The National Community Reinvestment Coalition (NCRC) regional conference in Davenport two weeks ago covered a wide array of what appeared to be disparate topics. But these sessions shared a premise: pumping money into neighborhoods and communities.
The connection isn't always obvious, but it can be illustrated through two very different workshops: "Mainstream Financial Services for the Unbanked" and "New Market Tax Credits: Making the Deal Work." The former session was designed to educate attendees about the pressure that should be put on financial institutions to provide services for low-income people, and the latter dealt with a new federal tax-credit program meant to attract investors to projects in low-income communities.
The issue of services for the "unbanked" is one that major financial institutions generally don't deal with - and that's the problem. Because banks typically don't reach out to low-income communities or provide low- or no-cost services for people without much money in savings, those people tend to go to "predatory" financial services such as payday-loan shops, check-cashing facilities, rent-to-own stores, and housing lenders with unfavorable terms.
The result is that people without much money to begin with end up paying relatively exorbitant sums for basic financial services. For example, short-term "payday" loans often have annual percentage rates of 400 percent or higher. Even a credit card for people with poor credit will generally have a rate of 25 percent or less - and the balance isn't due at one time.
But while predatory-lending companies often get knocked for preying on the poor, banks typically get a free pass, even though they could do a lot to erase demand for such services - and therefore keep local money in the community.
Josh Silver of the NCRC argued that banks have a responsibility to counter the predatory lenders. "The essence of safe and sound banking is the creation of wealth," he said. Businesses such as those offering payday loans "suck wealth," he said. Predatory services "prevent them [low-income people] from ever realizing their dreams," he added. These fringe lenders "see there's money to be made."
He noted that most people don't realize how convenient banking is. "It's actually easier to apply for a credit card than a payday loan," he said.
The NCRC seminar highlighted two programs in which banks reached out to poorer communities to provide basic financial services, including Wells Fargo's "Get Checking" program in Wisconsin. The program includes six hours of training that a participant must complete before opening a checking or savings account. Financial literacy is an integral part of most programs targeting low-income neighborhoods.
The marketing component is important, because "many people who are unbanked really distrust financial institutions," said Marva Williams of the Chicago-based Woodstock Institute.
"What's most important ... is establishing a relationship with the consumer," she said. Many banks complain that checking and saving accounts for low-income people aren't profitable, but that's the wrong approach, she added. That relationship will be profitable when the consumer uses other bank services, such as credit cards or loans.
The federal government discourages banks from establishing relationships with predatory lenders and encourages reaching out to low-income communities, but it has virtually no regulatory authority to force the issue.
The federal government has, however, rolled out a major community-reinvestment tax-credit program known as "New Markets Tax Credits." The program was designed to leverage $15 billion in investment in low-income communities between 2002 and 2007, but the first batch of money has just started to hit the street. "We are at the time of true rollout," said Andrew Potts, an attorney specializing in tax credits.
While federal historic or low-income-housing tax credits are earned by project developers, New Markets Tax Credits are earned by investors.
The program, Potts said, is meant to be relatively open and flexible, with "fairly generous" definitions of eligible areas and relatively simple processes to be eligible for money. "It's designed to encompass more of a community," he said.
Still, the mechanics of the program are somewhat complicated.
A Community Development Entity (CDE) applies for the tax credits for a specific qualified project. If it gets the credits, it can then use them to attract investors. With investment capital, a CDE can invest in qualified businesses in low-income communities.
The program requires that 85 percent of the investment generated by the tax credits remain in the community for seven years. That means that if a CDE loans out the money and a business begins repaying it, that cash has to be re-invested in the community.
The tax credits equal 39 cents for every dollar of investment, and they're paid out over seven years, meaning that their value to the investor on a present-value basis is about 20 cents on the dollar.
The program is meant to "leverage deals that would not happen without the credit but have merit without the credit," said Irvin Henderson, who is involved in several New Markets Tax Credit projects. "You still have to have people with belief in the veracity of the deal."
"It's not for projects that have no commercial viability," said Dan Carmody, executive director of Rock Island Economic Growth Corporation, which is working to become a CDE so it can leverage tax-credit investment.
"This process is extremely daunting. It takes a lot of time," Henderson said.
The program should be attractive to investors who have a large tax liability but who also have community goals other than return on investment. Its prospects are aided by the currently lower return of traditional investments.
Rock Island Economic Growth Corporation wants to use the tax credits to increase the limit of its revolving loan fund from $100,000 to $500,000. The organization is also looking at using New Market Tax Credits to rehabilitate the McKesson building into riverfront penthouse, commercial, and parking space. The project is expected to cost $7.68 million, Carmody said. "There's serious money here," he said.
