Bridges - Winter 2006

8/9/2019 Bridges - Winter 2006

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PUBLISHED QUARTERLY

BY THE COMMUNITY

AFFAIRS DEPARTMENT OF

THE FEDERAL RESERVEBANK OF ST. LOUIS

L i n k i n g L e n d e r s A n d C o m m u n i t i e s Winter 2006-2007

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By Michael O. Minor, SeniorCommunity Aairs Specialist,

and Glenda Wilson,Community Aairs Ofcer,Federal Reserve Bank o St. Louis

Breathing new lie into dis-tressed neighborhoods isa challenging proposition.

It requires government agencies,community organizations, nan-

cial institutions, corporationsand individuals to come togetherto get the job done. Sometimes,these entities are unaware o thework each is doing unawareo the possibilities collaborationwould oer.

Thats where the FederalReserve comes in.

The Community Aairs Oceat the Federal Reserve Bank oSt. Louis works to oster commu-nity and economic developmentin low- and moderate-income

(LMI) neighborhoods by bring-ing these entities together. Sta

members keep a nger on thepulse o community develop-ment in the Eighth District byparticipating in local communitydevelopment and asset-buildingcollaboratives and conducting

outreach meetings with con-stituents. The District includesall o Arkansas and portions o

six other states: Missouri, Mis-sissippi, Tennessee, Kentucky,Indiana and Illinois.

The Community Aairs teamrecently completed a district-

wide environmental assessmentthat ocused on community

and economic developmentissues and opportunities. Morethan 80 individuals represent-ing more than 60 organizationscovering nearly the total breadthand width o the District were

interviewed. Interviewees rep-resented state and local govern-ments, colleges and universities,

nancial institutions and otherlenders, nonprot developers,small business technical assis-tance providers, social serviceproviders and others.

Assessment Outcomes

Several signicant themes

emerged rom this assessment.

Regional economic actors hav-ing an impact on LMI individualsor communities: Low-skill/high-wage manu-

acturing jobs are beingreplaced with low-wageservice jobs. A more diverse

employer base is needed, butit is dicult in some parts othe District to attract indus-tries. Contributing actorsinclude a lack o educationamong residents and anunskilled workorce.

Several times during theinterviews, individual devel-

opment accounts (IDAs)matched savings accountsthat enable low-income,working individuals or ami-

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lies to save, build assets andenter the nancial main-streamwere mentionedas a tool in short supply inthe District. The monthlysavings and matched undscan be used toward purchas-ing an asset (most commonlybuying a rst home, payingor post-secondary educationor starting a small business).The lack o matching undsor IDAs limits the numbero successul programs.

Capacity and sustainability ononproft organizations In general, the District has an

immature nonprot (com-munity and housing devel-opment) community. Toomany nonprots are lackingcapacity, and the challenge to

developing capacity is that ahigh level o sta know-howor expertise is not matchedwith salary.

Agencies are challenged tosupport their existing inra-structures, not to mentionany new programs they wantto introduce. Competition

or private dollars is gettingmore intense. Governmentunding and oundation sup-port or community develop-ment corporations (CDCs)has diminished. Communityorganizations would benetrom increased participationby intermediaries that are

oten a source o capacity-building support. As nonprots compete or

a shrinking pool o unds,they are striving or opera-

tional eciency and sel-suciency. Some suggestedways to accomplish thesegoals include: starting or-prot ventures that can pro-vide a regular unding stream,adopting a business approachto managing the organiza-tion, and developing CDCnetworks to achieve scale thatwould allow greater access toinsurance and credit.

Eect o bank mergers on theability o fnancial institutions

to serve credit needs Many in the community

believe that the loss o

headquartered banks hasa negative impact on LMIindividuals because, when

banks merge, credit standardsmay be tighter, and creditdecisions are no longer madelocally. However, a bankertold us, As or bank mergers,some would say this has hada negative eect on the avail-ability o credit or LMI bor-rowers. I see positives and

negatives. On the positiveside, with each merger, wereviewed the products oeredby both nancial institutionsand kept those that best meet

the credit needs o the cus-tomers. In some instances,the bank merging with ushad some products that wedid not have, so we haveadded them to our oerings.On the negative side, mergerslead to the elimination andconsolidation o the backoce. When this happens,the back oce unctions maynot be at the depositors localinstitution. Thereore, creditdecisions slow down and givethe perception that credit is

more dicult to get. Withthe loss o the local backoce, we have also lost some

o the ability to do special-case exceptions based onpersonal knowledge.

A nonprot developer said,It is dicult to do busi-ness with non-local bankssince project managementrequires decisions that arequicker/more timely. Thechallenge or the bank is inthe complexity o marketsand development structures.

Most dont have in-houseexpertise. Some are trying todevelop new expertise, but itmay not be cost-eective orthem to do so.

Support services or theHispanic community In some parts o the District,

the Hispanic population isgrowing, but the growth hasbeen relatively slow, so thatmany Hispanics have assimi-lated into the community.Other parts o the District,particularly Arkansas, haveseen a large increase in thenumber o Hispanics.

Language barriers are a chal-lenge to oering services,and because some Hispanics

are undocumented, it is hardto connect them to services.Financial institutions, as wellas service providers, that donot have bilingual employeesidentied the language barrieras a major issue. Also, whilesome banks have establishedprograms or outreach to His-

panics in their service areas,others cited the concernabout legal status as an issuethat was hindering them romproviding more services.

Although several organiza-tions are supporting immi-grant or reugee populations,the lack o nancial resources

or these organizations isdiluting their impact.

Workorce development Workorce development

eorts have been hindered bya lack o accessibility (trans-portation and location). Also,the lack o adequate, aord-

able child care makes it di-cult or low-income parentsto maintain employment.

