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Community Investments December 1999 Community Investments December 1999
V O L U M E E L E V E N N U M B E R 3
Free subscriptions and additional copies are available upon request from the Community Affairs Unit, Federal Reserve Bank of San Francisco,101 Market Street, San Francisco, California 94105, or call (415) 974-2978.
Change-of-address and subscription cancellations should be sent directly to the Community Affairs Unit. Please include the current mailing label as well as any newinformation.
The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or the Federal Reserve System. Material herein may be reprinted orabstracted as long as Community Investments is credited. Please provide the Managing Editor with a copy of any publication in which such material is reprinted.
ATTENTION:Chief Executive OfficerCompliance OfficerCRA OfficerCommunity Development Department
FIRST CLASS MAILU.S. POSTAGE
PAIDPERMIT NO. 752
San Francisco, CA
FEDERAL RESERVE BANK OF SAN FRANCISCO101 Market Street
San Francisco, CA 94105
Address Service Requested
COMMUNITY AFFAIRS CONTACTS FOR ROUNDTABLES:Adria Graham Scott (213) 683-2785 (Los Angeles, Phoenix, San Diego) Craig Nolte (206) 343-3761 (Boise, Portland, Seattle)
Fred Mendez (415) 974-2722 (Northern California, Las Vegas, Utah) Lena Robinson (415) 974-2717 (Leadership Councils)
CITY 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Boise March 9 June 8 September 14 December 14
Greater Los Angeles February 9 May 17 August 9 November 8
Las Vegas March 14 June 13 September 12 December 12
Northern California February 8 May 9 August 8 November 7
Phoenix March 23 June 22 September 18 December 14
Portland January 4 April 4 July 6 October 3
San Diego Date TBD TBD TBD TBD
Seattle February 10 May 18 August 10 November 9
Utah January 13 TBD TBD TBD
CREDIT SCORING FOR
SMALL BUSINESS LENDING
We present the results of a 12th District bank-ing survey that examined the use of credit scor-ing for small business underwriting. Key dif-ferences between large and small banks illu-minate potential industry trends and raise in-teresting research possibilities for future study.
CREATING CULTURAL WINDOWS TO
BANKING OPPORTUNITIES
New immigrant communities across the UnitedStates represent tremendous, untapped poten-tial. This article presents some key findingsfrom an ethnic banking study conducted inLos Angeles, and suggests cultural adaptationsas a way to reach this underserved market.
HOME FOR DINNER HOME
BUYERS PROGRAM
Committed to “finding a way home,” a groupof Las Vegas financial institutions create anemployer-assisted mortgage loan and downpayment program for low- and moderate-income employees.
MICROPOLITAN COMMUNITY REINVESTMENT TRUSTS: A CRAINVESTMENT CONCEPT FOR SMALL COMMUNITIES
Searching for investment opportunities in small towns can be aCRA officer’s worst nightmare. Read on to learn how this CRA in-vestment concept might benefit your financial institution and itsassessment area.
SPECIAL INSERT:MORE ON CRA INVESTMENTS…
We hope you’ll enjoy this edition’s special insert featuring excerptsfrom the 1999 National Conference on Community DevelopmentInvestments. You’ll find solid technical information, and practicaltips for today’s shrewd CRA investor.
A P U B L I C A T I O N O F T H E C O M M U N I T Y A F F A I R S U N I T O F T H E F E D E R A L R E S E R V E B A N K O F S A N F R A N C I S C O
2000 CRA ROUNDTABLE DATES
Seasons Greetings from the Staff of Community Affairs
99December
Financial institution CRA officers and bank community development staff are invited to participate in the Roundtables.These meetings are valuable sources of information about CRA regulatory compliance and
about local community credit, service and investment opportunities.
Community Investments December 1999 Community Investments December 1999
T
2 Community Investments December 1999 15Community Investments December 1999
CREDIT SCORING FOR SMALL BUSINESS LENDING .......................................................... 3
CREATING CULTURAL WINDOWS TO BANKING OPPORTUNITIES .................................... 7
HOME FOR DINNER HOMEBUYERS PROGRAM ............................................................... 10
MICROPOLITAN COMMUNITY REINVESTMENT TRUSTS ................................................. 12
DISTRICT BULLETIN ......................................................................................................... 14
What’s Inside
Community Investments
EDITOR-IN-CHIEF
Joy Hoffmann Molloy
MANAGING EDITOR
Shawn Elliott Marshall
CONTRIBUTING EDITOR
Jack Richards
ART DIRECTOR
Cynthia B. Blake
PRODUCTION COORDINATOR
Ariel Andres
If you have an interesting community developmentprogram or idea, we would like to consider publish-ing an article by or about you. Please contact:
MANAGING EDITOR
Community InvestmentsFederal Reserve Bank of San Francisco
101 Market Street, Mail Stop 620San Francisco, California 94105
Community Affairs Departmentwww.frbsf.org(415) 974-2978
fax: (415) 393-1920
Joy Hoffmann MolloyAssistant Vice President
Community Affairs [email protected]
Jack RichardsCommunity Affairs Manager
Shawn Elliott MarshallCommunity Investment Advisor
H. Fred MendezCommunity Investment Advisor
Craig NolteCommunity Investment Advisor
(Seattle Branch)[email protected]
Adria Graham ScottCommunity Investment Advisor
(Los Angeles Branch)[email protected]
Lena RobinsonCommunity Investment Specialist
Ariel AndresExecutive Staff [email protected]
Mary MaloneProtocol Coordinator
Judith VaughnStaff Assistant
NOTEBOOK by Joy Hoffmann Molloy
TOWARD A SUSTAINABLE AMERICA
The President’s Council on SustainableDevelopment (PCSD) has released Toward aSustainable America: Advancing Prosperity,Opportunity, and a Healthy Environment forthe 21st Century. This report updates PCSDs1996 version, and includes current policyrecommendations. It highlights the council’sobjective to improve prosperity and qualityof life while reducing human pressures on theenvironment. Appendices include examples ofsuccessful community initiatives, resources,and council member profiles.
For more information or a copy of thereport, contact the PCSD at (202) 408-5296or at www.whitehouse.gov/PCSD.
NEW WEB SITE LINKS PROJECTS TO
PROGRAMS AND RESOURCES
1stSource is a new Internet site launched inOctober by the Federal Reserve Bank ofKansas City. The site is a guide to informationabout programs that assist community andeconomic development projects. Whetheryou are a developer trying to build afford-able housing, a small business entrepreneurseeking financing, a small farmer operating afarm, or a community seeking to improve itsinfrastructure, 1stSource can help you easilyand quickly cut through the maze ofprograms. With a little information from youabout your project, 1stSource will provideyou with a summary description of thoseprograms that best fit your project’s needs.
The site is http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/programs/index.asp. programs/index.asp. programs/index.asp. programs/index.asp. programs/index.asp. For more information,call John Wood at the Federal Reserve Bankof Kansas City at (800) 333-1010, ext. 2203.
CRA LEADERSHIP COUNCILS
January 7, 2000 is the final day to submit anomination form for the CRA LeadershipCouncil. The Leadership Councils are avoluntary advisory board of CRA officerswho will serve as representatives of theirlocal roundtable. For further information onthe program or to receive a nominationpacket, please call Lena Robinson at(415) 974-2717 or contact her via e-mail at:[email protected].
ECONOMIC EDUCATION PROGRAM
SATISFIES CRA CRITERIA
Bankers may want to consider JuniorAchievement’s (JA) innovative, economiceducation program as one option in fulfillingtheir CRA requirements. JA programs aredesigned to train students from kindergartenthrough 12th grade with work-force-readyeconomic skills and knowledge. The majorityof the programs are delivered to low-incomestudents.
One of JA’s primary programs is called theWhole School ProgramWhole School ProgramWhole School ProgramWhole School ProgramWhole School Program. Banks and businessesmay fund classrooms, whole grades, or adoptan entire school. Banks can receive Invest-ment Test credit when they provide fundingto sponsor a Whole School Program in a low-income neighborhood. They can also receiveService Test credit if their employeesvolunteer in the sponsored school.
For more information about Junior Achieve-ment programs, contact Senior DevelopmentManager, Julie Ringwood, at (323) 957-1818,ext. 20.
FREE COMPLIANCE CHAT GROUP
With Regulatory Risk Monitor’s compliancelistserv, you can pose your toughestquestions to colleagues and get speedyreplies offering insight, experience and usefultips on CRA, staff training, fair lending, creditscoring, regulatory requirements and safetyand soundness issues. You may even be theone who can respond to a colleague’schallenge!
It’s easy to subscribe. Just send an e-mailto: [email protected]. Leave thesubject line blank. In the message section,type: subscribe compliancesubscribe compliancesubscribe compliancesubscribe compliancesubscribe compliance. Please don’tinclude a signature file. Just hit the replybutton, send back the message, and you’redone!
For further information, call Regulatory RiskMonitor’s Executive Editor Fran Fanshel at(800) 929-4824, ext. 2245.
THE SOCIAL ENTREPRENURIAL
FUND (SEF)In its first two years of operation, the SocialEntrepreneurial Fund (SEF) of the Liberty HillFoundation has distributed over $300,000 ingrants to nine non-profit and/or worker-owned micro-enterprises in low-incomecommunities of Los Angeles. Based onlessons learned from this non-profitprogram, Liberty Hill is ready to proceed withmicro-loans to private entrepreneurs inlow-income areas for sustainable businessventures. They are seeking matchinginvestment funds from banks for a loan pool,as well as grants for technical assistance.
For more information, please contactMichele Prichard, director of Special Projectsat (310) 453-3611, ext. 104.
The last month has seen a flurry of editorial activity and op-ed pieces written about thenewly enacted Financial Services Modernization Act of 1999. Clearly, the debate isn’t overrelative to its potential impact and long-term value. Time and experience will likely serve asthe ultimate arbiters.
Debate and conjecture notwithstanding, the Federal Reserve Board is headlong into itsown flurry of activity to meet the March 2000 deadline for completion of the legislation’simplementing language. We expect this will include the new CRA provisions as well. Althoughtime is short, there are a few proactive steps that financial institutions can take to ensurereadiness for implementation of the new law:
➤ Develop a mechanism to internally assess and monitor the CRA activities of financialsubsidiaries and affiliates. This is an area where CRA actually got some additional “teeth,”since the new law mandates that all financial institution subsidiaries of a bank holding companyhave at least a satisfactory CRA rating in order to engage in any of the new activities grantedunder the bill. If even one subsidiary is rated below satisfactory, the expansion application willbe denied.
➤ Review current CRA agreements and create a more formal tracking system foractivities within these agreements. Under the new sunshine requirements, both banksand their non profit partners will be obliged to report (on an annual basis) CRA-related payments,fees, loans, investments, and services and their terms and conditions. Non-profits must alsoreport on the use of said funds, including compensation, administrative expenses, travel,entertainment and consulting/professional fees. Current thresholds mandate reporting ofcash payments and grants (individual or aggregate) in excess of $10,000 and loans (individualor aggregate) in excess of $50,000.
➤ Consider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with your
compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track. This will be especially importantfor small banks with satisfactory or outstanding ratings because they will now be examinedfor CRA compliance every 4-5 years. (Don’t forget that this only applies to CRA, and not othercompliance examinations!)
Over the next several months, Congress has charged the financial services industry and itsregulators with the task of developing meaningful and workable implementation strategies.We look forward to working with you to achieve this important goal.
