverty Law. For more information,
contact her at doryrand@povertylaw.org or (312) 368-2007.

10

Profitwise News and Views

Spring 2003

ECONOMIC DEVELOPMENTS

CEDA Community
Development Fund
ATM Demonstration Project
By Harry Pestine

n January 2003, a community development financial
institution (CDFI) placed automatic teller machines (ATMs)
in the financially underserved communities of Ford Heights
and Robbins, Illinois. This move is particularly noteworthy,
as the ATMs are operated by a nonprofit organization, the
Community Economic Development Association of Cook
County (CEDA), and not by a regulated financial institution.
CEDA’s Community Development Fund (CDF) mission
allows them to create, retain and develop small businesses
and economic institutions that improve the economic stability
of low- to moderate-income communities.

I

Of the over 400 financial institutions located in the
Chicagoland area, there are virtually no banking services
or financial institutions located in Ford Heights or Robbins.
Until now, residents of Ford Heights and Robbins have
had to leave their communities in order to access money
and complete simple financial transactions.
“We conducted a community survey on financial services
needs and the survey revealed ATMs would benefit the
community.” said Bernita Lucas, Southeast CEDA executive
director. “The best initial step in providing more banking
options was through an ATM; however, a full service financial
institution is needed. I see this project as a vehicle that
can address the critical financial void and bring great
opportunities to communities in need,” said Lucas. “Our
goal is to give residents access to financial services and
the banking system,” said Yevette Newton-Boutall, CEDA
CDF executive director.
Besides accommodating major credit and debit cards, the
ATMs will also accept the Illinois Link card, giving residents
access to social security and other electronically distributed
government payments. The demonstration project uses a
tracking system to measure use of the ATMs by number of
transactions and dollar volume. The tracking information
will be used to show a need for more financial services in
the community.

In Ford Heights, the organization placed the ATM in the police
station. “This is the first electronic ATM service in the history
of this community, so we felt the police station was the
most accessible and secure means of housing the ATM.
We believe this service will offer a sense of pride and will
allow the use of a service that is taken for granted by
others,” stated Veria Ely, community development director
for the Village of Ford Heights. In Robbins, the ATM
machine is located in the CEDA Southwest Building.

Local Partners
ShoreBank will partner with the Center for Economic
Progress in the project. They will provide the people of
Ford Heights and Robbins with checking and savings
accounts as well as two free hours of financial literacy
counseling and tax preparation services to qualified individuals.
ShoreBank plans to publicize the new ATMs and banking
services at information fairs throughout the township.
Additionally, Ford Heights will place advertisements in
water bills.

For additional information contact, Ms. Bernita Lucas,
Southwest CEDA, at (708) 371-1220.
Harry Pestine is the Community Affairs Program Director
for Illinois, in the Consumer and Community Affairs Division,
Federal Reserve Bank of Chicago. Mr. Pestine is an economic
development specialist and a Community Reinvestment Act
examiner for the Federal Reserve Bank of Chicago. Prior to
joining the Fed, Mr. Pestine worked in the governor’s office
of economic development in Illinois for 12 years. Mr. Pestine
has also been an instructor for the Neighborhood
Reinvestment Institute, the National Small Stores Institute,
and was an alternate voting member on the board of the
Illinois Development Finance Authority.

Profitwise News and Views

Spring 2003

11

RESEARCH REVIEW

Financial Institutions and
Participation in Individual
Development Account Programs
By Robin Newberger

his article considers the roles that banks and credit
unions play as part of the delivery mechanism for
Individual Development Accounts (IDAs) within the geographic district covered by the Federal Reserve Bank of
Chicago.1 IDAs began as a theory put forth by Michael
Sherraden in the early 1990s to address the wealth-building
component of anti-poverty strategies in the United States.2
IDAs are savings accounts matched with outside contributions that are designed to help lower-income families
accumulate money for homeownership, education, job
training, and business development. In most cases, IDA
programs operate through partnerships between nonprofits
that recruit and counsel participants and financial institutions
that hold the savings accounts. The participants attend
classes on financial topics and make regular deposits of
earned income. Appropriately earmarked deposits and
interest are matched by government, foundations, the
community and/or financial institutions.