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O N T h E I N T E R N E T A T w w w . S T L O U I S f E D . O R G#

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By Jean Morisseau-KuniCommunity Aairs SpecialistFederal Reserve Bank o St. Louis

orking parents needsae, reliable and

aordable child care.For low-income parentsmovingrom welare into the work-

orce, that can be hard to nd.Many depend on riends andamily to watch their childrenwhile they work.

Although this may be a goodoption or some parents, othersmay not have such support.In addition, children in homecare may not receive educa-

tional and social opportunitiesthat state-regulated child-carecenters oer.

Nonprot organizations canplay a critical role in bringingchild care to parents in low-and moderate-income areas.However, many nonprots thatoperate child-care acilities

lack the expertise or incometo develop and und a capitalproject and must look outsideo their organizations or help.That help can come in the ormo public-private partnershipswith lenders.

Partnerships: Getting the Right

People Involved in the ProjectA public-private partnershipexists when the public sector(ederal, state and local ocialsand agencies) joins the private

sector (amilies, employers,nonprots, nancial institutions,civic groups and service provid-ers) to attain a shared goal. Thepartnership allows each sector tocontribute its resourcesinclud-ing time, money and expertiseto complete the project.

The Department o Health

andHuman Services, whichrecognizes that collaborativeeorts are needed to completecapital projects, established theChild Care Partnership Project.

As a result, states are working tobuild and sustain partnershipswith the private sector thatbring together innovative eorts

and technical and nancialassistance. Those public-privatepartnership eorts have becomean important vehicle to expandaordablequality child care.

The Growing NeedThe need or more and better

child care in low-income neigh-borhoods grew out o the 1996Personal Responsibility and

Work Opportunity Reconcili-ationAct. Congress realizedthat, in order or low-incomepeople to move into the main-

stream, the government neededto create programs that encour-aged sel-suciency. Tem-porary Assistance or NeedyFamilies (TANF) and socialservice block grants are a resulto those plans. TANF requiresprogram recipients to have a

job within two years o receiv-

ing benets. The social serviceblock grant programs allowstates to create social programs,including child care, that workbest in their communities.

Parents moving rom welareinto entry-level jobs nd thathaving a job doesnt mean earn-ing a living wage. They alsond that child care is the largestexpense they have when joiningthe workorce.

States use portions o theirsocial service block grants

to ease the high cost o childcare or low-income workingparents, but that alone is notenough. Research has oundthat, even with assistance,low-income parents spend amuch larger percentage o theirincome on child care than theirmiddle-income counterparts.

In 2003, a single parent whoearned $8 to $9 an hour spenton average 15 percent to 22percent o his or her income

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C up wh $3,800,000Breakdown o nancing or New Lie in Christ Interdenominational Church

and Little Angels Day Care Center

CongregationEquity Bonds

$500,000 (13%)

Regions Bank$2,300,000 (61%)

IllinoisFacility Fund

$1,000,000 (26%)


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on child care, and those whoearned minimum wage spentmore than 28 percent. How-ever, middle-income parentsspent on average 8 percent to10 percent o their take-homeincome on child care.

Creating a Haven or Little Angels

A child-care center in south-ern Illinois is a perect exampleo a public-private partner-ships success.

In 2001, Dr. G. VincentDudley and his newly ormed

congregation established NewLie in Christ Interdenomina-tional Church. The congrega-tion created the ramework ora holistic ministry that bringsthe spirit o community backto neighborhoods.

Church members envisionedbuilding a church that would

be more than just worshipspace. They wanted a com-munity center where memberswould meet, learn, share, wor-ship and care or each other.The congregation also knew thecommunity would not be com-plete without a sae and aord-able space or working parents

to leave their children.The young congregation

quickly outgrew the space itwas renting and began lookingor land. Ater purchasing 11.5acres o land in Lebanon, Ill.,the congregation began workingwith a construction companythat has experience in building

aith-based acilities.New Lie in Christ Churchwas blessed with good cashfow and a growing member-ship, but it lacked experience

in real estate and acility man-agement. Members also oundthat, without a proven trackrecord, traditional lenders werereluctant to loan them a largeamount o money. Knowingthey were struggling to nd away to build, their constructioncompany told them about theIllinois Facilities Fund (IFF),a nonprot organization thatlends money to other nonprotsor acility building and renova-tion projects.

IFF is a community devel-

opment nancial institution(CDFI) and a partner in theChild Care Partnership Project.IFF works with nonprots thatserve low-income or specialneeds populations to assemblecommunity stakeholders romboth the public and private sec-tors to develop and complete

capital projects. Currently, theCDFI is working with nonpro-its in Illinois, Wisconsin, Iowaand Indiana. It plans to expandinto Missouri in 2007.

IFF had the expertise the con-gregation lackedexperiencein real estate development andmanagementand capital to get

the project o the ground. Aterlooking at the churchs cashfow and vision, the IFF helpedthem develop a plan or a largerand more unctional acility.

Dr. Dudley ound thatworking with IFF was dier-ent rom working with banks.The CDFI was willing to take

risks that, due to saety andsoundness matters, banks can-not. He said he was pleasantlysurprised when IFF agreed tolend them money at a cheaper

rate than they could get roma traditional lender. AlthoughIFF does not lend money orworship space, it could lendthe congregation $1 million ora child-care acility. The costor the entire church acility,including the day care, was$3,800,000.

Because IFF was willing totake the second position onthe loan, the capital projectwas more attractive to RegionsBank, which then became thelender in the rst position on

the loan, creating a layerednancing package.

Today, New Lie in ChristChurch and Little Angels DayCare Center stand on part othe 11.5 acres the congregationpurchased. The communityworship center includes a sanc-tuary, gym, bookstore, snack

bar, industrial kitchen, ocesand an education and meetingspace. Future developmentplans include a school, amilycenter and housing.

Little Angels Day Care Centeris a bright, colorul, interactiveand state-certied acility thatserves children aged 6 weeks

through preschool. In addition,parents o school-aged childrencan take advantage o a beore-and ater-school program. Cur-rent enrollment at the center is53 and quickly growing to ullcapacity o 105 children. Whilethe center oers market-ratechild care, it also works with

the Childrens Home and AidSociety o Illinois to provideree or greatly reduced care tolow-income amilies.