Best wishes to you and your family for a wonderful holiday season.
Community Investments December 1999 Community Investments December 1999
C
14 Community Investments December 1999 3Community Investments December 1999
Credit Scoring for
the models used. This data usuallycomes from Dunn and Bradstreet.
Typically, the models use some 20–25variables, and the end-result is a singlemeasure, or score, for each small busi-ness. Scores normally range from 300 to900. The higher the score, the greater asmall business’s creditworthiness.
Automatic decisioning: Lenders of-ten set policies to allow for automaticlending decisions. Applicants receiv-ing scores above a designated cut-offnumber are automatically approved,and those receiving scores below an-other cut-off are rejected. Generally,there’s a gray-area in between wherehuman judgement is involved.
In the example below, a lender au-
tomatically approves a business loanapplication when the amount re-quested is for $50 thousand and lessand the business’s credit score is 650and higher. A score between 600 and649 requires credit officer review, whilelower scores result in automatic rejec-tion. This would be the general policyfollowed by the lender, but with over-rides allowed in certain situations.
LENDER SURVEY
To find out more about scoring usagewithin the 12th Federal Reserve Dis-trict, a survey was administered infor-mally to a sample of lenders. Com-pleted surveys were returned from thefive largest banking companies head-
2000 COMMUNITY REINVESTMENT CONFERENCE
April 16-19, 2000Palace Hotel, San Francisco
WIN A FREE REGISTRATION AND
THE SPOTLIGHT AT THE 2000 COMMUNITY REINVESTMENT CONFERENCE
The Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Franciscoare pleased to invite financial institutions to participate in a Products and Services Awardscompetition. The awards program is an effort to recognize and share innovative and outstand-ing examples of CRA-eligible products or services in the categories of lending, service, invest-ment and community development. Entries in any or every category will be accepted untilFebruary 15, 2000.
Entry information was sent out in mid December. If you did not receive it or would like moredetailed information, please contact Lena Robinson at (415) 974-2717 or by e-mail [email protected].
TRAINING SESSIONS AT-A-GLANCE
SUNDAY, APRIL 163:00 p.m. Executive Briefing
Leadership Council Meetings
5:00 p.m. Leadership Council Reception
MONDAY, APRIL 178:00 a.m. Registration and Breakfast
10:00 a.m. Opening SessionEllen Seidman, OTSAngela Blackwell, PolicyLink
12:00 noon Lunch and Keynote AddressEdward GramlichFederal Reserve Board
1:30 p.m. Concurrent Training Sessions
5:00 pm Speaker’s Reception/Free Evening
TUESDAY, APRIL 187:30 a.m. Networking Breakfast
8:30.a.m. Concurrent Training Sessions
11:45 a.m. CRA Awards Presentation
12:30 p.m. Lunch and SpeakerScott Morgan, DreamBuilders
1:30 p.m. Concurrent Training Sessions
5:00 p.m. Showcase Reception
WEDNESDAY, APRIL 197:30 a.m. Networking Breakfast
8:30.a.m. Concurrent Training Sessions
11:30 a.m. Closing AddressDonna Tanoue, FDIC (invited)
12:00 noon Lunch: Special CommonwealthClub Presentation:The Future of CRA
Credit scoring models are increasinglyreplacing human judgement in lend-ing decisions. Scoring dominates theconsumer-lending arena, with the vastmajority of credit card and mortgageoriginations aided by credit scoringmodels. All indications are that smallbusiness lending is going the sameroute.
During the first half of 1999, the Fed-eral Reserve Bank of San Franciscoconducted a survey of 51 12th Districtfinancial institutions to learn moreabout the use of credit scoring in un-derwriting small business loans. Thefollowing presents highlights of thesurvey results, which cover the extentthat scoring is used among large andsmall banks and the varying ap-proaches to scoring system implemen-tation. The results will also serve asthe basis for future Fed research onthis topic.
MODELS FOR BUSINESS LENDING
Similar to consumer loan models, smallbusiness models use credit history in-formation from credit bureaus to statis-tically estimate the likelihood that bor-rowers will repay their loans. For busi-ness lending models, credit bureau in-formation for the business’ principalowner is used. Additionally, the mod-els factor in information from the loanapplication such as the business owner’sdeposit account relationships, liquid as-sets, and type of business. Sometimes,credit history variables on the smallbusiness itself are also incorporated into
By Gary Palmer, Banking Studies Officer, Division of Banking Supervision & Regulation,the Federal Reserve Bank of San Francisco
Small Business Lending
REPORT OF A REGIONAL SURVEY
CRA Conference brochures with detailed session and
registration information will be mailed in mid January.
Contact Lena Robinson at (415) 974-2717 if you do not
receive a brochure or if you would like more information.
TRAINING MONDAY TUESDAY TUESDAY WEDNESDAY
TRACK AFTERNOON MORNING AFTERNOON MORNING
Profiles of Overview of CRA Small Large Community Safety & SoundnessCompliance Exam Techniques Bank Bank Development for CRA Officers
Exam Exam Service & Investment
Community Small Business Single Family Multi-Family Housing Finding the CommonDevelopment Lending Housing & Mixed-Use Ground forFinance Development Developments Development Lending
Community Bank Treasury Equity Deposits & Grants/ Fixed IncomeDevelopment Training for CRA Investments Corporate Giving SecuritiesInvestments Professionals Strategies
Community Profile of a The Unbanked – Profile of a Serving Rural andBuilding Community: Serving Emerging Community: Native American
Site Visit to Markets Site Visit to CommunitiesEastmont Responsibly The Tenderloin
DAILY SCHEDULE(Please refer to conference brochurefor more details.)
&EXAMPLE OF DECISIONING POLICY
USING CREDIT SCORES
Review(“grey area”)650–900
300–599 Reject
Review600–900
300–599 Reject
Loans 50Kand Under
Loansover 50K
650–900 Approve
CreditScore
Action
Community Investments December 1999 Community Investments December 19994 13
credit scoring models, just as consumerand mortgage lending is similarly domi-nated by scoring users. Also, given thecompetitive advantage that is possible,it appears that more and more smalland mid-sized banks will adopt scoringover time.
SURVEY QUESTIONS
Respondents were asked a variety ofquestions about their credit scoringprograms. A summary of their re-sponses follow:
Length of time used: Eight of the nineusers implemented their scoring pro-grams within the past three years. OnlyWells Fargo started its program ear-lier. This industry pioneer in creditscoring implemented its small businessscoring model in 1989.
Automatic approvals: Six of the ninebanks that use scoring automaticallygrant some loan requests based on cus-tomer scores. The other three use scor-ing to streamline their lending pro-cesses, but they continue to subjectall loan applications to human review.
Scoring for business expansion:Three use scoring as a means to at-tract new customers through mail so-licitations, but only one uses scoringto expand outside its normal geo-graphic area.
Home-grown or vendor models: In-terestingly, all nine of the respondentsuse scorecards purchased from Fair,Isaac and Company of San Rafael, Cali-fornia. Seven use scorecards from anoff-the-shelf Fair Isaac (FICO) model,and two use a customized FICOmodel. Wells Fargo also uses an inter-nally developed model.
Overall reliance on scoringmodels: Some of the usage factors andothers were combined on the follow-ing table to produce a subjective rank-ing of respondents by their reliance onthe models for business lending.
tions and realize substantial savings indebt rating fees, underwriting costs,and interest expenses, since such costswould be shared among pool partici-pants. Collectively, these municipali-ties could reduce their interest costssince diversification would improvetheir credit profiles and since “qualityof life,” indicators, which are gener-ally high for small cities, could be con-sidered as rating criteria.
Financial institutions could chooseeither to sponsor or invest in thesetrusts. Sponsors would create the trustsand could originate bridge loans, se-cured by tax anticipation notes, whichwould initially fund the trusts. Munici-palities would, of course, place theiryet-to-be-subscribed obligations intothe trusts.
Investors, including financial insti-tutions, would then purchase “com-munity reinvestment certificates” is-sued by the trusts, much as they wouldpurchase securitized packages of creditcard receivables or automobile loans.This same process could apply for thesale of securitized municipal tax liens,which are projected to grow at $5 bil-lion per year.
Besides sponsoring trust obligationsor investing in certificates, financial in-stitution representatives could chooseto serve on “inter-bank tender panels”which would periodically review cer-tificates issued by the trusts or reviewoffering memoranda describing spe-cific issues.
In addition to favorable customerand public perception, financial insti-tutions could benefit from CRA invest-ment test consideration since products
designed to finance community andeconomic development initiativessponsored by local governmentsqualify. Also, investment interest in-come from subscription of communityreinvestment certificates and reducedportfolio volatility through diversifica-tion of credit risk would be advan-tages. Sponsoring financial institutionswould also have the capability to earnfinancial advisory and facility fees.Finally, sponsoring banks could cre-ate bridge funds to provide small cityissuers with interim financing beforeobligations are securitized, generatingan additional source of fee revenue.Investing institutions could hold theseobligations for their own accounts orcould re-price them for retail distri-bution as individual investor accountproducts.
Through participation in this pro-gram, financial institutions could di-rectly and profitably facilitate commu-nity development projects within tar-geted lending markets, creating foun-dations for future profitability frompopulation and business growththrough development of local and re-gional credit markets. The trusts couldalso improve access to capital for eco-nomically disadvantaged communitiesand ensure availability of financialresources for small communitiesacross America.
If you are interested in pursuing thisidea, please contact Kevin O’Brien atSovereign Capital, Inc. in Tucson, Ari-zona. Tel: (520) 615-4525 / Fax: (520)749-3304.
ABOUT THE AUTHOR
Over the past sixteen years, KEVIN O’BRIEN
has worked in both corporate and economicdevelopment finance. As an investmentbanking professional in California, Mr. O’Brienspecialized in emerging market transactions,debt conversion finance and special situa-tions, and participated in the creation ofspecial purpose vehicles utilized in the issu-ance of asset-backed securities and otherspecialized financial structures. As presidentof Sovereign Capital, Inc., Mr. O’Brien pio-neered the creation of First Nations andsmall city economic development financeprograms, including creation of a regional airservice program to benefit underservedcommunities. He also developed theExitbond® program for increasing privateinvestment on Native American reservations.Mr. O’Brien holds a Bachelors degree in Fi-nance from Northern Arizona University.
CI
quartered in the District, and from 46smaller banking companies selected ar-bitrarily from banks and bank holdingcompanies regulated by the Federal Re-serve. They ranged in size from less than
$10 million in assets to over $200 bil-lion, with a median size of $195 mil-lion.
The survey found that, for these 51banking institutions, 18% use creditscoring models for business lending,and another 16% are considering us-ing in the future.
While the proportion of bankingcompanies using scoring for businesslending is relatively low, a different
picture emerges when we look at thelending volume of those organizations.As shown in the chart on the lowerleft, the nine organizations that usescoring account for over 90% of the
small business loans of the institutionssurveyed. The five largest Districtbanking organizations all use creditscoring models for business lending:Wells Fargo & Company, Union BanCalCorporation, First Security Corporation,Zions Bancorporation, and BankWestCorporation.