T

The IDA field has grown from three programs in 1995 to
over 350 programs in 2001 (Schreiner 2001). Programs
are flourishing in each of the states within the Federal
Reserve Bank of Chicago’s district. The expansion is due,
at least in part, to the fact that a savings strategy for lowand moderate-income individuals appeals to a range of
constituencies. Community groups support IDAs because
matched savings help their target populations reach goals
like buying a house or attaining higher education. Federal
and state governments have allocated funds for IDAs as
they further the agenda of welfare reform to build the assets
of lower-income families.
IDAs also offer a mechanism for drawing so-called
“unbanked” households (people without bank accounts)
into the financial mainstream. The impediments to having
a bank account are a policy concern in so far as these
households may pay more in fees, face a loss in personal
security, forego an opportunity to build a credit rating, or

12

Profitwise News and Views

Spring 2003

accumulate less savings. In addition, IDA programs showcase
the importance of financial education and related support
services for clients who seek to maintain financial assets.
The Consumer and Community Affairs division (CCA) of
the Federal Reserve Bank of Chicago has chosen to include
greater economic literacy, the use of mainstream financial
services, and asset-growth among low- and moderateincome households in its mission to promote sustainable
community development. The CEDRIC Web site, founded
and maintained by the CCA division, contains a repository
of research and other documents on consumer education,
alternative financial services and community development.
The Federal Reserve Bank of Chicago has also launched
its own projects for fostering mainstream financial access
for the unbanked and improving the population’s understanding of fundamental financial concepts.3 In addition,
the Community Affairs staff is encouraging the study of
community development programs at the level
of implementation.4
The effectiveness of the IDA model is being measured in
two national evaluations that look at impacts on individual
participants, design features, and community effects.
Financial institutions are also stakeholders in the IDA
strategy. IDA programs, as currently structured, could not
exist without depository institutions that hold the deposits
and track account balances. It is therefore worthwhile to
understand the contributions made and received by financial
institutions from their own perspective.

Overview of Findings
A diverse group of financial institutions, most of which have
no explicit community development mission, hold IDA
accounts in the district. Banks tend to limit their IDA-related
activities to conventional depository functions such as holding
accounts and mailing statements. A larger proportion of
credit unions dedicates resources to program operations,

reflecting the prevalence of low-income credit unions in
this study. The most frequently cited motivation for involvement by both banks and credit unions is their desire to help
the communities in which they do business. Fewer banks
list business-related interests as a reason for involvement. A
higher proportion of credit unions cite opening new markets
and cross-selling products as their motivation.

Data Collection
The findings are based on short interviews with financial
institutions that participated in IDA programs in the first
half of 2001. Sixty-three financial “partners” were identified
through conversations with selected IDA program operators,
publicly available lists of programs that were awarded Assets
for Independence Act grants, and discussions with state
personnel in Illinois, Iowa, Indiana and Michigan. (The state
of Wisconsin does not fund IDAs.) The conversations
focused on how the institutions became involved, the functions they perform for IDA account holders, their incentives
to participate, and how they structured their savings product.
Representatives from state agencies and selected community-based organizations supplemented some of the explanations obtained from financial institutions. A number of
financial institutions may not have been included because
their programs were just getting started. Personnel ranging
in positions from account representatives to presidents
participated in the interviews.5
Data on participating banks is also drawn from the most
recent public Community Reinvestment Act (CRA) performance evaluations, from the Federal Deposit Insurance
Corporation/Office of Thrift Supervision Summary of
Deposits database, and from Home Mortgage Disclosure
Act reports available through the Federal Financial
Institutions Examination Council (FFIEC). Data on credit
unions is taken from the National Credit Union Association
and conversations with credit union officials. Census tract
income information for the banks’ assessment areas (the
geographic market where financial institutions conduct
business) and branch locations comes from the FFIEC
census reports.
A few caveats about the responses deserve mention. At
the time of the interviews, programs were relatively young,
many financial institutions had opened only a small number
of accounts, and these institutions were still forming their
impressions about IDAs. About 80 percent of banks have
been offering IDA accounts since 1998 and more than 70
percent of the credit unions began offering IDA accounts
as of 2000. Information on banks from the CRA performance evaluations may be dated as the most recent reports
for a number of institutions were published in 1996, 1997
and 1998. CRA performance evaluations were not found
for this study for four banks.6 For the 44 banks with CRA
reports, not all reports contain all the data analyzed in this
study such as the percent of low- and moderate-income