A Double Bottom

Line or BanksBuilding a child-care acility in

a low-income neighborhood is animportant tool that helps amilies

become sel-sucient. Banks

are an important element in

unding these projects. In return

or their investment, banks reap

double bottom-line benets

investments in child-care projects

are long-term investments in their

community and uture customers.

Banks also receive Community

Reinvestment Act (CRA) credit.

CRAs denition o community

development includes: community

or tribal-based child care; edu-

cational, health or social services

targeted to low- or moderate-

income persons; or services that

revitalize low- or moderate-income

geographies.

How banks can get involved:

Make loans or provide grantsto child-care acilities in low- to

moderate-income communities.

Lend, make investments orprovide grants to intermediar-

ies, loan pools or consortiums

that make loans to nonprots.

Serve on boards and shareknowledge and technicalexpertise with intermediaries

and nonprots.


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continued on Page 6

By Christopher H. WheelerSenior EconomistFederal Reserve Bank o St. Louis

ithin any city ormetropolitan area

in the United States,there are vast dierences in

the economic well-being oindividuals residing in di-erent neighborhoods. Someareas tend to be populated byindividuals with high incomesand large stocks o wealth; oth-ers, by those with substantiallylower incomes and ewer assets.

Dierences in neighborhood-

level economic outcomes canalso be seen in the incidence ounemployment, which can varysubstantially rom one residen-tial area to another. Among theblock groups (i.e., neighborhoodsconsisting o approximately 500households and 0.33 squaremiles o land) located within the

St. Louis metropolitan area, orinstance, the unemployment ratein the year 2000 ranged rom 0.3percent to more than 98 percent.

While it is hardly surprisingthat unemployment rates dieracross neighborhoods within ametropolitan area, between 1980and 2000, there was a striking

increase across the country in thevariation in neighborhood-levelunemployment.

During this period, rates ojoblessness among block groups

with the lowest levels o unem-ployment dropped even urther,whereas rates o unemploymentamong neighborhoods with thehighest levels o joblessness greweven larger. In other words, theunemployed within the nationsmetropolitan areas became

increasingly concentrated withinrelatively ew residential areasbetween 1980 and 2000.

Why did this occur? Threepossible explanations are:urban decentralization (i.e.,the movement o individualsrom dense city cores into lessdense suburban ringes), indus-

trial and institutional changesin the labor market, andincreases in the sorting o indi-viduals across neighborhoodsby income and education.

The National Trend

Based on data rom thedecennial U.S. Census cover-

ing more than 165,000 blockgroups across 361 metropoli-tan areas, it is apparent that,between 1980 and 2000,unemployment became lessevenly distributed across thenations residential areas.1 Forexample, in 1980, the medianunemployed worker lived in

a block group with an unem-ployment rate o 7.5 percent.That is, the unemployment ratewithin a workers own blockgroup o residence was 7.5

percent or greater or at least50 percent o all unemployedworkers.2 Two decades later,this worker lived in a blockgroup with an unemploymentrate o 7.9 percent. This trendis particularly striking becausethe average metropolitan area

unemployment rate declinedrom 6.9 percent to 5.9 percentduring this period.

Neighborhood-level percen-tile dierences reveal a qualita-tively similar pattern. In 1980,the average dierence betweenthe neighborhood at the 90thpercentile o the unemployment

distribution (i.e., the unem-ployment rate that is larger than90 percent o the block-grouplevel unemployment rateswithin a metropolitan area) andthe neighborhood at the 10thpercentile was 7.3 percentagepoints. Two decades later, thedierence was 11.2 percentage

points. As noted previously, therise in this gap is the result o asimultaneous increase in unem-ployment among block groupswith already high levels ounemployment and a decreasein unemployment among blockgroups with already low levels.The average 90th percentile

increased rom 11 percent in1980 to 12.5 percent in 2000.The average 10th percentiledecreased rom 3.7 percent in1980 to 1.3 percent in 2000.

Some Local Trends

By and large, these nationaltrends were also observedwithin the metropolitan areaso the Eighth Federal ReserveDistrict. Consider, or example,the experiences o Little Rock,Louisville, Memphis and

St. Louis. In 1980, the gapbetween the 90th and 10thpercentiles o the block groupunemployment distributionin Little Rock stood at 7.5percentage points. By 2000,this gure had widened to 11.9percentage points. Memphisand St. Louis saw even larger

increases in unemploymentdierences between neighbor-hoods. Between 1980 and2000, the 90-10 gap rose rom11.4 to 15.1 percentage pointsin St. Louis, and expandedrom 13 to 17.1 percentagepoints in Memphis. Althoughit was modest in comparison,

Louisville also experienced anincrease in its unemploymentconcentration. Its 90-10 dier-ence rose rom 10.3 percentagepoints in 1980 to 10.5 percent-age points two decades later.

Three Possible Explanations

Urban Decentralization

One o the most prominenttheories in urban econom-ics over the past hal century

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suggests that the movement opopulation and employmentaway rom city centers towardsuburban locales has createdan underclass o unemployedworkers in central cities. Thisidea, known widely as the spa-tial mismatch hypothesis, wasrst studied by the economist

John Kain.3

The basic rationale behind thistheory is straightorward. Ascity populations and employersmove away rom traditional cen-

tral business districts, it becomesmore dicult or workers whochoose to remain in those centralcities to nd and secure jobs.Increased spatial isolation romemployment opportunitiespresumably increases commut-ing costs and makes the jobsearch process more dicult.