These findings provide support tothe notion that small business lendingis now dominated by those that use
INSTITUTIONS USING CREDIT SCORING FOR BUSINESS LENDING
BY SMALL BUSINESS LOAN VOLUME
Scoring Users
$8.0 B (90.4%)
No Plans to Use
$.6 B (6.7%)
May Use in Future
$0.3 B (2.8%)Based on 12th District Bank and
BHC Survey – includes loans
<$250K only
INSTITUTIONS USING CREDIT SCORING FOR BUSINESS LENDING
NUMBER OF INSTITUTIONS
Scoring Users
9 (18%)
May Use in Future
8 (16%)
No Plan to Use
34 (67%)
Based on 12th District Bank
and BHC Survey
Community Investments December 1999 Community Investments December 199912 5
The resulting analytical tool, with theinstitution names excluded here, con-siders four factors: 1) the lender use ofscoring for automatic loan approvals; 2)the maximum size of loan applicationsscored; 3) the volume of scored loanson the organization’s books; and 4) theuse of scoring to facilitate business andgeographic expansion.
Institutions shown towards the topplace greater reliance on the scoringmodels. In other words, they are moreliberal users of the models. Those listedtoward the bottom are more conserva-tive users. Based on this survey group,it appears that the longer an institu-tion uses scoring, the more liberal theirusage becomes.
Performance of scored loans: Therespondents all indicated that the per-formance of scored loans has been atleast as good as expected, with mostreporting “better than expected” per-formance. Five also believe that theirscored loans have outperformed theirnon-scored loans in terms of charge-offs and delinquencies, although tosome, this could also be a function ofan improved economy. One respon-
dent reported that scored loans haveunderperformed non-scored loans, al-though this lender is still satisfied withits scoring system results.
Why scoring is used: Lenders that usescoring models claim several benefits:1) faster loan decisions, 2) substantialefficiencies, and 3) improved under-
writing consistency across an entireorganization.
Why other institutions don’t use scor-ing: Many of the forty-two respondentsthat do not use scoring models for smallbusiness lending prefer to give indi-vidual attention to each loan request.They feel that scoring would interferewith the existing culture of the insti-tution, which emphasizes close cus-tomer relationships. Many also re-ported cost as a factor, citing an insuf-ficient scale of business lending to jus-tify the expense of a scoring model.
LOAN GROWTH OF SCORERS VERSUS
NON-SCORERS
With the efficiencies made possiblethrough credit scoring, we wanted tofind out if scoring users are “corner-
ing the market” on new small busi-ness loan originations.
While there is some evidence thatscoring users are able to expand theirsmall business lending at a rapid pace,the non-scorers are also generatingnew small business loans. Based onour sample, the growth rate of smallbusiness loans at institutions usingscoring was a healthy 11% between6/98 and 6/99. Over the same period,non-scorers grew their small businessloans by 6%.1 While this is a lowergrowth rate than that of the scorers, itdoes indicate that, at least for thisgroup of western banks, small busi-ness loan expansion opportunities stillexist for those that do not use scoring.
FAIR LENDING IMPLICATIONS
Scoring models can have positive fairlending impacts. A properly constructedmodel avoids using any variable that isamong the prohibited bases2 in Regula-tion B. A scoring program can there-fore, help reduce fair lending risks tolenders and facilitate an equitable ex-pansion of credit access.
However, a model must be empiri-cally derived and demonstrably andstatistically valid to qualify as a creditscoring system under Regulation B.Otherwise, the system is considered“judgmental,” which removes certain“safe harbor” protections such as thelimited inclusion of applicant age inthe model, and necessitates a morethorough fair lending review.
1 Based on small business loans with origi-nal maturities of $250 thousand or less.
2 Prohibited bases include: national origin,age, gender, marital status, race or color,religion, receipt of public assistance.
inancial Institutions face uniquechallenges in complying with theCRA in smaller “micropolitan”
communities where there are few in-vestment opportunities with acceptableportfolio risk. Opportunities that canbe found tend to be characterized byhigh levels of distressed infrastructure.
Small municipal governments facetheir own challenges in financing com-munity facilities and making physical im-provements. The costs of debt rating andissuance of debt are frequently prohibi-tive because of relatively small-sizedbond issues in micropolitan areas.
By Kevin O’Brien, President, Sovereign Capital, Inc.
This article offers a potential solu-tion for both financial institutions andsmall community governments: spe-cial asset securitization trusts. Thesetrusts, while still in a conceptual phase,could operate as revolving debt poolsfor small cities.1 Small city govern-ments, special districts, schools, hos-pitals and other taxing jurisdictionscould collectively issue debt obliga-
1 The IRS allows for the creation of truststhat securitize pooled debt obligations.These obligations are treated as debt forfederal income tax purposes so that in-terest is deductible.
CRA INVESTMENT CONCEPT
COMMUNITY REINVESTMENT TRUST OPERATING STRUCTURE
PublicIssuers
Pool Originator and FacilityArranger/Agent
Placement of Obligations into Trust
Ownership Interest(Certificates of Beneficial Interest
Master TrustFASIT Special Purpose Vehicle
Community Development
Note Pool
or
Municipal Tax Lien Pool
CollateralTrustee
Payment ofCollections to
CertificateHolders
SubscriptionProceeds
Remitted toPublic Issuers
LessOriginator’s
Discount Subscription of Undivided Interests(Certificates of Beneficial Interest)
Single or Multiple TrancheInstitutional Purchasers
[Tender Panel Members]
Periodic ReinvestmentRemarketing toRetail Investors
Subscription Proceeds
Spread Account
A
Bank Bank Bank Bank
Inter-Bank Community ReinvestmentTender Panel
Exhibit 1a
F EXTENT AND RELIANCE ON CREDIT REPORTING
INSTITUTION AUTOMATIC
APPROVALS?MAX SIZE OF
LOAN SCOREDA
VOLUME
SCORED
USED FOR
BUSINESS
EXPANSION?*B
Bank A
Bank B
Bank C
Bank E
Bank G
Bank H
Bank I
Bank D
Bank F
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
High
High
Moderate
Low
Low
Low
Moderate
Moderate
Low
High
Low
Moderate
Moderate
Moderate
Low
Moderate
Low
Low
Yes
No
No
No
Yes
Yes
No
No
No
– Geog exansion
– Within existing Mkt.
– Within existing Mkt.
LIBERAL
USAGE
CONSERVATIVE
USAGE
* Shown as a percentage of small business loans on the books.
A Low = $100K or less; Moderate = $100K–250K; High = greater than $250K
B Low = less than 10%; Moderate = 10–50%; High = 50% or greater
This article offers apotential solution for both
financial institutionsand small community
governments: special assetsecuritization trusts.
“
”
Reinvestment TrustsReinvestment
TrustsMicropolitan Community
Community Investments December 1999 Community Investments December 19996 11
Additionally, even a qualified creditscoring system does not eliminate fairlending concerns. For example, lend-ers often allow for a limited volume ofoverrides in their use of scoring mod-els. Care must be taken to ensure thatreasons for overrides are objective andnondiscriminatory; the reasons for theoverrides should then be documented.Lenders should also track the perfor-mance of overrides.
CONCLUSIONS AND NEXT STEPS
It is evident that small business lend-ing is now dominated by lenders thatuse credit scoring models, and thatscoring is continuing to attract newfollowers for cost and competitive rea-sons. It is also clear that the vast ma-jority of these lenders use models fromone vendor, and that the fair lendingimplications of these models appearto be mostly positive.
The Federal Reserve is continuingto research issues related to credit scor-ing. Some of the areas of possible fur-ther research include:
➤ Evaluating the variables and meth-odology used by the popular scor-ing models;
➤ Obtaining information on the ap-plication integrity risk controls inplace by vendors and credit bu-reaus to prevent the distribution oferroneous information;
➤ Looking at how lenders validate themodels they use to ensure that thescoring systems are leading to ap-propriate decision-making;
➤ Considering the implications ofscoring on credit risk at individualinstitutions and the entire bankingindustry;
➤ Considering differences in regula-tory risks faced by lenders basedon their selection of vendor orhome-grown models.
For more information on this surveyor future Fed research please call GaryPalmer at (415) 974-3003.
GARY PALMER has nearly 20 years of experi-
ence at the Federal Reserve Bank of San
Francisco. He currently serves as banking
studies officer in the Division of Banking Su-
pervision and Regulation. Mr. Palmer’s recent
work has focused on researching emerging
issues and trends within the banking indus-
try. Previously, he served as information
technology officer and as financial analysis
officer within the Division. Mr. Palmer holds
an M.B.A. degree from the University of Cali-
fornia at Berkeley and is a graduate of the
Pacific Coast Banking School in Seattle.
ABOUT THE AUTHOR
CI
ABOUT THE AUTHORS
JOSELYN COUSINS is a vice president in Community
Development Banking at Bank of America in Ne-
vada. Ms. Cousins is responsible for the organi-
zation’s performance under the Community Rein-
vestment Act. She administers the Community Re-
investment Act program through partnerships with
community group representatives and Bank of
America senior management.
Ms. Cousins began her banking career in 1986, and
has been a member of the Bank of America team since
1993. She was appointed to her current position in
1994. Her past roles includes residential lending, con-
struction lending and retail banking.
Ms. Cousins currently serves on several boards
including North Las Vegas Neighborhood Housing
Services, Nevada MicroEnterprise Initiative and the
Community Development Recommending Board
for the City of Las Vegas. She attended California
State University, San Bernardino and holds a B.A. in
Administration.
DOREEN DAVIS-PETERSON is vice president and man-
ager of U.S. Bank’s Community Investment De-
partment in Nevada and Utah, responsible for
assuring the organization’s compliance with the
objective and technical requirements, and imple-
mentation of the federal Community Reinvest-
ment Act. In addition, she manages community
relations for U.S. Bank in both states, including
corporate philanthropy, employee volunteerism,
and community partnerships.
Ms. Davis-Peterson began her banking career in
1977. She joined U.S. Bank in 1992, was named CRA
manager in 1993, and undertook the community
relations function in 1999. Ms. Davis-Peterson has
also held roles in lending, credit analysis, branch
management and customer service.
Ms. Davis-Peterson currently serves on the Ad-
visory Board of the Ethnic Student Resource Cen-
ter at the University of Nevada, Reno and is an
appointed member of the Nevada State Depart-
ment of Human Resources Block Grant Commis-
sion. She holds an A.A. from Truckee Meadows
Community College and is currently attending the
University of Nevada, Reno.
sentatives of the three participating mort-gage lenders—Bank of America, U.S.Bank and Wells Fargo - along with teammembers from Nevada Fair HousingCenter and Consumer Credit Counsel-ing Service presented the EAH concept.Presentations included an overview ofthe program, homeownership educationrequirements, and steps in the mortgagelending process.
It is not yet known how many ofthose first 95 will proceed through theprogram and qualify for a mortgage. Theestimated time for completion is any-where from 1–12 months, dependingon the condition of the applicant’s credit.And, although the program is targetedto serve people earning from 50-80% ofthe area median income, the team iscommitted to offering it to anyone in-terested in pursuing home ownership.
This commitment is demonstrated bythe critical roles played by the NevadaFair Housing Center and the ConsumerCredit Counseling Service. In additionto leading the educational effort, theNFHC received a program grant fromthe U.S. Department of Housing andUrban Development to serve in a liai-son capacity for participants who needone-on-one assistance throughout theentire process. If requested, NFHC staffwill guide participants through everystep to ensure that nobody “gets lostin the shuffle.” For those with weakcredit, Consumer Credit CounselingService is on-hand to provide freecredit counseling and credit repair.