census tracts in their assessment areas. In addition, since
a preponderance of institutions are in Indiana, the general
perspective of the respondents, as summarized at various
points in this paper, may be tilted towards issues specific
to Indiana.
The remainder of the article is organized as follows. Section I
compares the characteristics of participating institutions
based on asset size, market share and mission. Section II
lists the responsibilities of financial institutions in IDA programs. Section III presents the reasons financial institutions
(among the sample) support IDAs. Section IV discusses the
program design features that encourage participation.

I. Characteristics of Financial Institutions
Size and Market Coverage
Of the 63 financial institutions interviewed, 78 percent (49)
are banks and 22 percent (14) are credit unions.7 The
participating banks divide fairly evenly between larger
institutions with more than $1 billion in assets, midsize
institutions with assets between $250 million and $1 billion,
and smaller institutions with less than $250 million in assets.
Among credit unions, asset size ranges from less than $1
million to more than $380 million. The preponderance of
institutions dominate their markets in terms of deposits
held. Over half of the banks rank within the top five in deposit
market share in their assessment areas.8 Eighty percent
(35) rank within the top ten in their assessment areas.
An outside entity such as a local nonprofit or government
agency approached over 80 percent (50 of 60) of the
institutions with proposals to open IDA accounts. More
than half of these institutions were contacted by nonprofits
with which they had a previous relationship. The rest were
approached because of their proximity to the target population, their known participation in IDA programs in other
states, or their entry into a new market.
Institutional Mission
Most institutions qualify as “mainstream”–full service
entities that provide a range of traditional banking services
with no particular community development mandate.
Ninety-three percent of banks (38 of 41) target assessment
areas in which half or fewer of the census tracts are lowor moderate-income (Table 1). Sixty-three percent (27 of
43) show a lower or equal percentage of mortgage financing
in low- and moderate-income census tracts than the average
for all banks in the metropolitan area in which the institution
is located (or is in close proximity). Most of the institutions
assign a particular branch to serve IDA customers. Over
60 percent (26 of 42) of the banks and two thirds (6 of 9)
of the credit unions that operate multiple locations offer
IDA accounts at just one branch or office.
Institutions with a mission or business strategy to serve
distressed communities and target low-income individuals

Profitwise News and Views

Spring 2003

13

are relatively well represented in the sample. Eighteen
percent of banks and credit unions (11 of 62) have a designation as a community development financial institution
(CDFI), a community development credit union (CDCU) or
a low-income credit union (LICU). One bank drafted and
plays the lead role in carrying out the area’s plan as a
Federal Enterprise Community, and yet another focuses its
branch on an immigrant neighborhood. In comparison, among
all 1,635 banks in the district (including the banks and
thrifts overseen by other regulators), nine banks, less than
one percent, have a CDFI designation. Among all 1,591
credit unions in the district, 3.7 percent (59) have a CDCU
or LICU designation.
In addition, 62 percent of banks (28 of 45) reported that
low- and moderate-income IDA account holders fall within
the spectrum of their existing customer bases, although
some indicated that IDA participants represent the lowestincome group in this spectrum. Many of the institutions offer
various deposit products with low or no opening balances,
and have a history of participation in housing and economic
development projects with local community groups and city
government. Eighty-six percent of credit unions (12) say
they serve low- and moderate-income individuals as part
of their existing customer bases. Many of the institutions
that do not think IDA account holders fall within their customer base describe the IDA participants as “unbanked” —
having no previous relationship with a financial institution.