In addition, increased distancemay limit access to inormationabout available jobs or createnegative attitudes about centralcity workers among employers.Thus, as employers move artheraway, it becomes less likely thatthe residents o historical citycenters will be able to locate and

maintain a job.Urban populations in the

United States, o course, beganmoving rom central cities tosuburban locales more than acentury ago and have continuedto do so in recent decades. Forexample, population density,which measures the extent to

which residents within a cityare concentrated or spread out,decreased rom a level o 3,080residents per square mile in1980 to 3,004 in 2000.

Industrial and InstitutionalChange in the Labor Market

The last several decades havebeen characterized by decreas-ing employment in certainsectors, but increasing employ-ment in others. Most notably,manuacturing employmenthas decreased while serviceemployment has increased. Inaddition, rates o unionizationhave allen substantially.

Between 1980 and 2000, theaverage share o manuacturingin total employment declined

rom 22 percent to 14 percentacross the 361 metropolitanareas in this studys sample,whereas the ractions o work-ers employed in education andhealth services rose rom 17percent to 20 percent. Rates ounionization decreased rom anaverage o 24 percent in 1980

to 14 percent in 2000.How might these changes

infuence the geographic distri-bution o unemployment withina metropolitan area? I workersin certain neighborhoods tendto be employed in similar typeso industries, or i unioniza-tion is relatively concentrated

among the residents o certainneighborhoods, these changesmay have produced dierentialrates o unemployment acrossdierent areas within a city. Inother words, rather than therehaving been a change in theway that residents o a metro-politan area sort themselves

across neighborhoods (e.g.,into areas populated primar-ily by either high-skill workersor low-skill workers), it maysimply be that changes in the

labor market have dierentiallyinfuenced workers o dierentneighborhoods.

Segregation by Income, EducationThe rise in the concentration

o unemployment may, on theother hand, be the product ogreater segregation o individualsby income and education. I themanner by which individualssort themselves into residentialareas has created neighborhoodswith concentrations o eitherhigh- or low-skill individuals,

we should see increasing dispar-ity between the unemploymentrates o dierent neighborhoods.Low-skill individuals, ater all,tend to experience higher rateso unemployment than high-skill individuals.4

On the surace, this explana-tion seems related to the urban

decentralization hypothesissketched above. In act, previ-ous work has suggested thatas city populations spread out,households become increas-ingly sorted into high- andlow-income neighborhoods.Recent research, however, hasound little association between

the extent to which urbanpopulations spread out and theincome dierentials they exhibitacross block groups.5

In general, there was a rise inincome variation across blockgroups in the urban areas othe country between 1980 and2000. On average, the variance

o block-group level house-hold income nearly doubledduring this period. Addition-ally, college graduates becameincreasingly segregated rom

REFERENCES

1 These data are taken rom Census

extracts compiled by GeoLytics Inc.,which assembles Census data using con-

stant geographic denitions over time.See www.geolytics.com.

2 This gure is calculated by taking aweighted median across all block groupswithin a metropolitan area, where the

weights are the number o unemployedindividuals within each block group.

3 John F. Kain. Housing Segregation,

Negro Employment, and MetropolitanDecentralization. Quarterly Journal ofEconomics, May 1968, 82(2), pp. 175-97.

4 For example, the Bureau o LaborStatistics reports that the average rate o

unemployment tends to decrease witheducation attainment. See www.bls.gov/news.release/empsit.t04.htm.

5 See, or example, Christopher H.Wheeler. Urban Decentralization and

Income Inequality: Is Sprawl Associatedwith Rising Income Segregation AcrossNeighborhoods? Working Paper No.

2006-037A, Federal Reserve Bank oSt. Louis, 2006.

6 Christopher H. Wheeler and Elizabeth

A. La Jeunesse. Trends in the Distribu-

tions o Income and Human CapitalWithin Metropolitan Areas: 1980-2000.Working Paper No. 2006-055A, Federal

Reserve Bank o St. Louis, 2006.

7 The analysis is based on regressions ounemployment concentration on numer-

ous metropolitan-area-level characteris-tics. For more details, including all o

the results, see Christopher H. Wheeler,Trends in Neighborhood-Level Unem-ployment in the United States: 1980-

2000. Working Paper, Federal ReserveBank o St. Louis, 2006.

8 Anne C. Case and Lawrence F. Katz.The Company You Keep: The Eectso Family and Neighborhood on Disad-

vantaged Youths. NBER Working Paper3705, National Bureau o Economic

Research, May 1991.

9 Giorgio Topa. Social Interactions, LocalSpillovers and Unemployment. Reviewof Economic Studies, April 2001, 68(2),pp. 261-95.

10 William Julius Wilson. The Truly Disad-vantaged: The Inner City, The Underclass,and Public Policy. Chicago: University oChicago Press, 1987.

continued from Page 5



individuals with less school-ing, suggesting that, in recentdecades, the highly educatedhave sought neighborhoodspopulated primarily by otherhighly educated individuals.6

The Findings

Results rom the statisticalanalysis o these patterns indi-cate that, o these three possibleexplanations, rising segregationo individuals by income andeducation is the most likelyculprit.7 Ater controlling or a

number o characteristics thatmay infuence the residentialdistribution o unemploy-ment, including the basicdemographic makeup o eachmetropolitan area, the ndingsindicate that there is essentiallyno correlation between risingunemployment concentration

and any o the ollowing threequantities: population density(a measure o urban decentral-ization), industrial composi-tion o a metropolitan area andextent o unionization amongthe local workorce. In contrast,there is a signicantly positiveassociation between unemploy-

ment concentration and theextent to which neighborhoodsare segregated by income andeducational attainment.

The Implications

Why should the rise in theconcentration o unemploymentwithin relatively ew residentialareas concern us? The answer,quite simply, relates to the ideathat we are all infuenced byour immediate surroundings.For decades, economists and

sociologists have argued that thecharacteristics o an individualsresidential area greatly infuencehis or her economic outcomes.The evidence largely supportsthis notion.