THE FUTURE OF THE PROGRAM
After the initial round of sessions arecomplete, the Home for Dinner teamwill meet to discuss next steps for theprogram. Topics for discussion willlikely include outreach to additionalLas Vegas employers and the creationof non-profit partnerships to expanddown payment and closing cost op-tions. In the meantime, hundreds ofHousehold Bank employees will bebuilding a financial edge for their fu-tures and contributing to the stability
of the neighborhoods they choose tocall home.
ROLES OF HOME FOR DINNER PARTNERS
BANK OF AMERICA, U.S. BANK,WELLS FARGO
➤ Provide first mortgages, using spe-cially designed loan products with fa-vorable terms.➤ Present the program to HouseholdBank employees at series of informa-tional sessions.➤ Work with potential clients to helpthem understand various mortgageloan programs and the loan process.
BANKWEST OF NEVADA
➤ Provide a loan secured by a sec-ond deed of trust to assist the employ-ees of Household Bank with downpayment and/or closing costs.
HOUSEHOLD BANK
➤ Provide access and marketing toemployees.➤ Provide space at their facilities forinformational and education sessionsassociated with the program.➤ Deposit $50,000 in a CD accountto write-down the seconds offered byBankWest of Nevada.
NEVADA FAIR HOUSING CENTER &CONSUMER CREDIT COUNSELING SERVICE
➤ Determine eligibility of each emplo-yee and, when appropriate, refer them toConsumer Credit Counseling Service forpre-purchase credit preparation.➤ Lead home buyer education ses-sions, provide credit and post-pur-chase counseling for employees whoparticipate in the program.➤ Serve in a liaison capacity for par-ticipants seeking one-on-one assis-tance throughout the process.
For more information on the Home for Din-ner Home Buyers Program, please contactJoselyn Cousins at Bank of America Nevada(702) 654-7848, Doreen Davis-Peterson at US.Bank Nevada (702) 688-3565, or Steve Linderat Household Bank (702) 243-1390.
CI
Community Investments December 1999 Community Investments December 1999
TT
7
CreatingCULTURALWINDOWSto BankingOPPORTUNITIESBy Gilda Haas, Executive Director,Strategic Actions for a Just Economy
By Joselyn A. Cousins, Vice President, Community Development Banking, Bankof America Nevada and Doreen Davis-Peterson, Community InvestmentManager, U.S. Bank Nevada
Finding a Way to Increase HomeownershipOpportunities for Las Vegas Employees
HERE IS A RECURRING CONDITION
IN THIS COUNTRY’S ECONOMIC
LANDSCAPE THAT LEAVES LARGE SEG-MENTS OF OUR POPULATION SITTING
ON THE SIDELINES. The underservedmarket to which I refer representsenormous, yet still untapped, eco-nomic potential. It includes individu-als who are systematically lumped intothe “unbanked” category; a catch-allword that carries so many stereotypesand so much baggage, it’s just easierto ignore it altogether.
The numbers are economically sig-nificant. Approximately 1 million newimmigrants enter the United States eachyear. The majority come from Asia andthe Americas, and as a result, Los An-geles has replaced New York as theprimary point of entry into this coun-try. Although there are new immigrantsliving in cities and towns across thenation, many regard L.A. as a “livinglaboratory” . . . the perfect place tostudy and better understand immigrant
issues. In L.A., for example, one outof three residents is foreign born, andthe area’s cultural diversity is so greatthat 79 different languages are spo-ken in the L.A. Unified School District.
Strategic Actions for a Just Economy(SAJE) is a community-based organi-zation in Los Angeles that is dedicatedto improving opportunities for work-ing-class people and new immigrants.The organization’s banking experiencebegan back in 1988, when activists,who are now part of SAJE’s bankingprogram, organized to fight branchclosings in South Central LA.
More recently, SAJE has launched anethnic banking project to learn more aboutthe banking practices and economic po-tential of immigrant groups. The pilotstudy has generated financial profiles offour immigrant communities—Armenian,Korean, Salvadoran and Cambodian. Morestudies are planned, but these initial fourprovide a basic foundation of knowledge,a methodology, and a platform uponwhich to build a much larger view of theimpediments to and possibilities forbanking L.A.’s diverse ethnic consumers.
LESSONS FROM THE STUDY
Banks that are interested in playing alarger role in the financial lives of newimmigrants may borrow some lessonsfrom the SAJE study. There are obvi-ous communication efforts that can bemade, such as hiring staff who speakthe language, both literally and cul-turally, and providing materials in lan-guages other than English. But to learnhow banking issues interface with theimmigrant experience requires flexiblethinking.
The numbers areeconomically significant.Approximately 1 millionnew immigrants enter
the United Stateseach year.
“
”
➤ a sponsoring employer with a baseof at least 1500 employees;➤ a home owner education and creditcounseling component;➤ down payment assistance optionsfor qualifying borrowers; and,➤ affordable mortgage products, withrates that could be offered below market.
At the outset of the effort, casinos head-quartered in both Reno and Las Vegaswere targeted as sponsoring employ-ers, an obvious first choice in Nevada.But the team found little success withthe gaming industry. In late 1998, theNevada Fair Housing Center (NFHC)joined the planning effort, and severalnon-gaming employers were identifiedas Home for Dinner prospects.
Meanwhile, the mortgage divisionsof participating banks were busy iden-tifying and creating affordable lend-ing products for the Home for Dinnerprogram. By February 1999, the lend-ing products were in place, and therole of each program partner was clari-fied. With these steps completed, theplanning team was ready to share itsHome for Dinner program with threetarget employers, two of which werelocal governments, and the other, acredit card bank with a large back-of-fice operation in Southern Nevada.
HOUSEHOLD BANK ACCEPTS THE CONCEPT
Seizing an opportunity to fulfill invest-ment test requirements under the Com-munity Reinvestment Act, HouseholdBank decided to pilot the program and
market it to its Las Vegas employees.But this decision was not without itsset of challenges and limitations.
The primary challenge was how toparticipate in the down payment as-sistance piece without violating em-ployee benefits law. At its most basiclevel, the law requires that all non-salary related benefits be made equallyavailable to employees of a corporation.Since Household has offices and staffin other states, and because the pro-gram targets those earning 80% or lessof area median income, managementdetermined that its participation wouldhave to be “invisible” to employees.Since down payment grants were notan option, an additional partner wasneeded to complete the puzzle.
In August 1999, a local communitybank, BankWest of Nevada, joined theinitiative, agreeing to offer second deedof trust loans that could be used fordown payment or closing costs. House-hold agreed to deposit $50,000 in aBankWest CD account, which effectivelyeliminated the interest on the seconddeed of trust loans for a period of fiveyears. With these final pieces in place,the Home for Dinner Home Buyer’sProgram was ready to go. Householdbegan internal marketing of the pro-gram, and the first informational ses-sions were held in the fall of 1999.
OUTREACH TO POTENTIAL HOME OWNERS
Ninety-five Household employees at-tended the first session of the Home forDinner Home Buyers program. Repre-
10 Community Investments December 1999
TTTTThe Las Vegas Valley is home to thou-sands of companies that employ low-to moderate-income wage earners.
Visitors are often amazed by the sheernumber of dealers, waiters, parking at-tendants, and others who work hardto maintain the city’s reputation asAmerica’s greatest play land. Whilehourly wages tend to be low in thehospitality industry, employees farepretty well—mainly because tipssupplement their low pay. But in thelarge urban valley that exists beyondthe Strip, there are hundreds of othercompanies where tips aren’t part of thetrade. For employees of these compa-nies, their paychecks are often theirsole source of income.
Employment opportunities at all lev-els of the income scale have fueledexplosive population growth in the LasVegas area. As a result, the ratio of rent-ers to owners has reached an all-timehigh. Nevertheless, Las Vegans continueto place a high priority on home owner-ship, and the development of affordable,single-family housing is a prevalent lend-ing activity for many financial institu-tions operating in Southern Nevada.
Affordable mortgages are also highon the area’s priority list, again fueledby population growth. But banks havestruggled with how to effectively reachand serve a potentially profitable seg-ment of the market . . . the thousandsof low- and moderate-income wageearners slowly being shut out of theLas Vegas housing market.
CRA OFFICERS TAKE THE LEAD
To address this growing problem, asmall group of CRA officers met in April1997, and discussed ways to better cap-ture Las Vegas’ lower wage market.After researching various programsaround the country, the team decidedto pursue the creation of an employer-assisted housing (EAH) program. Theprogram, which eventually came to beknown as the “Home for Dinner HomeBuyers Program,” would have fourimportant components:
AA good starting place is to look atboilerplate requirements that mostbanks use to determine the stabilityand creditworthiness of their custom-ers. In the case of new immigrants,these requirements may simply bemissing the mark, and with it, oppor-tunities for communities as well as fi-nancial institutions. Questions to pose,are “what do we really need to know?”and, “ Is their another way to achievethe same results?” Concrete action stepsfor banks to consider include:
➤ DEVELOP FLEXIBLE IDENTIFICATION
REQUIREMENTS
Bank accounts are a basic point of en-try to the financial mainstream of theU.S., but the requirement to providecredit cards and/or multiple forms ofphoto identification often preclude theability of newcomers to open a bankaccount. SAJE has worked with severalbanks to identify what they really needto know about people, and to developalternative identification requirementsthat meet the banks’ needs and are morefeasible for our constituents.
➤ TAKE A MORE FLEXIBLE APPROACH TO
EVALUATING CREDIT HISTORY AND CREDIT-WORTHINESS
Establishing a credit-history is difficultfor most first-generation immigrants,even through they may have excellentcredit records in their country of ori-gin. The fact that a person or organi-zation has been operating successfullyoutside the U.S. financial mainstreamcould be seen as an asset rather thana liability. More respect should be paidto financial success in another coun-try as a valid credit history. An alter-native is to accept non-traditional formsof credit history—consistent and timelypayment of bills, for example, over asubstantial period of time.
➤ DEVELOP FLEXIBLE STRATEGIES THAT
INCREASE LOAN OPPORTUNITIES FOR
IMMIGRANTS
Cultural adaptations are the key com-ponents of successful programs thatbuild and extend credit to new immi-grant populations. Korean banks, forexample, have helped their customersbuild credit histories by establishing in-stallment savings accounts that borrowfrom Korean cultural practices. Autofin,described later, incorporates the famil-iar tanda process in an institutionallending setting. These are not dissimi-lar from Christmas Clubs and other tra-ditional American banking products, yetare designed to resonate with the ex-perience of immigrant consumers.
This type of thinking and approachactually opens doors for all under-servedpeople, native Americans and immi-grants alike. Indeed, one of the great ad-vantages of accomodating immigrantsis how it accomodates the rest of us aswell. The following story illustrates howcultural traditions can be adapted toU.S. banking practices in order to reapsubstantial collateral benefits.
THE STORY OF AUTOFIN
Autofin is a large Mexican financecompany with over 60,000 custom-ers. The company’s lending strategy isdesigned to capitalize on tanda, a tra-ditional, informal lending circle typi-cally used by women in Mexico to poolresources for “once in a lifetime” ex-penses such as weddings, quinceneras,or funerals.
Autofin has adapted and formalizedthe concept so that applicants enteran established lending group definedby the loan amount they are seeking.Autofin, like tanda, requires partici-pants to make monthly contributionsto a common fund prior to actuallyapplying for a loan. This way, poten
tial applicants build up savings whileestablishing a “repayment” history atthe same time. After a minimum num-ber of payments into the loan pool,applicants are able to receive car,home, or business loans. But now,instead of making monthly contribu-tions to the pool, they are makingmonthly loan repayments, under muchthe same terms as before.