Table 1: Income of Geographic Market/Number
of Service Delivery Locations
Banks

Percent LMI geographies in assessment area
25 percent or less
26—50 percent
51 percent or more
Observations1

IDA proponents have identified various ways for financial
institutions to contribute to IDA programs, spanning from
servicing accounts to contributing operating funds. In addition,
federal banking regulators granted CRA credit for a range
of IDA-related activities including making grants to IDA
programs, providing staff to participate in the development
of IDA programs, and making loans to IDA holders.
Table 2 presents the list of responsibilities reported by
banks and credit unions. All but one hold deposits and send
account statements. (One of the banks contributes only
match funds, held outside of the bank.) In fact, 62 percent
of banks and 21 percent of credit unions limit their
involvement to holding deposits, sending account statements
and holding match funds. These are functions that fall within
the normal activities of depository institutions, although
roughly a quarter of the banks must also assist program
sponsors in allocating match funds to individual accounts
(as technical assistance to nonprofits or as a mandate
from the funding sources).
Their services depart from convention in that participating
institutions do not assess charges on the accounts. All
waive fees on balances below pre-set thresholds and pay
interest (usually a basic passbook rate) regardless of the
balance, with the exception of one bank that pays interest
on balances of $100 and over. One bank pays in excess
14

Profitwise News and Views

Spring 2003

18
20
3
41

Percent
43.9
48.8
7.3

1
The CRA performance evaluations of 7 banks do not include the
census tract incomes of their assessment areas.
Sources: Community Reinvestment Act Performance Evaluations
and 2000 Census of Population and Housing.

Banks

N

Bank-issued LMI home loans vs. average in MSA
Lower
20
Higher
6
Same
7
Observations1
43

Percent
46.5
37.2
16.3

1
Five banks did not provide HMDA data since they are not located
in metropolitan statistical areas.
Sources: Home Mortgage Disclosure Act disclosure and aggregate
reports and author’s interviews.

Banks

II. Responsibilities of Financial Institutions

N

Institutions with more than one branch/office
IDAs offered at a single location
IDAs offered at more than one location

N
42
26
16

Credit Unions

N

Institutions with more than one branch/office
IDAs offered at a single location
IDAs offered at more than one location

9
6
3

Percent
91.3
61.9
38.1
Percent
64.3
66.7
33.3

of the rate on non-IDA accounts. The majority of institutions
require no minimum balance for opening an account,
although eight banks require opening deposits of $1 to
$30, and seven credit unions require opening balances of
$5 to $25. Some institutions offer savings bonds or certificates of deposit rather than savings accounts. Thirteen
percent of banks (6 of 47) also cash payroll checks at no
charge and offer free ATM cards. One institution relaxes
certain requirements to enable some IDA participants to
open checking accounts.
Compared with the credit unions in the sample, a smaller
percentage of the banks participate in activities that fall
outside of standard depository functions. Thirteen percent
(6 of 47) contribute to match funds in addition to holding
deposit accounts. A seventh bank contributes match funds

without holding any deposits. Of these, one indicated direct
compensation from the U.S. Treasury Bank Enterprise Award
Program for its work with CDFIs was the motivation, and another
institution waited to allocate money until it identified other
sources with which to supplement its own contribution. Thirty
percent of the banks (14 of 47) report participation in financial
literacy programs, which ranges from overseeing a money
management workshop to providing space for a course.
As Table 2 shows, credit unions tend to take a broader
operational and administrative role, reflecting the prevalence
of in-house IDA programs at these institutions. Half of the
14 credit unions sponsor their own IDA programs, while
98 percent of banks in the sample do not. Each of these
credit unions has a mandate to serve traditionally underserved customers or markets. Over half of credit unions
contribute operating funds or recruit and screen participants,
over a third sponsor a VISTA volunteer,9 and 43 percent
report involvement in the economic literacy component. In
contrast to the banks, none of the credit unions in this
study contributes matching funds.