Economists Anne Case andLawrence Katz, or instance,have ound evidence o strongpeer eects characterizing avariety o behaviors, includingcriminal activity, drug and alco-hol use, schooling, and employ-ment status within a sampleo residential areas in Boston.8

Giorgio Topa, an economist atthe Federal Reserve Bank o New

York, has ound evidence o localspillovers in unemploymentacross neighborhoods in Chi-cago.9 High levels o unemploy-ment within a residential areatend to have a negative infuenceon the employment prospects

o individuals residing within ornear that neighborhood.

According to William JuliusWilson, an infuential soci-ologist and scholar o urbanpoverty, neighborhood eectso this sort ormed the basis othe rise in inner city povertyin the United States in recent

decades.10

As successul work-ers have gradually let innercities, those who remain aresurrounded by rising levels opoverty and joblessness, whichmakes it increasingly less likelythat the residents o these areaswill nd work.

The rise in the concentrationo unemployment, thereore,may be creating poverty trapsrom which people will nd itincreasingly dicult to escape.

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Federal Reserve System Chairman Ben S.

Bernanke spoke about community devel-

opment fnancial institutions (CDFIs)

at the Oppor tunity Finance Networks

Annual Conerence on Nov. 1, 2006, in

Washington, D.C. Following are excerpts

rom his speech.

Improvements in Economic

Opportunity and Some ChallengesIn the past decade or so, U.S. house-

holds overall have experienced notable

gains in terms o some key indicators

o economic opportunity. Three such

indicators are access to credit, rates

o home ownership and small business

development. Moreover, as measured by

these indicators, recent improvements in

traditionally underserved markets appear

to have been as great as or greater than

those in middle- and upper-income

households and communities. At the

same time, however, the gaps between

lower-income households and other

households with respect to these mea-

sures o opportunity remain wide

CDFIs as a Solutionto Market Failures

Many actors have contributed to the

economic gains that I have cited, includ-

ing broad macroeconomic orces and

advances in the delivery o nancial ser-vices. CDFIs have also played a valuable

role by analyzing the economic potential

o lower-income markets and developing

strategies and marshaling resources to

tap that potential ....

Standard economic analysis tells

us that when competitive conditions

prevail in a market, the resulting prices

induce rms and individuals to allocate

resources in a manner that tends to

maximize social welare. However,

economists also recognize that various

deviations rom idealized market condi-

tions, termed market ailures, can inhibit

the ecient allocation o resources. Inone type o market ailure, called a neigh-

borhood externality, the actions o one

person aect the well-being or economic

welare o others in the local area, but the

individual taking the action neither bears

the ull costs o nor reaps the ull benets

rom those actions. Because the individ-

ual does not bear the ull consequences

o the actions taken, he or she may act

in a way that is not in the best economic

interest o the neighborhood as a whole.For example, the ailure o some owners

to maintain their properties can lower the

value o well-maintained properties in

the same neighborhood. Ultimately, such

spillover eects rom neglected properties

can lead to underinvestment in the whole

community, potentially harming all neigh-

borhood residents and businesses.

A related type o market ailure

studied by economists is known as an

inormation externality. An inormation

externality may arise when inormation

about economic opportunities in an

area has the potential to benet many

investors but is costly to gather. As a

result, no single potential investor may

nd obtaining the data to be protable.

For example, on average, lower-income

areas have ewer owner-occupied homes

and record ewer home-purchase loans

than higher-income areas do. Lower

transaction activity makes accurately

gauging property values and evaluatingcredit risks in those areas more dicult,

which may inhibit the extension o credit.

Alternatively, lower-income people may

have shorter and more-irregular credit

histories, making an evaluation o their

individual creditworthiness more dicult

and costly. Because a potential investor

who bears the costs o obtaining data

about underserved neighborhoods may

be able to obtain only a portion o the

ull economic benets, these data may

remain uncollected.

One purpose o CDFIs is to help

overcome these and other market ailures

that inhibit local economic development.For example, by acilitating larger-scale

property development projects, coordinat-

ing public and private investment eorts,

and working to improve amenities and

services in a local area, CDFIs may help

to solve collective action problems and

reduce neighborhood externalities. CDFIs

can counter inormation externalities by

assuming the cost o learning about their

local communities and developing spe-

cialized nancial products and servicesthat better t local needs. In general,

CDFIs provide coordinated development

activities and community-specic inor-

mation that the market may not supply

on its own.

Among other benets, the amiliarity

with each community that CDFIs develop

can help to gauge and control risk. For

example, the use by CDFIs o appraisers

who specialize in evaluating properties in

a particular community produces more-

reliable estimates o the value o the

loan collateral. Likewise, CDFIs structure

loans and use public and private credit

enhancements both to increase borrow-

ers ability to qualiy or loans and to

spread the associated credit risk among

a mix o private creditors and other

providers o unds.

Although these specialized techniques

can reduce credit risk, they are labor-

intensive and, consequently, expensive.

Most private lending institutions reducecosts by adopting processes that are

highly standardized and automated.

Such systems are not necessarily

compatible with lending to borrowers who

require substantial screening, counsel-

ing and monitoring or with acquiring

specialized inormation about community

development lending. Part o the explicit

mission o CDFIs is to assume the costs

o conducting such research and analy-

ses in underserved communities. CDFIs

have also developed techniques and

strategiessuch as fexible underwriting

criteria, specialized loan products and

intensive nancial education programsto meet the nancial circumstances o

their communities

Is Community DevelopmentLending Proftable?

Can private-market participants prot

rom community development lending?

Data based on Community Reinvestment

Act (CRA) examinations tell us much

about the volume o such loans but less

about their perormance and protability.However, a Federal Reserve survey ound

that nearly all banks reported that their

community development activities were

protable, at least to some degree. About

two-thirds o the banks also reported

receiving some benet rom their lending

unrelated to loan protability, such as an

improved image in the community.