The Autofin story describes how tra-ditional banking products such as sav-ings clubs and secured loans can beadapted to emulate cultural practicesaround lending and money. This is arelatively new concept for U.S. banks,which adapt to cultural contexts inorder to compete in foreign markets,but still shape their domestic productsaround a white, middle-class consumermodel.
Today, substantial “foreign markets”reside in American cities. SAJE plansto continue the ethnic banking projectto learn more from other, diverse com-munities in L.A. Based on our pastexperience, we are confident thatmerging the culture of banks with thatof new immigrant communities canresult in great opportunity and signifi-cant potential for both.
SAJE’s ethnic banking study entitled“Transactions: Building Access to Fi-nancial Services and Credit AcrossL.A.’s Immigrant Communities” isavailable free of charge. SAJE isactively soliciting partnerships withbanks that wish to develop innova-tive, culturally responsive strategies forserving immigrant populations. For acopy of the report or additional infor-mation, please contact Gilda Haas,executive director, at (323) 732-9961.
CI
Community Investments December 19998
SAJESAJE is a 501(c)3 corporation founded on the premise that many of LosAngeles’ social problems have economic roots. Our primary mission is to buildeconomic power among grassroots people. SAJE’s strategy is a bottom-upapproach that convenes people affected by a problem and helps them createsolutions with others at a much greater scale.
Our unique contribution to community development in Los Angeles is ourfocus on the relationships between ownership, capital and participation.Towards this end, SAJE’s core programs promote access to banking services,the development of sustainable jobs through cooperative enterprises, and thecreation of public policies that make capital more accountable to communityand worker needs.
RECENT ACCOMPLISHMENTS
SAJE has been building new economic options for working class people in LosAngeles since our inception in 1994. In addition to our ethnic banking project,some of our accomplishments include:
➤ Welfare-to-Work Banking: SAJE has created a partnership among communityreinvestment activists, welfare recipients, advocates, L.A. County’s Departmentof Social Services, and Washington Mutual Bank to create the County’s firstdirect-deposit policy and a welfare-to-work bank account that may ultimatelyserve thousands of people on aid in L.A. County. Presently in the pilot stage, theprogram anticipates federally mandated electronic benefit transfer laws thatmust be implemented across the country by the year 2001. It will provide analternative banking model for people who are being mainstreamed fromwelfare checks to paychecks.
➤ Cooperative Job Development::::: SAJE has organized immigrant low-wageworkers into cooperative job development programs that provide alternativesto exploitative working conditions, provide living wages, and a sustainablefoundation for the future. To date, our Hollywood Domestic Workers Coopera-tive has generated over 200 housecleaning jobs which pay an average of $10per hour.
➤ Healthy Homes Collaborative: SAJE is the lead organization of a collaborativewhich includes Esperanza Community Housing, St. John’s Well Child Clinic, andL.A. County’s Childhood Lead Poisoning Prevention Program. The project seeksto prevent lead poisoning in SAJE’s own “lead hot spot” neighborhood byintegrating housing, health, and employment initiatives into a comprehensiveapproach. We have recently trained 15 neighborhood residents as State-certified lead abatement workers and are building a foundation for a morestrategic lead abatement policy in L.A.
For more information, please call or write us:SAJE, 2636 Kenwood Avenue, Los Angeles, CA 90007, (323) 732-9961
SAJEStrategic Actions for a Just Economy
ABOUT THE AUTHOR
GILDA HAAS is an organizer, educator, and
economic development professional who has
been assisting community and labor organi-
zations in building economic development
projects and policies from the ground up for
over twenty years. She is the director of
Strategic Actions for a Just Economy (SAJE),
an organization dedicated to building economic
power for working class people in Los Angeles.
Ms. Haas’ contributions to economic devel-
opment are varied. She founded Communi-
ties for Accountable Reinvestment, a diverse
coalition based in Los Angeles that fights
against redlining and for community devel-
opment banking. She was also founding Board
member of South Central People’s Federal
Credit Union. Ms. Haas also created the Com-
munity Scholars Program, housed in UCLA’s
School of Public Policy and Social Research,
where she has taught economic development
courses for the past 15 years. Congress has
tapped Ms. Haas’ expertise numerous times
by requesting her testimony on community
banking issues.
Community Investments December 1999 9
Community Investments December 1999 Community Investments December 1999
TT
7
CreatingCULTURALWINDOWSto BankingOPPORTUNITIESBy Gilda Haas, Executive Director,Strategic Actions for a Just Economy
By Joselyn A. Cousins, Vice President, Community Development Banking, Bankof America Nevada and Doreen Davis-Peterson, Community InvestmentManager, U.S. Bank Nevada
Finding a Way to Increase HomeownershipOpportunities for Las Vegas Employees
HERE IS A RECURRING CONDITION
IN THIS COUNTRY’S ECONOMIC
LANDSCAPE THAT LEAVES LARGE SEG-MENTS OF OUR POPULATION SITTING
ON THE SIDELINES. The underservedmarket to which I refer representsenormous, yet still untapped, eco-nomic potential. It includes individu-als who are systematically lumped intothe “unbanked” category; a catch-allword that carries so many stereotypesand so much baggage, it’s just easierto ignore it altogether.
The numbers are economically sig-nificant. Approximately 1 million newimmigrants enter the United States eachyear. The majority come from Asia andthe Americas, and as a result, Los An-geles has replaced New York as theprimary point of entry into this coun-try. Although there are new immigrantsliving in cities and towns across thenation, many regard L.A. as a “livinglaboratory” . . . the perfect place tostudy and better understand immigrant
issues. In L.A., for example, one outof three residents is foreign born, andthe area’s cultural diversity is so greatthat 79 different languages are spo-ken in the L.A. Unified School District.
Strategic Actions for a Just Economy(SAJE) is a community-based organi-zation in Los Angeles that is dedicatedto improving opportunities for work-ing-class people and new immigrants.The organization’s banking experiencebegan back in 1988, when activists,who are now part of SAJE’s bankingprogram, organized to fight branchclosings in South Central LA.
More recently, SAJE has launched anethnic banking project to learn more aboutthe banking practices and economic po-tential of immigrant groups. The pilotstudy has generated financial profiles offour immigrant communities—Armenian,Korean, Salvadoran and Cambodian. Morestudies are planned, but these initial fourprovide a basic foundation of knowledge,a methodology, and a platform uponwhich to build a much larger view of theimpediments to and possibilities forbanking L.A.’s diverse ethnic consumers.
LESSONS FROM THE STUDY
Banks that are interested in playing alarger role in the financial lives of newimmigrants may borrow some lessonsfrom the SAJE study. There are obvi-ous communication efforts that can bemade, such as hiring staff who speakthe language, both literally and cul-turally, and providing materials in lan-guages other than English. But to learnhow banking issues interface with theimmigrant experience requires flexiblethinking.
The numbers areeconomically significant.Approximately 1 millionnew immigrants enter
the United Stateseach year.
“
”
➤ a sponsoring employer with a baseof at least 1500 employees;➤ a home owner education and creditcounseling component;➤ down payment assistance optionsfor qualifying borrowers; and,➤ affordable mortgage products, withrates that could be offered below market.
At the outset of the effort, casinos head-quartered in both Reno and Las Vegaswere targeted as sponsoring employ-ers, an obvious first choice in Nevada.But the team found little success withthe gaming industry. In late 1998, theNevada Fair Housing Center (NFHC)joined the planning effort, and severalnon-gaming employers were identifiedas Home for Dinner prospects.
Meanwhile, the mortgage divisionsof participating banks were busy iden-tifying and creating affordable lend-ing products for the Home for Dinnerprogram. By February 1999, the lend-ing products were in place, and therole of each program partner was clari-fied. With these steps completed, theplanning team was ready to share itsHome for Dinner program with threetarget employers, two of which werelocal governments, and the other, acredit card bank with a large back-of-fice operation in Southern Nevada.
HOUSEHOLD BANK ACCEPTS THE CONCEPT
Seizing an opportunity to fulfill invest-ment test requirements under the Com-munity Reinvestment Act, HouseholdBank decided to pilot the program and
market it to its Las Vegas employees.But this decision was not without itsset of challenges and limitations.
The primary challenge was how toparticipate in the down payment as-sistance piece without violating em-ployee benefits law. At its most basiclevel, the law requires that all non-salary related benefits be made equallyavailable to employees of a corporation.Since Household has offices and staffin other states, and because the pro-gram targets those earning 80% or lessof area median income, managementdetermined that its participation wouldhave to be “invisible” to employees.Since down payment grants were notan option, an additional partner wasneeded to complete the puzzle.
In August 1999, a local communitybank, BankWest of Nevada, joined theinitiative, agreeing to offer second deedof trust loans that could be used fordown payment or closing costs. House-hold agreed to deposit $50,000 in aBankWest CD account, which effectivelyeliminated the interest on the seconddeed of trust loans for a period of fiveyears. With these final pieces in place,the Home for Dinner Home Buyer’sProgram was ready to go. Householdbegan internal marketing of the pro-gram, and the first informational ses-sions were held in the fall of 1999.
OUTREACH TO POTENTIAL HOME OWNERS
Ninety-five Household employees at-tended the first session of the Home forDinner Home Buyers program. Repre-
10 Community Investments December 1999
TTTTThe Las Vegas Valley is home to thou-sands of companies that employ low-to moderate-income wage earners.
Visitors are often amazed by the sheernumber of dealers, waiters, parking at-tendants, and others who work hardto maintain the city’s reputation asAmerica’s greatest play land. Whilehourly wages tend to be low in thehospitality industry, employees farepretty well—mainly because tipssupplement their low pay. But in thelarge urban valley that exists beyondthe Strip, there are hundreds of othercompanies where tips aren’t part of thetrade. For employees of these compa-nies, their paychecks are often theirsole source of income.
Employment opportunities at all lev-els of the income scale have fueledexplosive population growth in the LasVegas area. As a result, the ratio of rent-ers to owners has reached an all-timehigh. Nevertheless, Las Vegans continueto place a high priority on home owner-ship, and the development of affordable,single-family housing is a prevalent lend-ing activity for many financial institu-tions operating in Southern Nevada.
Affordable mortgages are also highon the area’s priority list, again fueledby population growth. But banks havestruggled with how to effectively reachand serve a potentially profitable seg-ment of the market . . . the thousandsof low- and moderate-income wageearners slowly being shut out of theLas Vegas housing market.
CRA OFFICERS TAKE THE LEAD
To address this growing problem, asmall group of CRA officers met in April1997, and discussed ways to better cap-ture Las Vegas’ lower wage market.After researching various programsaround the country, the team decidedto pursue the creation of an employer-assisted housing (EAH) program. Theprogram, which eventually came to beknown as the “Home for Dinner HomeBuyers Program,” would have fourimportant components:
Community Investments December 1999 Community Investments December 19996 11
Additionally, even a qualified creditscoring system does not eliminate fairlending concerns. For example, lend-ers often allow for a limited volume ofoverrides in their use of scoring mod-els. Care must be taken to ensure thatreasons for overrides are objective andnondiscriminatory; the reasons for theoverrides should then be documented.Lenders should also track the perfor-mance of overrides.
CONCLUSIONS AND NEXT STEPS
It is evident that small business lend-ing is now dominated by lenders thatuse credit scoring models, and thatscoring is continuing to attract newfollowers for cost and competitive rea-sons. It is also clear that the vast ma-jority of these lenders use models fromone vendor, and that the fair lendingimplications of these models appearto be mostly positive.