Table 2: Functions Performed
Banks

Hold deposit accounts
Hold match accounts
Send account statements (monthly/quarterly)
Contribute match funds
Participate in financial literacy education
Program Administration:
Develop program design
Contribute operating funds
Recruit/screen participants
VISTA volunteer
Observations1,2

N

Percent

46
40
46
7
14
2
1
1
0
NA
47

97.9
85.1
97.9
14.9
29.8
4.3
2.1
2.1
0
NA

Does not include one bank that recently began its program.
Respondents could give multiple answers.

1
2

Credit Unions

Hold deposit accounts
Hold match accounts
Send account statements (monthly/quarterly)
Contribute match funds
Participate in financial literacy education
Program Administration:
Develop program design
Contribute operating funds
Recruit/screen participants
VISTA volunteer
Observations1
Respondents could give multiple answers.

1

N

Percent

14
8
14
0
6
8
3
7
3
5
14

100
57.1
100
0
42.9
57.1
21.4
50
21.4
35.7

III. Motives for Participation
The literature in support of IDAs notes the following
reasons financial institutions might want to partner in
IDA programs:
■ Better serve the local community
■ Tap new markets

■ Cross-sell products like mortgages, business loans or
college loans
■ Receive CRA credit
■ Realize profit potential with the right mix of public,

private and nonprofit support (Boshara 2001)
Community Outreach
Community outreach is by far the most common motive
for becoming involved in an IDA program according to the
institutions in this sample. Seventy percent of banks and
79 percent of credit unions list “contribution to the community,” “relationship-building with the local service provider,”
or “mission of institution” as at least one of their motives.
Many credit unions consider the IDA program an extension
of their mission. Many banks mention that they want to help
individuals build wealth. Other banks indicate that there is
no reason not to participate. The commitment is relatively
“easy” inasmuch as the bank incurs little or no risk (if the
accounts can be easily monitored), existing savings products can be adapted to IDAs, staff do not need intensive
training, and the banks do not have to choose from a pool
of potential grantees.
In conjunction with the benefits of contributing to the
community, banks receive CRA credit for their participation.
Fifty-five percent of banks (26 of 47) mention CRA as a
reason for participation; however, many others are reluctant
to explain their involvement in quid pro quo terms. For
large banks, CRA service credit is awarded for holding the
IDA accounts and investment credit is awarded for contributing match funds. Forty-nine percent of banks
(23 of 47) participate exclusively for community outreach,
CRA credit, or both (i.e., they indicate no business motivation).
Cross-Sell Products and Target New Customers
Fifty-one percent of bank respondents (24 of 47) list
cross-selling products and/or targeting new customers as
a motive for holding IDA accounts. Six percent list these
business motives to the exclusion of community outreach
or CRA credit. Eighty-six percent of credit unions (12 of 14)
aim to cross-sell or target new customers, and 21 percent
(3 of 14) list these as their only motives. IDA participants
have actually used other financial products—most commonly
a checking account—at 28 percent of banks (13 of 47)
and 50 percent of credit unions, although some of these
institutions did not list cross-selling as a motive for participating in an IDA program.