Since the Federal Reserve report, stud-

ies undertaken by the CDFI Data Project

show that, or 2004, charge-o rates or

CDFI portolios were similar to those or

the banking industry as a whole. These

studies and market data suggest that

banks and other private organizations may

become an increasingly signicant source

o competition or CDFIs. That is good

news, not bad news. Indeed, the surest

sign o a CDFIs success is that private

investors see viable investment opportuni-

ties in the neighborhoods in which the

CDFI has been operating.

(To read the entire speech, go to

www.ederalreserve.gov/boarddocs/

speeches/2006.)

Community Development Financial Institutions:Promoting Economic Growth and Opportunity



Job skills training is availablein most communities throughcommunity colleges, churchesor other organizations. Someinterviewees suggested thatan evaluation o the numberand types o programs andtheir eectiveness wouldbe benecial. Employmenttrends, job classications andtypes o industries a commu-nity is attracting (or hopes toattract) should dictate the type

o employees the communitywill need and, thereore, whatskills training is needed.

Aordable housing Rising interest rates com-

bined with the availability ofexible mortgage productsand relaxed credit standards

are now leading to higher lev-els o bankruptcies and ore-closures. Low credit scoresand poor credit histories arekeeping many potential bor-rowers rom accessing creditthrough traditional lenders.

As one banker said, Find-ing qualied home buyers is

becoming more dicult. Many low- and moderate-income individuals still lackthe basic skills, undamentallyand nancially, to becomehome owners. Home-buyercounseling programs gener-ally are available throughoutthe District, but the qual-ity o the education beingprovided is an issue. Bothnancial education curriculaand home-buyer trainingprograms should be evaluated

or eectiveness, and, as oneinterviewee put it, stick withthe ones that work.

Following hurricanes Katrinaand Rita, the cost o buildingmaterials has risen. Escalat-ing construction costs haveresulted in the developmento ewer aordable housingunits and demands or moreprogram resources.

In addition to the expectedresponses about aordablehousing (credit concerns,unding issues and a need or

home ownership training),there were concerns about thegeneral availability o bothaordable and moderate-income housing. Even withqualied buyers, there wasnot enough housing stockavailable. This issue was evenmore pronounced in rural

areas where there was notsignicant stock o moder-ate-income rental housing.Financing sources or repairo rental units was also citedas a need.

Availability o capital or smallbusinesses and entrepreneurs

On the entrepreneurialront, inadequate training orentrepreneurs and the lack osignicant venture capital orstartup and emerging busi-nesses are concerns.

Tightening credit standardscan turn o the aucet orsmall businesses and entre-preneurs, which are typicallyundercapitalized. Businessloan pools are helping to meetthe demand or nancing.

Microenterprise loan pro-

grams are lling some o thenancing gaps or loans inthe $5,000 to $50,000 range.

The need or collaborative eorts Finally, the assessment

showed a need or more col-laborative eorts that includeall aected stakeholders: notonly community groups, localgovernment and lenders, butalso state and ederal govern-ments, academic institutionsand others.

Regional, Rural and Urban NeedsRecognizing the wide range

o locales within the District,urther analysis was doneto distinguish issues alongregional, rural and urban areas.

About two-thirds o the inter-views occurred in urban areasand a third in rural areas; how-

ever, the organizations served avariety o geographic regionsrom as small as a neighbor-hood to as large as multi-state.The breakdown o interviewsby geographies served was:36 percent multi-county, 17percent county, 16 percent city,13 percent MSA, 10 percent

multi-state, 7 percent state and1 percent neighborhood.Regionally, the major issues

o concern could be summa-rized as the need or more anddiverse collaboration and moreinormation sharing.

In rural areas, workorcedevelopment and diversiy-ing the employment base weredistinct needs.

An analysis o issues in urbanareas presented three signi-cant ndings. First, there was

concern about the pace andscope o revitalization o centralcities in all urban areas. Second,gentrication, particularly inmetro Memphis and St. Louis,is becoming a larger concernas increasing house prices areorcing some home owners outo the market. Finally, expandedHispanic support services are adenite need in Little Rock,St. Louis, Memphis, Evansvilleand Springeld, Mo.

Looking Ahead

This environmental assessmenthelped direct the Community

Aairs departments ocus or2007. The departments initia-tives primarily will all underthree comprehensive themes:opportunity nance, asset build-ing and placed-based economies.

Opportunity nance involves

community development andeconomic growth in whichpeople come together and makedecisions to organize and poolassets and resources or thepurpose o addressing unmetneeds and opportunities.

Asset building encompassespublic policies, strategies and

programs that enable peoplewith limited nancial resourcesto accumulate long-term andproductive assets.

Finally, place-based econo-mies ocus on building theorganizational capacity ostates, cities and neighborhoodsto create housing, jobs andcommunity development.

C ncontinued from Page 2


10/120L I N K I N G L E N D E R S A N D C O M M U N I T I E S

The region served by the Federal Reserve Bank of

St. Louis encompasses all of Arkansas and parts of Illinois,

Indiana, Kentucky, Mississippi, Missouri and Tennessee.

SpANNING the regioNMemphis Gets New Seeds

or Small Business Growth

Southeast CommunityCapital Corp. has an additional$500,000 to help nancesmall businesses in Memphisunderserved areas thanks toan investment rom SeedcoFinancial Services, a subsidiaryo Structured EmploymentEconomic Development Corp.

in New York.The Seedco investment allots

$250,000 or businesses in theSouth Main Historic District indowntown Memphis. It comesas small business opportuni-ties emerge because o thenew Westin-Beale Street Hoteldevelopment.

The remaining $250,000 isdesignated or the MemphisBusiness Opportunity Fund(MBOF), managed by South-east Community Capital Corp.This is the rst injection o newcapital into the MBOF since itsinception in 2002. Additionalinvestors include First Tennes-

see Bank, Regions Bank andSunTrust Bank, with invest-ments totaling $1,350,000.

The City o Memphis cre-ated MBOF to make loans todisadvantaged small businesses.Loan amounts are $10,000 to$500,000. The und targetssmall businesses owned byminority and women entrepre-neurs that either employ low- tomoderate-income individuals orthat are located in the MemphisRenewal Community, designated

by the Cityo Memphis.