The Federal Reserve is continuingto research issues related to credit scor-ing. Some of the areas of possible fur-ther research include:
➤ Evaluating the variables and meth-odology used by the popular scor-ing models;
➤ Obtaining information on the ap-plication integrity risk controls inplace by vendors and credit bu-reaus to prevent the distribution oferroneous information;
➤ Looking at how lenders validate themodels they use to ensure that thescoring systems are leading to ap-propriate decision-making;
➤ Considering the implications ofscoring on credit risk at individualinstitutions and the entire bankingindustry;
➤ Considering differences in regula-tory risks faced by lenders basedon their selection of vendor orhome-grown models.
For more information on this surveyor future Fed research please call GaryPalmer at (415) 974-3003.
GARY PALMER has nearly 20 years of experi-
ence at the Federal Reserve Bank of San
Francisco. He currently serves as banking
studies officer in the Division of Banking Su-
pervision and Regulation. Mr. Palmer’s recent
work has focused on researching emerging
issues and trends within the banking indus-
try. Previously, he served as information
technology officer and as financial analysis
officer within the Division. Mr. Palmer holds
an M.B.A. degree from the University of Cali-
fornia at Berkeley and is a graduate of the
Pacific Coast Banking School in Seattle.
ABOUT THE AUTHOR
CI
ABOUT THE AUTHORS
JOSELYN COUSINS is a vice president in Community
Development Banking at Bank of America in Ne-
vada. Ms. Cousins is responsible for the organi-
zation’s performance under the Community Rein-
vestment Act. She administers the Community Re-
investment Act program through partnerships with
community group representatives and Bank of
America senior management.
Ms. Cousins began her banking career in 1986, and
has been a member of the Bank of America team since
1993. She was appointed to her current position in
1994. Her past roles includes residential lending, con-
struction lending and retail banking.
Ms. Cousins currently serves on several boards
including North Las Vegas Neighborhood Housing
Services, Nevada MicroEnterprise Initiative and the
Community Development Recommending Board
for the City of Las Vegas. She attended California
State University, San Bernardino and holds a B.A. in
Administration.
DOREEN DAVIS-PETERSON is vice president and man-
ager of U.S. Bank’s Community Investment De-
partment in Nevada and Utah, responsible for
assuring the organization’s compliance with the
objective and technical requirements, and imple-
mentation of the federal Community Reinvest-
ment Act. In addition, she manages community
relations for U.S. Bank in both states, including
corporate philanthropy, employee volunteerism,
and community partnerships.
Ms. Davis-Peterson began her banking career in
1977. She joined U.S. Bank in 1992, was named CRA
manager in 1993, and undertook the community
relations function in 1999. Ms. Davis-Peterson has
also held roles in lending, credit analysis, branch
management and customer service.
Ms. Davis-Peterson currently serves on the Ad-
visory Board of the Ethnic Student Resource Cen-
ter at the University of Nevada, Reno and is an
appointed member of the Nevada State Depart-
ment of Human Resources Block Grant Commis-
sion. She holds an A.A. from Truckee Meadows
Community College and is currently attending the
University of Nevada, Reno.
sentatives of the three participating mort-gage lenders—Bank of America, U.S.Bank and Wells Fargo - along with teammembers from Nevada Fair HousingCenter and Consumer Credit Counsel-ing Service presented the EAH concept.Presentations included an overview ofthe program, homeownership educationrequirements, and steps in the mortgagelending process.
It is not yet known how many ofthose first 95 will proceed through theprogram and qualify for a mortgage. Theestimated time for completion is any-where from 1–12 months, dependingon the condition of the applicant’s credit.And, although the program is targetedto serve people earning from 50-80% ofthe area median income, the team iscommitted to offering it to anyone in-terested in pursuing home ownership.
This commitment is demonstrated bythe critical roles played by the NevadaFair Housing Center and the ConsumerCredit Counseling Service. In additionto leading the educational effort, theNFHC received a program grant fromthe U.S. Department of Housing andUrban Development to serve in a liai-son capacity for participants who needone-on-one assistance throughout theentire process. If requested, NFHC staffwill guide participants through everystep to ensure that nobody “gets lostin the shuffle.” For those with weakcredit, Consumer Credit CounselingService is on-hand to provide freecredit counseling and credit repair.
THE FUTURE OF THE PROGRAM
After the initial round of sessions arecomplete, the Home for Dinner teamwill meet to discuss next steps for theprogram. Topics for discussion willlikely include outreach to additionalLas Vegas employers and the creationof non-profit partnerships to expanddown payment and closing cost op-tions. In the meantime, hundreds ofHousehold Bank employees will bebuilding a financial edge for their fu-tures and contributing to the stability
of the neighborhoods they choose tocall home.
ROLES OF HOME FOR DINNER PARTNERS
BANK OF AMERICA, U.S. BANK,WELLS FARGO
➤ Provide first mortgages, using spe-cially designed loan products with fa-vorable terms.➤ Present the program to HouseholdBank employees at series of informa-tional sessions.➤ Work with potential clients to helpthem understand various mortgageloan programs and the loan process.
BANKWEST OF NEVADA
➤ Provide a loan secured by a sec-ond deed of trust to assist the employ-ees of Household Bank with downpayment and/or closing costs.
HOUSEHOLD BANK
➤ Provide access and marketing toemployees.➤ Provide space at their facilities forinformational and education sessionsassociated with the program.➤ Deposit $50,000 in a CD accountto write-down the seconds offered byBankWest of Nevada.
NEVADA FAIR HOUSING CENTER &CONSUMER CREDIT COUNSELING SERVICE
➤ Determine eligibility of each emplo-yee and, when appropriate, refer them toConsumer Credit Counseling Service forpre-purchase credit preparation.➤ Lead home buyer education ses-sions, provide credit and post-pur-chase counseling for employees whoparticipate in the program.➤ Serve in a liaison capacity for par-ticipants seeking one-on-one assis-tance throughout the process.
For more information on the Home for Din-ner Home Buyers Program, please contactJoselyn Cousins at Bank of America Nevada(702) 654-7848, Doreen Davis-Peterson at US.Bank Nevada (702) 688-3565, or Steve Linderat Household Bank (702) 243-1390.
CI
Community Investments December 1999 Community Investments December 199912 5
The resulting analytical tool, with theinstitution names excluded here, con-siders four factors: 1) the lender use ofscoring for automatic loan approvals; 2)the maximum size of loan applicationsscored; 3) the volume of scored loanson the organization’s books; and 4) theuse of scoring to facilitate business andgeographic expansion.
Institutions shown towards the topplace greater reliance on the scoringmodels. In other words, they are moreliberal users of the models. Those listedtoward the bottom are more conserva-tive users. Based on this survey group,it appears that the longer an institu-tion uses scoring, the more liberal theirusage becomes.
Performance of scored loans: Therespondents all indicated that the per-formance of scored loans has been atleast as good as expected, with mostreporting “better than expected” per-formance. Five also believe that theirscored loans have outperformed theirnon-scored loans in terms of charge-offs and delinquencies, although tosome, this could also be a function ofan improved economy. One respon-
dent reported that scored loans haveunderperformed non-scored loans, al-though this lender is still satisfied withits scoring system results.
Why scoring is used: Lenders that usescoring models claim several benefits:1) faster loan decisions, 2) substantialefficiencies, and 3) improved under-
writing consistency across an entireorganization.
Why other institutions don’t use scor-ing: Many of the forty-two respondentsthat do not use scoring models for smallbusiness lending prefer to give indi-vidual attention to each loan request.They feel that scoring would interferewith the existing culture of the insti-tution, which emphasizes close cus-tomer relationships. Many also re-ported cost as a factor, citing an insuf-ficient scale of business lending to jus-tify the expense of a scoring model.
LOAN GROWTH OF SCORERS VERSUS
NON-SCORERS
With the efficiencies made possiblethrough credit scoring, we wanted tofind out if scoring users are “corner-
ing the market” on new small busi-ness loan originations.
While there is some evidence thatscoring users are able to expand theirsmall business lending at a rapid pace,the non-scorers are also generatingnew small business loans. Based onour sample, the growth rate of smallbusiness loans at institutions usingscoring was a healthy 11% between6/98 and 6/99. Over the same period,non-scorers grew their small businessloans by 6%.1 While this is a lowergrowth rate than that of the scorers, itdoes indicate that, at least for thisgroup of western banks, small busi-ness loan expansion opportunities stillexist for those that do not use scoring.
FAIR LENDING IMPLICATIONS
Scoring models can have positive fairlending impacts. A properly constructedmodel avoids using any variable that isamong the prohibited bases2 in Regula-tion B. A scoring program can there-fore, help reduce fair lending risks tolenders and facilitate an equitable ex-pansion of credit access.
However, a model must be empiri-cally derived and demonstrably andstatistically valid to qualify as a creditscoring system under Regulation B.Otherwise, the system is considered“judgmental,” which removes certain“safe harbor” protections such as thelimited inclusion of applicant age inthe model, and necessitates a morethorough fair lending review.
1 Based on small business loans with origi-nal maturities of $250 thousand or less.
2 Prohibited bases include: national origin,age, gender, marital status, race or color,religion, receipt of public assistance.
inancial Institutions face uniquechallenges in complying with theCRA in smaller “micropolitan”
communities where there are few in-vestment opportunities with acceptableportfolio risk. Opportunities that canbe found tend to be characterized byhigh levels of distressed infrastructure.
Small municipal governments facetheir own challenges in financing com-munity facilities and making physical im-provements. The costs of debt rating andissuance of debt are frequently prohibi-tive because of relatively small-sizedbond issues in micropolitan areas.
By Kevin O’Brien, President, Sovereign Capital, Inc.
This article offers a potential solu-tion for both financial institutions andsmall community governments: spe-cial asset securitization trusts. Thesetrusts, while still in a conceptual phase,could operate as revolving debt poolsfor small cities.1 Small city govern-ments, special districts, schools, hos-pitals and other taxing jurisdictionscould collectively issue debt obliga-
1 The IRS allows for the creation of truststhat securitize pooled debt obligations.These obligations are treated as debt forfederal income tax purposes so that in-terest is deductible.
CRA INVESTMENT CONCEPT
COMMUNITY REINVESTMENT TRUST OPERATING STRUCTURE
PublicIssuers
Pool Originator and FacilityArranger/Agent
Placement of Obligations into Trust
Ownership Interest(Certificates of Beneficial Interest
Master TrustFASIT Special Purpose Vehicle
Community Development
Note Pool
or
Municipal Tax Lien Pool
CollateralTrustee
Payment ofCollections to
CertificateHolders
SubscriptionProceeds
Remitted toPublic Issuers
LessOriginator’s
Discount Subscription of Undivided Interests(Certificates of Beneficial Interest)
Single or Multiple TrancheInstitutional Purchasers
[Tender Panel Members]
Periodic ReinvestmentRemarketing toRetail Investors
Subscription Proceeds
Spread Account
A
Bank Bank Bank Bank
Inter-Bank Community ReinvestmentTender Panel
Exhibit 1a
F EXTENT AND RELIANCE ON CREDIT REPORTING
INSTITUTION AUTOMATIC
APPROVALS?MAX SIZE OF
LOAN SCOREDA
VOLUME
SCORED
USED FOR
BUSINESS
EXPANSION?*B
Bank A
Bank B
Bank C
Bank E
Bank G
Bank H
Bank I
Bank D
Bank F
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
High
High
Moderate
Low
Low
Low
Moderate
Moderate
Low
High
Low
Moderate
Moderate
Moderate
Low
Moderate
Low
Low
Yes
No
No
No
Yes
Yes
No
No
No
– Geog exansion
– Within existing Mkt.