Profitwise News and Views

Spring 2003

15

Among those institutions that cross-sell, one bank reports
that it made a mortgage loan to an IDA graduate, and three
credit unions have offered secured loans to build a credit
history. Among those institutions that target new customers,
many see IDA accounts as giving an inroad into untapped
markets including growing Hispanic populations and immigrant groups. Some state targeting new customers as a
secondary consideration or phrase it in indirect terms such
as improving the quality of life of the IDA account holder
by turning them into a “regular” bank customer. For the
banks that hope to cross-sell in the future, they focus on
credit cards, car loans and other consumer products in
addition to home loans.
Institutions that do not cross-sell cite a handful of reasons.
Among them, many programs are relatively new and account
balances are still low. Some institutions observe that IDA
participants have barely enough resources to save for the
match, let alone use other bank services. Some institutions
suggest that cross-selling goes against their civic-minded
motivation for participating in the IDA program. These
institutions make a clear distinction between contributing
to the community and deriving any business benefits
from involvement.
Financial Bottom Line
In keeping with these results, no institution in this study
lists profit potential as a motive for participating in an IDA
program. Some institutions face higher costs with respect
to their management of IDA accounts, sending statements
every month rather than every quarter, and at times to both
the local service provider and the individual account holder.
Some institutions are required to complete and submit
paperwork for the match funds, modify account-processing
systems, and monitor authorized and unauthorized withdrawals. Dedicating match funds from the institution itself
adds to the total costs.
The extent to which an institution’s management information
system is compatible with IDA tracking is another factor
affecting costs. The institutions in the sample have tended
towards using “off-the-shelf” savings products to set up
IDAs, flagging the accounts with special codes, creating
custodial accounts held jointly by the nonprofits and the
individual, or designating the accounts for deposit only. Some
institutions confine their IDA accounts to a single location
precisely to avoid making system-wide changes to their
MIS systems. One large bank chose not to hold accounts
(but to contribute to operating and administrative expenses)
in part because its centralized processing system could not
easily track IDA accounts.
None of the institutions had performed a break-even
analysis of the IDA accounts at the time of the interviews.
Accounts do not cover costs as currently designed at 34
percent (15 of 44) of banks. Another 34 percent of bank
respondents steer away from cost measurements given
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Profitwise News and Views

Spring 2003

their community development reasons for participation. Two
others indicated the accounts probably do not lose money
for the bank. Among 13 credit unions, 23 percent (3)
report that accounts do not cover their costs and another 23
percent (3) indicate they do not consider breaking even
[a priority] given their goals. Another three are waiting to
judge costs based on future lending opportunities.
In instances where financial institutions say costs are not
covered, many acknowledge the possibility that a change
in the design of the account could lead to more profitable
results. These changes include greater automation and a
larger number of accounts with higher balances. The higher
the match rate, the shorter the time it takes for the accounts
to break even. To paraphrase one respondent, a short-term
deposit account is not a moneymaking product. Four credit
unions also recognize that utilizing VISTA volunteers substantially reduces the costs of operations. At the time of
the interviews, about half of the banks in the sample had
opened 30 accounts or fewer, and over three-quarters of
credit unions held fewer than 50 accounts each.

IV. Discussion of Major Findings and Conclusion
Variety of Institutional Partners
Looking at features such as size, branch location or organizational mission does not suggest a particular type of
financial institution to partner in an IDA program. From the
perspective of an account holder, institutional trustworthiness
and the suspension of credit checks might be the most
sought-after features of financial institutions—potentially
outweighing the importance of geographical proximity or
personalized attention. From the perspective of a local
service provider, institutions with larger capital bases and
mortgage departments with formal relationships with entities
such as the Federal Home Loan Bank and Neighborhood
Housing Services may be better equipped to offer the
most competitive loans to IDA graduates. Institutions that
reach widely dispersed populations through multiple
branches may also work best for service providers that
operate across several counties.
Local service providers, perhaps anticipating few other
choices, have often approached the institutions with which
they had a pre-existing relationship. Differences in state
legislation and policy initiatives have also resulted in various
types of institutions holding IDA accounts. For example, the
Center for Urban Affairs program at Michigan State
University recruits special-mission credit unions to administer
IDA programs.10 The federal government’s Assets for
Independence Act demonstration, offering the single largest
pool of money for IDA service providers, comes with its
own set of specifications for involvement by financial
institutions. The relatively few CDFI-designated banks and
low-income credit unions in the district may also explain
why more local service providers have not opened IDA
accounts at institutions with economic development missions.