In addition to the$500,000 invest-ment, Seedco placed$50,000 into a loan-loss reserveto encourage investments inriskier ventures.

For more inormation,contact Patrice Harris, MBOFmanager, Southeast Community

Capital Corp., Memphis Oce,at 901-526-9300 or e-mail herat [email protected].

Illinois Main Street

Communities Go Wi-Fi

The Carbondale, Ill., MainStreet program got a $17,875boost rom the Illinois Main

Street program to create a wi-district in downtown Carbon-dale. The ree wireless districtwill stretch or 30 blocks, cov-ering downtown businesses, thehospital, library, city hall andthe civic center. About 5,500residents, students and touristswork and play in downtown

Carbondale every day, makingit a hub or activity. Adding awireless network will make it avirtual hub as well. In addi-tion, the new wireless districtwill extend the wireless accessalready available on SouthernIllinois Universitys campus,allowing students the fexibilityo taking their virtual campuso campus.

The Illinois Main Street pro-grams mission to increase tour-ism and economic development

includes helping communitiescreate wi- zones. Belleville,Mount Vernon and Quincy alsohave received grants to createvirtual hot spots in their down-town areas.

Wi-, short or wireless del-ity, is a term or certain types o

wireless local area networks.

Small Towns, Businesses Focus

o Arkansas Partnership

The East Arkansas Enter-prise Community (EAEC) ispartnering with the EnterpriseCorporation o the Delta andthe Southern Good Faith Fund

to help existing and potentialentrepreneurs.

The EAECs Small TownResource & Business Devel-opment Center assists smalltowns and cities with com-munity, human and economicdevelopment and small busi-ness development. Located in

Forrest City, Ark., the center isa one-stop shop or small andemerging businesses. Expertsprovide technical assistance invarious areas o communitydevelopment.

The Enterprise Corporationo the Delta provides techni-cal assistance to small businessstartups and helps them planor expansion and viability.The Southern Good Faith Fundacilitates the start-up workor small business owners by

providing workshops, trainingand technical assistance.

For more inormation,contact Cassandra Lumpkin atEAEC at 870-630-2005 or bye-mail at [email protected].

REACH IllinoisEmployer

Assisted HousingThe REACH Illinois pro-

gram provides matching undsand state tax credits or Illinoisemployers who implementemployer-assisted housingprograms.

The Illinois Aordable Hous-ing Trust Fund will match an

employers down payment andclosing cost assistance up to$5,000 or each income-quali-ed employee. Income-qualiedemployees must earn less than80 percent o the median countyincome where they reside. Inaddition, to help oset the costto employers who implement

a live near work component,the state will provide a tax credito 50 cents or each dollar anemployer invests in the programor eligible employees. Eligibleexpenses include down paymentand closing cost assistance aswell as home-buyer counselingand administrative costs.

For more inormation, con-tact Housing Action Illinoisat 312-939-6074 or visitwww.housingactionil.org.


11/12#O N T h E I N T E R N E T A T w w w . S T L O U I S f E D . O R G

BridgesBridges is a publication o the Com-munity Aairs department o the FederalReserve Bank o St. Louis. It is intendedto inorm bankers, community develop-

ment organizations, representatives ostate and local government agencies andothers in the Eighth District about cur-rent issues and initiatives in communityand economic development. The EighthDistrict includes the state o Arkansasand parts o Illinois, Indiana, Kentucky,Mississippi, Missouri and Tennessee.

Glenda WilsonCommunity Aairs Ocer, AssistantVice President and Managing Editor314-444-8317

Linda FischerEditor314-444-8979

Community Affairs staff

St. Louis: Matthew Ashby314-444-8891Ellen Eubank314-444-8650Jean Morisseau-Kuni314-444-8646Eileen Wolngton314-444-8308

Memphis: Michael Minor901-579-4106Dena Owens901-579-4103

Little Rock: Lyn Haralson501-324-8240Amy Simpkins501-324-8268

Louisville: Lisa Locke502-568-9292Faith Weekly502-568-9216

The views expressed in Bridges are notnecessarily those o the Federal ReserveBank o St. Louis or the Federal ReserveSystem. Material herein may be reprintedor abstracted as long as Bridges is credited.Please provide the editor with a copy oany reprinted articles.

I you have an interesting communitydevelopment program or idea or anarticle, we would like to hear rom you.

Please contact the editor.

Free subscriptions and additional copiesare available by calling 314-444-8761 orby e-mail to [email protected].

FeBrUArY

1-2

Community Cae 24Columbia, Mo.

Sponsor: Missouri Community

Development Society

314-444-8891

6

Neighborhood Revitalization Series:

Urban Inormation GapLouisville

Sponsor: Federal Reserve Bank o

St. Louis, Louisville Branch

www.stls.rb.org/community/conerences.html

19-23

NeighborWorks Training InstituteAtlanta

Sponsor: NeighborWorkswww.nw.org/training

202-220-2454

26-Mac 1

Rural Leadership: Creating the Future

Long Beach, Cali.

Sponsors: Rural Community Assistance

Corp., Rural Community Assistance

Partnership, U.S. Department o Agriculture

www.rcac.org/news/events/rcac/

conerence%20inormation.pd

MArCh

10

12th Annual St. Louis Neighborhoods

ConerenceSt. Louis

Sponsor: St. Louis Association o

Community Organizations

http://stlouis.missouri.org/slaco/

314-533-9104

12-15

Mid-South Basic Economic Development

CourseLittle Rock, Ark.

Sponsor: UALRs Institute or Economic

Advancement

www.aiea.ualr.edu/econdev/

20

Neighborhood Revitalization Series:

Neighborhoods in BloomLouisville

Sponsor: Federal Reserve Bank o

St. Louis, Louisville Branch

www.stls.rb.org/community/conerences.html

21-23

CDVCA Annual Conerence

Washington, D.C.