– Within existing Mkt.
LIBERAL
USAGE
CONSERVATIVE
USAGE
* Shown as a percentage of small business loans on the books.
A Low = $100K or less; Moderate = $100K–250K; High = greater than $250K
B Low = less than 10%; Moderate = 10–50%; High = 50% or greater
This article offers apotential solution for both
financial institutionsand small community
governments: special assetsecuritization trusts.
“
”
Reinvestment TrustsReinvestment
TrustsMicropolitan Community
Community Investments December 1999 Community Investments December 19994 13
credit scoring models, just as consumerand mortgage lending is similarly domi-nated by scoring users. Also, given thecompetitive advantage that is possible,it appears that more and more smalland mid-sized banks will adopt scoringover time.
SURVEY QUESTIONS
Respondents were asked a variety ofquestions about their credit scoringprograms. A summary of their re-sponses follow:
Length of time used: Eight of the nineusers implemented their scoring pro-grams within the past three years. OnlyWells Fargo started its program ear-lier. This industry pioneer in creditscoring implemented its small businessscoring model in 1989.
Automatic approvals: Six of the ninebanks that use scoring automaticallygrant some loan requests based on cus-tomer scores. The other three use scor-ing to streamline their lending pro-cesses, but they continue to subjectall loan applications to human review.
Scoring for business expansion:Three use scoring as a means to at-tract new customers through mail so-licitations, but only one uses scoringto expand outside its normal geo-graphic area.
Home-grown or vendor models: In-terestingly, all nine of the respondentsuse scorecards purchased from Fair,Isaac and Company of San Rafael, Cali-fornia. Seven use scorecards from anoff-the-shelf Fair Isaac (FICO) model,and two use a customized FICOmodel. Wells Fargo also uses an inter-nally developed model.
Overall reliance on scoringmodels: Some of the usage factors andothers were combined on the follow-ing table to produce a subjective rank-ing of respondents by their reliance onthe models for business lending.
tions and realize substantial savings indebt rating fees, underwriting costs,and interest expenses, since such costswould be shared among pool partici-pants. Collectively, these municipali-ties could reduce their interest costssince diversification would improvetheir credit profiles and since “qualityof life,” indicators, which are gener-ally high for small cities, could be con-sidered as rating criteria.
Financial institutions could chooseeither to sponsor or invest in thesetrusts. Sponsors would create the trustsand could originate bridge loans, se-cured by tax anticipation notes, whichwould initially fund the trusts. Munici-palities would, of course, place theiryet-to-be-subscribed obligations intothe trusts.
Investors, including financial insti-tutions, would then purchase “com-munity reinvestment certificates” is-sued by the trusts, much as they wouldpurchase securitized packages of creditcard receivables or automobile loans.This same process could apply for thesale of securitized municipal tax liens,which are projected to grow at $5 bil-lion per year.
Besides sponsoring trust obligationsor investing in certificates, financial in-stitution representatives could chooseto serve on “inter-bank tender panels”which would periodically review cer-tificates issued by the trusts or reviewoffering memoranda describing spe-cific issues.
In addition to favorable customerand public perception, financial insti-tutions could benefit from CRA invest-ment test consideration since products
designed to finance community andeconomic development initiativessponsored by local governmentsqualify. Also, investment interest in-come from subscription of communityreinvestment certificates and reducedportfolio volatility through diversifica-tion of credit risk would be advan-tages. Sponsoring financial institutionswould also have the capability to earnfinancial advisory and facility fees.Finally, sponsoring banks could cre-ate bridge funds to provide small cityissuers with interim financing beforeobligations are securitized, generatingan additional source of fee revenue.Investing institutions could hold theseobligations for their own accounts orcould re-price them for retail distri-bution as individual investor accountproducts.
Through participation in this pro-gram, financial institutions could di-rectly and profitably facilitate commu-nity development projects within tar-geted lending markets, creating foun-dations for future profitability frompopulation and business growththrough development of local and re-gional credit markets. The trusts couldalso improve access to capital for eco-nomically disadvantaged communitiesand ensure availability of financialresources for small communitiesacross America.
If you are interested in pursuing thisidea, please contact Kevin O’Brien atSovereign Capital, Inc. in Tucson, Ari-zona. Tel: (520) 615-4525 / Fax: (520)749-3304.
ABOUT THE AUTHOR
Over the past sixteen years, KEVIN O’BRIEN
has worked in both corporate and economicdevelopment finance. As an investmentbanking professional in California, Mr. O’Brienspecialized in emerging market transactions,debt conversion finance and special situa-tions, and participated in the creation ofspecial purpose vehicles utilized in the issu-ance of asset-backed securities and otherspecialized financial structures. As presidentof Sovereign Capital, Inc., Mr. O’Brien pio-neered the creation of First Nations andsmall city economic development financeprograms, including creation of a regional airservice program to benefit underservedcommunities. He also developed theExitbond® program for increasing privateinvestment on Native American reservations.Mr. O’Brien holds a Bachelors degree in Fi-nance from Northern Arizona University.
CI
quartered in the District, and from 46smaller banking companies selected ar-bitrarily from banks and bank holdingcompanies regulated by the Federal Re-serve. They ranged in size from less than
$10 million in assets to over $200 bil-lion, with a median size of $195 mil-lion.
The survey found that, for these 51banking institutions, 18% use creditscoring models for business lending,and another 16% are considering us-ing in the future.
While the proportion of bankingcompanies using scoring for businesslending is relatively low, a different
picture emerges when we look at thelending volume of those organizations.As shown in the chart on the lowerleft, the nine organizations that usescoring account for over 90% of the
small business loans of the institutionssurveyed. The five largest Districtbanking organizations all use creditscoring models for business lending:Wells Fargo & Company, Union BanCalCorporation, First Security Corporation,Zions Bancorporation, and BankWestCorporation.
These findings provide support tothe notion that small business lendingis now dominated by those that use
INSTITUTIONS USING CREDIT SCORING FOR BUSINESS LENDING
BY SMALL BUSINESS LOAN VOLUME
Scoring Users
$8.0 B (90.4%)
No Plans to Use
$.6 B (6.7%)
May Use in Future
$0.3 B (2.8%)Based on 12th District Bank and
BHC Survey – includes loans
<$250K only
INSTITUTIONS USING CREDIT SCORING FOR BUSINESS LENDING
NUMBER OF INSTITUTIONS
Scoring Users
9 (18%)
May Use in Future
8 (16%)
No Plan to Use
34 (67%)
Based on 12th District Bank
and BHC Survey
Community Investments December 1999 Community Investments December 1999
C
14 Community Investments December 1999 3Community Investments December 1999
Credit Scoring for
the models used. This data usuallycomes from Dunn and Bradstreet.
Typically, the models use some 20–25variables, and the end-result is a singlemeasure, or score, for each small busi-ness. Scores normally range from 300 to900. The higher the score, the greater asmall business’s creditworthiness.
Automatic decisioning: Lenders of-ten set policies to allow for automaticlending decisions. Applicants receiv-ing scores above a designated cut-offnumber are automatically approved,and those receiving scores below an-other cut-off are rejected. Generally,there’s a gray-area in between wherehuman judgement is involved.
In the example below, a lender au-
tomatically approves a business loanapplication when the amount re-quested is for $50 thousand and lessand the business’s credit score is 650and higher. A score between 600 and649 requires credit officer review, whilelower scores result in automatic rejec-tion. This would be the general policyfollowed by the lender, but with over-rides allowed in certain situations.
LENDER SURVEY
To find out more about scoring usagewithin the 12th Federal Reserve Dis-trict, a survey was administered infor-mally to a sample of lenders. Com-pleted surveys were returned from thefive largest banking companies head-
2000 COMMUNITY REINVESTMENT CONFERENCE
April 16-19, 2000Palace Hotel, San Francisco
WIN A FREE REGISTRATION AND
THE SPOTLIGHT AT THE 2000 COMMUNITY REINVESTMENT CONFERENCE
The Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Franciscoare pleased to invite financial institutions to participate in a Products and Services Awardscompetition. The awards program is an effort to recognize and share innovative and outstand-ing examples of CRA-eligible products or services in the categories of lending, service, invest-ment and community development. Entries in any or every category will be accepted untilFebruary 15, 2000.
Entry information was sent out in mid December. If you did not receive it or would like moredetailed information, please contact Lena Robinson at (415) 974-2717 or by e-mail [email protected].
TRAINING SESSIONS AT-A-GLANCE
SUNDAY, APRIL 163:00 p.m. Executive Briefing
Leadership Council Meetings
5:00 p.m. Leadership Council Reception
MONDAY, APRIL 178:00 a.m. Registration and Breakfast
10:00 a.m. Opening SessionEllen Seidman, OTSAngela Blackwell, PolicyLink
12:00 noon Lunch and Keynote AddressEdward GramlichFederal Reserve Board
1:30 p.m. Concurrent Training Sessions
5:00 pm Speaker’s Reception/Free Evening
TUESDAY, APRIL 187:30 a.m. Networking Breakfast
8:30.a.m. Concurrent Training Sessions
11:45 a.m. CRA Awards Presentation
12:30 p.m. Lunch and SpeakerScott Morgan, DreamBuilders
1:30 p.m. Concurrent Training Sessions
5:00 p.m. Showcase Reception
WEDNESDAY, APRIL 197:30 a.m. Networking Breakfast
8:30.a.m. Concurrent Training Sessions
11:30 a.m. Closing AddressDonna Tanoue, FDIC (invited)
12:00 noon Lunch: Special CommonwealthClub Presentation:The Future of CRA
Credit scoring models are increasinglyreplacing human judgement in lend-ing decisions. Scoring dominates theconsumer-lending arena, with the vastmajority of credit card and mortgageoriginations aided by credit scoringmodels. All indications are that smallbusiness lending is going the sameroute.
During the first half of 1999, the Fed-eral Reserve Bank of San Franciscoconducted a survey of 51 12th Districtfinancial institutions to learn moreabout the use of credit scoring in un-derwriting small business loans. Thefollowing presents highlights of thesurvey results, which cover the extentthat scoring is used among large andsmall banks and the varying ap-proaches to scoring system implemen-tation. The results will also serve asthe basis for future Fed research onthis topic.
MODELS FOR BUSINESS LENDING
Similar to consumer loan models, smallbusiness models use credit history in-formation from credit bureaus to statis-tically estimate the likelihood that bor-rowers will repay their loans. For busi-ness lending models, credit bureau in-formation for the business’ principalowner is used. Additionally, the mod-els factor in information from the loanapplication such as the business owner’sdeposit account relationships, liquid as-sets, and type of business. Sometimes,credit history variables on the smallbusiness itself are also incorporated into
By Gary Palmer, Banking Studies Officer, Division of Banking Supervision & Regulation,the Federal Reserve Bank of San Francisco
Small Business Lending
REPORT OF A REGIONAL SURVEY
CRA Conference brochures with detailed session and
registration information will be mailed in mid January.
Contact Lena Robinson at (415) 974-2717 if you do not
receive a brochure or if you would like more information.