Another way to account for institutional diversity is in the
risks and rewards to participation. When start-up costs are
relatively low and financial institutions can contribute by
carrying out traditional bank functions, IDA programs offer
an opportunity for all types of financial organizations to
support community development. Any number of depository
institutions could have a basic affinity to the IDA concept
when the scale of programs is kept relatively small.
Reducing Costs and Institutional Participation
From what financial institutions report as their responsibilities
and motives, fewer institutions might show an interest in
IDAs if they were charged with helping bring the IDA concept to scale. Many activists in the IDA field recognize that
cost-cutting measures and direct subsidies are useful
incentives to encourage institutions to open larger numbers
of accounts or contribute match funds. One group of
researchers is already promoting efficient account processing as the way to increase the impact of the IDA strategy.
This approach removes IDAs from the domain of retail
depository institutions and experiments with accounts based
on 401(k) processing systems (Tufano 2001). Another
broad coalition of IDA activists supports federal tax credits
to for-profit depository institutions to mitigate the costs of
contributing match funds. The “Savings for Working
Families Act” would cover 100 percent of matching funds
(up to $500 per account holder per year), and provide
$100 for each new account opened and $30 for each
account maintained.
Business Opportunities and Institutional Participation

institutions in this sample have not begun to link IDA participation with appropriate financial products, in part because
programs are relatively young and many financial institutions
have opened only a small number of accounts. Another
impediment may be intermediation by local service providers,
whom many financial institutions see as their clients rather
than the IDA-savers themselves. This perception can be
reinforced in situations where depositors themselves rarely,
if ever, visit the financial institution. (Bank personnel pick
up deposits and open accounts directly at the local service
provider’s office, or depositors send their money by mail.)
The business potential of IDA accounts might be best
appreciated in the context of how people with savings
accounts but no checking accounts, and the “unbanked”
population in general, conducts their financial transactions.
A survey of banked and unbanked households in New York
and Los Angeles revealed that only 12 percent of savings
accounts holders used personal checks to pay their bills
(perhaps using other household members’ checking accounts).
The remainder rely on money orders and cash, much like
the unbanked (Dunham 2001). The profit potential of IDA
participants depends in part on the availability and cost of
products that this population accesses elsewhere—
convenient check cashing, purchasing of money orders or
wire transfers, non-English speakers for recent immigrants
and bill paying services, among others (Rhine et al, 2001).
A financial institution’s involvement in an IDA program can
offer an inroad into this client base by improving their
qualifications for having a checking as well as a savings
account, and potentially changing their attitudes toward
services offered by banks and credit unions.

Cross-selling financial products tailored to the needs of
IDA participants could create additional incentives for
institutions to partner in IDA programs. A number of financial

Notes

1

The district includes Iowa and portions of Michigan, Illinois,

5

Indiana and Wisconsin.

Some financial institutions had terminated their involvement in
IDAs. Although beyond the scope of this paper, conversations
with these institutions could provide a fuller understanding of

2

See Assets and the Poor: A New American Welfare Policy.

3

More information about the “unbanked” can be obtained at

the incentives and disincentives for participation.
6

CRA information for those institutions was not located through
their regulators’ Web sites.

www.chicagofed.org/unbanked/purpose.cfm. More information
about Project Money$mart can be obtained at
www.chicagofed.org/consumerinformation/projectmoneysmart.

7

The remainder of the analysis does not include one of the banks
that provided money indirectly to a coalition of IDA programs.

4

The Community Affairs officers of the Federal Reserve System

Also, the total does not count branches of banks that partner

have jointly sponsored their third biennial research conference in

independently with nonprofits in their areas.

March 2003 to address these and related issues.
See www.chicagofed.org/CEDRIC.

Profitwise News and Views

Spring 2003

17

8

Based on information from the FDIC/OTS database for 44 banks
where the CRA performance evaluation gives information on the
bank’s assessment area.

9

The Volunteers In Service To America (VISTA) program is a
national program placing individuals with community-based
agencies to address urban and rural poverty issues.
A complete description of state IDA policies is available through

10

the Center for Social Development at Washington University.