Sponsor: Community Development Venture

Capital Alliancewww.cdvca.org

212-594-6747

26-30

Community Development Academy,

Courses 1 and 2Excelsior Springs, Mo.

Sponsor: University o Missouri Community

Development Extension Program

http://mucon.missouri.edu/

CommDevelopmentAcademy/

573-882-8320

29-30

Financing Community Development:

Learning rom the Past, Looking to the

FutureWashington, D.C.

Sponsor: Community Aairs Oce o the

Federal Reserve System

www.ederalreserve.gov/communityaairs/

national/deault.htm

APriL

2-4

Cambio de Colores: Latinos in Missouri

Kansas City, Mo.

Sponsor: University o Missouri

www.cambiodecolores.org

17-19

8th Gathering o Social Enterprise

AllianceLong Beach, Cali.Sponsor: Social Enterprise Alliance

www.se-alliance.org

CALeNdAr

Home Buyer Brochures Available in SpanishFour brochures from the Federal Reserve Bank of St. Louis that list home-

buyer counseling agencies are now available in English and Spanish.

Each o the brochures, titled Learn Beore You Leap (Enterese antes e lanzarse),lists agencies in one o the Feds Eighth District zones: St. Louis, Little Rock,

Louisville or Memphis. The nonprot agencies help potential home buyers through

every step o the home-buying process, rom budgeting income to negotiating a

contract to closing on a loan.

Multiple copies can be ordered rom Cindy Davis in St. Louis, 314-444-8761;

Julie Kerr in Little Rock, 501-324-8296; Kendra Keller in Louisville, 502-568-9202;

or Cathy Martin in Memphis, 901-579-4102.

Ent

reseantes de la

nzar

se

ParacomprarunacasaenelreadeSt. Louis


12/12

Brochure ExplainsNontraditional Mortgages

A new publication that can help

consumers decide whether a nontradi-

tional mortgage loan is right or them

is available rom the ederal bank, thrit

and credit union regulatory agencies.

Interest-Only Mortgage Payments

and Payment-Option ARMsAre They

or You?eatures inormation on inter-

est-only (I-O) mortgages and adjust-

able-rate mortgages (ARMs) with theoption to make a minimum payment

(a payment-option ARM).

The publication is available at

www.ederalreserve.gov/pubs/

mortgage_interestonly/deault.htm.

Single copies are available ree o

charge by calling 202-452-3245.

Freddie Mac Oers Employers Helpwith Home Ownership Initiative

Workorce Home Benet, a newinitiative rom Freddie Mac, helps

businesses explore employer-assisted

home ownership options. The program

can be customized to each companys

particular needs.

Typically or companies with at least

1,000 employees, Workorce Home

Benet can be structured to include

home-buyer education and counseling,

nancial literacy training and down

payment and closing cost assistance.Freddie Mac can match employers with

lenders, nonprot housing counseling

agencies and local down payment

assistance programs.

One-time grants to help with

closing costs, deerred loans, orgiv-

able loans and matched savings

accounts are the options used by most

employers. In addition, a company

may be able to take a tax deduction

or a business expense.For more inormation on the Work-

orce Home Benet initiative, visit

www.reddiemac.com.

Have you

heArd

The Financial Services Regula-tory Relie Act o 2006 wentinto eect Oct. 13, 2006. Thelegislation is designed to provideregulatory relie to bankingorganizations and to increaseeciency in the banking system.

The new law modies a num-ber o statutes related to bank-ing and other nancial services.

Among other things, it changesand enhances the authority orbanks to make public welareinvestments.

Specically, it raises the capon the maximum aggregatepublic welare investments state-member and national banks canmake rom 10 percent to 15percent o the banks unimpairedcapital and surplus. Generally,

banks may make public welareinvestments o up to 5 percento their capital and surpluswithout prior approval rom aregulatory agency. State-mem-ber banks must continue toobtain Federal Reserve approval

or any investments that wouldcause them to report aggregatepublic welare investments thatexceed 5 percent o the banksunimpaired capital and surplus.

The FSRR Act also redenesa permissible public welareinvestment as one that primarilybenets low- and moderate-income (LMI) communities oramilies. State-member andnational banks had been per-mitted to make investments thatprimarily promoted the public

welare, with LMI-ocusedinvestments included as theprincipal example o a permis-sible investment.

Although the standard orpermissible public welareinvestments has changed, most

common public welare invest-ments beneting LMI com-munities and amilies, such aslow-income housing tax creditprojects, will continue to beauthorized. Further, any publicwelare investment or writtencommitment to make such aninvestment made beore thenew law was enacted will notbe aected.

For more inormation, visitwww.occ.gov/tp/bulletin/2006-44.html.

New Law Changes Regulations on Public Welare Investments

Michael Minor has joined

the Community Aairs Oceo the Federal Reserve Bank

o St. Louis as a senior

specialist. He works at the

Banks Memphis Branch.

Minor has extensive

experience in the Memphis

community. Beore coming

to the Fed, he was chair

and associate proessor o

business administration,

division o business and

economic development, at

LeMoyne-Owen College in

Memphis, Tenn.

Previously, he held

several positions with theCity o Memphis, including

manager o its Business

Development Center. Minor

obtained his undergradu-

ate degree in economics

rom Harvard University

and a Master o Busi-

ness Administration and a

Master o Science in real

estate development rom

the University o Memphis.

He currently is a candidate

or a doctorate in higher

and adult education rom

the University o Memphis.

Minor can be reached at901-579-4106.

The Community Aairs

Oce also announced that

Ellen Eubank, commu-

nity aairs manager, has

relocated rom the Banks

Memphis Branch to its

headquarters in St. Louis.

Eubank joined the Fed in

1998. She can be reached

at 314-444-8650.

Minor Joins Bank, Eubank Relocates

Eubank

Minor

Bridges - Winter 2006

Documents