That's just one local example of how this new program could have a dramatic impact on communities around the country.
The connection isn't always obvious, but it can be illustrated through two very different workshops: "Mainstream Financial Services for the Unbanked" and "New Market Tax Credits: Making the Deal Work." The former session was designed to educate attendees about the pressure that should be put on financial institutions to provide services for low-income people, and the latter dealt with a new federal tax-credit program meant to attract investors to projects in low-income communities.
The issue of services for the "unbanked" is one that major financial institutions generally don't deal with - and that's the problem. Because banks typically don't reach out to low-income communities or provide low- or no-cost services for people without much money in savings, those people tend to go to "predatory" financial services such as payday-loan shops, check-cashing facilities, rent-to-own stores, and housing lenders with unfavorable terms.
The result is that people without much money to begin with end up paying relatively exorbitant sums for basic financial services. For example, short-term "payday" loans often have annual percentage rates of 400 percent or higher. Even a credit card for people with poor credit will generally have a rate of 25 percent or less - and the balance isn't due at one time.
But while predatory-lending companies often get knocked for preying on the poor, banks typically get a free pass, even though they could do a lot to erase demand for such services - and therefore keep local money in the community.
Josh Silver of the NCRC argued that banks have a responsibility to counter the predatory lenders. "The essence of safe and sound banking is the creation of wealth," he said. Businesses such as those offering payday loans "suck wealth," he said. Predatory services "prevent them [low-income people] from ever realizing their dreams," he added. These fringe lenders "see there's money to be made."
He noted that most people don't realize how convenient banking is. "It's actually easier to apply for a credit card than a payday loan," he said.
The NCRC seminar highlighted two programs in which banks reached out to poorer communities to provide basic financial services, including Wells Fargo's "Get Checking" program in Wisconsin. The program includes six hours of training that a participant must complete before opening a checking or savings account. Financial literacy is an integral part of most programs targeting low-income neighborhoods.
The marketing component is important, because "many people who are unbanked really distrust financial institutions," said Marva Williams of the Chicago-based Woodstock Institute.
"What's most important ... is establishing a relationship with the consumer," she said. Many banks complain that checking and saving accounts for low-income people aren't profitable, but that's the wrong approach, she added. That relationship will be profitable when the consumer uses other bank services, such as credit cards or loans.
The federal government discourages banks from establishing relationships with predatory lenders and encourages reaching out to low-income communities, but it has virtually no regulatory authority to force the issue.
The federal government has, however, rolled out a major community-reinvestment tax-credit program known as "New Markets Tax Credits." The program was designed to leverage $15 billion in investment in low-income communities between 2002 and 2007, but the first batch of money has just started to hit the street. "We are at the time of true rollout," said Andrew Potts, an attorney specializing in tax credits.
While federal historic or low-income-housing tax credits are earned by project developers, New Markets Tax Credits are earned by investors.
The program, Potts said, is meant to be relatively open and flexible, with "fairly generous" definitions of eligible areas and relatively simple processes to be eligible for money. "It's designed to encompass more of a community," he said.
Still, the mechanics of the program are somewhat complicated.
A Community Development Entity (CDE) applies for the tax credits for a specific qualified project. If it gets the credits, it can then use them to attract investors. With investment capital, a CDE can invest in qualified businesses in low-income communities.
The program requires that 85 percent of the investment generated by the tax credits remain in the community for seven years. That means that if a CDE loans out the money and a business begins repaying it, that cash has to be re-invested in the community.
The tax credits equal 39 cents for every dollar of investment, and they're paid out over seven years, meaning that their value to the investor on a present-value basis is about 20 cents on the dollar.
The program is meant to "leverage deals that would not happen without the credit but have merit without the credit," said Irvin Henderson, who is involved in several New Markets Tax Credit projects. "You still have to have people with belief in the veracity of the deal."
"It's not for projects that have no commercial viability," said Dan Carmody, executive director of Rock Island Economic Growth Corporation, which is working to become a CDE so it can leverage tax-credit investment.
"This process is extremely daunting. It takes a lot of time," Henderson said.
The program should be attractive to investors who have a large tax liability but who also have community goals other than return on investment. Its prospects are aided by the currently lower return of traditional investments.
Rock Island Economic Growth Corporation wants to use the tax credits to increase the limit of its revolving loan fund from $100,000 to $500,000. The organization is also looking at using New Market Tax Credits to rehabilitate the McKesson building into riverfront penthouse, commercial, and parking space. The project is expected to cost $7.68 million, Carmody said. "There's serious money here," he said.
That's just one local example of how this new program could have a dramatic impact on communities around the country.