Robin Newberger is a research analyst in the Consumer
and Community Affairs Division at the Federal Reserve
Bank of Chicago. Ms. Newberger conducts research and
writes on matters related to the savings behavior of lowand moderate-income people in Chicago. She holds a B.A.
from Columbia University and a Masters in Public Policy
from the John F. Kennedy School of Government at Harvard
University. She received a Chartered Financial Analyst designation in 2001.

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Profitwise News and Views

Spring 2003

1st Quarter 2003

Calendar of Events
Midwest Macroecononmic Conference
Federal Reserve Bank Of Chicago
May 16–17, 2003
The 11th Midwest Macroeconomics Conference will be
hosted by the Federal Reserve Bank of Chicago on Friday,
May 16 and Saturday, May 17. The sessions will begin at
8:30 a.m. on Friday and end at 5:00 p.m. on Saturday.
For more information, contact Jonas Fisher at:
midwestmacro@frb.chi.org or (312) 322-8177, or
www.chicagofed.org/newsandevents/
conferences/index.cfm.

Greening Rooftops for Sustainable Communities
Congress Plaza Hotel, Chicago, IL
May 29–30, 2003

Microenterprise Tools & Techniques
Training Seminars
June 19 & 20, 2003–Providence, RI
September 18 & 19, 2003–Boston, MA
The Federal Reserve Bank of Boston will host several twoday training seminars for microenterprise lenders and technical assistance providers. This program was developed by
MicroNet (Maine’s association of microenterprise lenders)
and the Federal Reserve Bank of Boston to help build the
organizational, lending, and technical assistance capacity
of microenterprise practitioners and organizations throughout New England.
For registration and information contact:
www.bos.frb.org/commdev/conf/micro/index.htm.

The First North American Green Roof Infrastructure
Conference, Awards and Trade Show is being organized
by Green Roofs for Healthy Cities, a network of public and
private organizations working to develop the green roof
industry for the past four years. The event will provide a
unique opportunity to strengthen and broaden the growing
constituency of policy makers, researchers, designers, manufacturers, Non-Governmental Organizations and consulting
professionals who are involved in the green roof industry in
North America. A trade show, guided tour of green roofs,
presentation of papers and posters, and more will be featured
at this conference. Co-hosted by the City of Chicago, with
support from the Chicago Environmental Fund.
For more information contact:
www.greenroofs.ca/grhcc/conference.htm.

Profitwise News and Views

Spring 2003

19

The Consumer and Community Affairs Division of the
Federal Reserve Bank of Chicago & Proteus, Inc. invites you to attend:

An Informed Discussion of the
Financial Assimilation of Immigrants
Des Moines Marriott – Downtown
700 Grand Avenue
Des Moines, IA

Tuesday, June 24, 2003
8:00 a.m. Continental Breakfast
Program begins 8:30 a.m.— 4:00 p.m.
Complimentary lunch will be served
at 12:00 noon

A panel of experts on the topic featuring Terry Meek, Executive Director of Proteus, Inc. will address
issues and opportunities surrounding the financial assimilation of immigrants, such as legal services,
documentation and tax matters, use of the Matricula card, and employment and housing concerns.

Target audience:
■ Employers of immigrant workers
■ Researchers interested in immigrant and working poor issues
■ Public and private agencies serving immigrants and lower-income workers
■ Compliance and CRA officers of financial institutions.

Topics include:
■ Serving the financial needs of immigrant populations
■ USA Patriot Act impact on immigrant issues
■ Legal services to immigrants
■ Documentation issues surrounding the IRS, Social Security, and the Matricula card
■ Financial assimilation as a tool to stem poverty and welfare dependence.

There is no charge for the event, and lunch is provided, however seating is limited. If you would like
to attend this event, please reply via fax at (312) 913-2626 or on-line at CCAEvents@chi.frb.org,
by Monday, June 16th and provide the following information:
1. Participant(s) name;
2. Title;
3. Organization;
4. Phone/fax #’s
5. E-mail address
20