TRAINING MONDAY TUESDAY TUESDAY WEDNESDAY
TRACK AFTERNOON MORNING AFTERNOON MORNING
Profiles of Overview of CRA Small Large Community Safety & SoundnessCompliance Exam Techniques Bank Bank Development for CRA Officers
Exam Exam Service & Investment
Community Small Business Single Family Multi-Family Housing Finding the CommonDevelopment Lending Housing & Mixed-Use Ground forFinance Development Developments Development Lending
Community Bank Treasury Equity Deposits & Grants/ Fixed IncomeDevelopment Training for CRA Investments Corporate Giving SecuritiesInvestments Professionals Strategies
Community Profile of a The Unbanked – Profile of a Serving Rural andBuilding Community: Serving Emerging Community: Native American
Site Visit to Markets Site Visit to CommunitiesEastmont Responsibly The Tenderloin
DAILY SCHEDULE(Please refer to conference brochurefor more details.)
&EXAMPLE OF DECISIONING POLICY
USING CREDIT SCORES
Review(“grey area”)650–900
300–599 Reject
Review600–900
300–599 Reject
Loans 50Kand Under
Loansover 50K
650–900 Approve
CreditScore
Action
Community Investments December 1999 Community Investments December 1999
T
2 Community Investments December 1999 15Community Investments December 1999
CREDIT SCORING FOR SMALL BUSINESS LENDING .......................................................... 3
CREATING CULTURAL WINDOWS TO BANKING OPPORTUNITIES .................................... 7
HOME FOR DINNER HOMEBUYERS PROGRAM ............................................................... 10
MICROPOLITAN COMMUNITY REINVESTMENT TRUSTS ................................................. 12
DISTRICT BULLETIN ......................................................................................................... 14
What’s Inside
Community Investments
EDITOR-IN-CHIEF
Joy Hoffmann Molloy
MANAGING EDITOR
Shawn Elliott Marshall
CONTRIBUTING EDITOR
Jack Richards
ART DIRECTOR
Cynthia B. Blake
PRODUCTION COORDINATOR
Ariel Andres
If you have an interesting community developmentprogram or idea, we would like to consider publish-ing an article by or about you. Please contact:
MANAGING EDITOR
Community InvestmentsFederal Reserve Bank of San Francisco
101 Market Street, Mail Stop 620San Francisco, California 94105
Community Affairs Departmentwww.frbsf.org(415) 974-2978
fax: (415) 393-1920
Joy Hoffmann MolloyAssistant Vice President
Community Affairs [email protected]
Jack RichardsCommunity Affairs Manager
Shawn Elliott MarshallCommunity Investment Advisor
H. Fred MendezCommunity Investment Advisor
Craig NolteCommunity Investment Advisor
(Seattle Branch)[email protected]
Adria Graham ScottCommunity Investment Advisor
(Los Angeles Branch)[email protected]
Lena RobinsonCommunity Investment Specialist
Ariel AndresExecutive Staff [email protected]
Mary MaloneProtocol Coordinator
Judith VaughnStaff Assistant
NOTEBOOK by Joy Hoffmann Molloy
TOWARD A SUSTAINABLE AMERICA
The President’s Council on SustainableDevelopment (PCSD) has released Toward aSustainable America: Advancing Prosperity,Opportunity, and a Healthy Environment forthe 21st Century. This report updates PCSDs1996 version, and includes current policyrecommendations. It highlights the council’sobjective to improve prosperity and qualityof life while reducing human pressures on theenvironment. Appendices include examples ofsuccessful community initiatives, resources,and council member profiles.
For more information or a copy of thereport, contact the PCSD at (202) 408-5296or at www.whitehouse.gov/PCSD.
NEW WEB SITE LINKS PROJECTS TO
PROGRAMS AND RESOURCES
1stSource is a new Internet site launched inOctober by the Federal Reserve Bank ofKansas City. The site is a guide to informationabout programs that assist community andeconomic development projects. Whetheryou are a developer trying to build afford-able housing, a small business entrepreneurseeking financing, a small farmer operating afarm, or a community seeking to improve itsinfrastructure, 1stSource can help you easilyand quickly cut through the maze ofprograms. With a little information from youabout your project, 1stSource will provideyou with a summary description of thoseprograms that best fit your project’s needs.
The site is http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/http://www.1stsource.kc.frb.org/programs/index.asp. programs/index.asp. programs/index.asp. programs/index.asp. programs/index.asp. For more information,call John Wood at the Federal Reserve Bankof Kansas City at (800) 333-1010, ext. 2203.
CRA LEADERSHIP COUNCILS
January 7, 2000 is the final day to submit anomination form for the CRA LeadershipCouncil. The Leadership Councils are avoluntary advisory board of CRA officerswho will serve as representatives of theirlocal roundtable. For further information onthe program or to receive a nominationpacket, please call Lena Robinson at(415) 974-2717 or contact her via e-mail at:[email protected].
ECONOMIC EDUCATION PROGRAM
SATISFIES CRA CRITERIA
Bankers may want to consider JuniorAchievement’s (JA) innovative, economiceducation program as one option in fulfillingtheir CRA requirements. JA programs aredesigned to train students from kindergartenthrough 12th grade with work-force-readyeconomic skills and knowledge. The majorityof the programs are delivered to low-incomestudents.
One of JA’s primary programs is called theWhole School ProgramWhole School ProgramWhole School ProgramWhole School ProgramWhole School Program. Banks and businessesmay fund classrooms, whole grades, or adoptan entire school. Banks can receive Invest-ment Test credit when they provide fundingto sponsor a Whole School Program in a low-income neighborhood. They can also receiveService Test credit if their employeesvolunteer in the sponsored school.
For more information about Junior Achieve-ment programs, contact Senior DevelopmentManager, Julie Ringwood, at (323) 957-1818,ext. 20.
FREE COMPLIANCE CHAT GROUP
With Regulatory Risk Monitor’s compliancelistserv, you can pose your toughestquestions to colleagues and get speedyreplies offering insight, experience and usefultips on CRA, staff training, fair lending, creditscoring, regulatory requirements and safetyand soundness issues. You may even be theone who can respond to a colleague’schallenge!
It’s easy to subscribe. Just send an e-mailto: [email protected]. Leave thesubject line blank. In the message section,type: subscribe compliancesubscribe compliancesubscribe compliancesubscribe compliancesubscribe compliance. Please don’tinclude a signature file. Just hit the replybutton, send back the message, and you’redone!
For further information, call Regulatory RiskMonitor’s Executive Editor Fran Fanshel at(800) 929-4824, ext. 2245.
THE SOCIAL ENTREPRENURIAL
FUND (SEF)In its first two years of operation, the SocialEntrepreneurial Fund (SEF) of the Liberty HillFoundation has distributed over $300,000 ingrants to nine non-profit and/or worker-owned micro-enterprises in low-incomecommunities of Los Angeles. Based onlessons learned from this non-profitprogram, Liberty Hill is ready to proceed withmicro-loans to private entrepreneurs inlow-income areas for sustainable businessventures. They are seeking matchinginvestment funds from banks for a loan pool,as well as grants for technical assistance.
For more information, please contactMichele Prichard, director of Special Projectsat (310) 453-3611, ext. 104.
The last month has seen a flurry of editorial activity and op-ed pieces written about thenewly enacted Financial Services Modernization Act of 1999. Clearly, the debate isn’t overrelative to its potential impact and long-term value. Time and experience will likely serve asthe ultimate arbiters.
Debate and conjecture notwithstanding, the Federal Reserve Board is headlong into itsown flurry of activity to meet the March 2000 deadline for completion of the legislation’simplementing language. We expect this will include the new CRA provisions as well. Althoughtime is short, there are a few proactive steps that financial institutions can take to ensurereadiness for implementation of the new law:
➤ Develop a mechanism to internally assess and monitor the CRA activities of financialsubsidiaries and affiliates. This is an area where CRA actually got some additional “teeth,”since the new law mandates that all financial institution subsidiaries of a bank holding companyhave at least a satisfactory CRA rating in order to engage in any of the new activities grantedunder the bill. If even one subsidiary is rated below satisfactory, the expansion application willbe denied.
➤ Review current CRA agreements and create a more formal tracking system foractivities within these agreements. Under the new sunshine requirements, both banksand their non profit partners will be obliged to report (on an annual basis) CRA-related payments,fees, loans, investments, and services and their terms and conditions. Non-profits must alsoreport on the use of said funds, including compensation, administrative expenses, travel,entertainment and consulting/professional fees. Current thresholds mandate reporting ofcash payments and grants (individual or aggregate) in excess of $10,000 and loans (individualor aggregate) in excess of $50,000.
➤ Consider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with yourConsider formalizing a CRA self-assessment process and establish close ties with your
compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track.compliance examiners to make sure you’re on the right track. This will be especially importantfor small banks with satisfactory or outstanding ratings because they will now be examinedfor CRA compliance every 4-5 years. (Don’t forget that this only applies to CRA, and not othercompliance examinations!)
Over the next several months, Congress has charged the financial services industry and itsregulators with the task of developing meaningful and workable implementation strategies.We look forward to working with you to achieve this important goal.
Best wishes to you and your family for a wonderful holiday season.
Community Investments December 1999 Community Investments December 1999
V O L U M E E L E V E N N U M B E R 3
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ATTENTION:Chief Executive OfficerCompliance OfficerCRA OfficerCommunity Development Department
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FEDERAL RESERVE BANK OF SAN FRANCISCO101 Market Street
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Address Service Requested
COMMUNITY AFFAIRS CONTACTS FOR ROUNDTABLES:Adria Graham Scott (213) 683-2785 (Los Angeles, Phoenix, San Diego) Craig Nolte (206) 343-3761 (Boise, Portland, Seattle)
Fred Mendez (415) 974-2722 (Northern California, Las Vegas, Utah) Lena Robinson (415) 974-2717 (Leadership Councils)
CITY 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Boise March 9 June 8 September 14 December 14
Greater Los Angeles February 9 May 17 August 9 November 8
Las Vegas March 14 June 13 September 12 December 12
Northern California February 8 May 9 August 8 November 7
Phoenix March 23 June 22 September 18 December 14
Portland January 4 April 4 July 6 October 3
San Diego Date TBD TBD TBD TBD
Seattle February 10 May 18 August 10 November 9
Utah January 13 TBD TBD TBD
CREDIT SCORING FOR
SMALL BUSINESS LENDING
We present the results of a 12th District bank-ing survey that examined the use of credit scor-ing for small business underwriting. Key dif-ferences between large and small banks illu-minate potential industry trends and raise in-teresting research possibilities for future study.
CREATING CULTURAL WINDOWS TO
BANKING OPPORTUNITIES
New immigrant communities across the UnitedStates represent tremendous, untapped poten-tial. This article presents some key findingsfrom an ethnic banking study conducted inLos Angeles, and suggests cultural adaptationsas a way to reach this underserved market.
HOME FOR DINNER HOME
BUYERS PROGRAM
Committed to “finding a way home,” a groupof Las Vegas financial institutions create anemployer-assisted mortgage loan and downpayment program for low- and moderate-income employees.
MICROPOLITAN COMMUNITY REINVESTMENT TRUSTS: A CRAINVESTMENT CONCEPT FOR SMALL COMMUNITIES
Searching for investment opportunities in small towns can be aCRA officer’s worst nightmare. Read on to learn how this CRA in-vestment concept might benefit your financial institution and itsassessment area.
SPECIAL INSERT:MORE ON CRA INVESTMENTS…
We hope you’ll enjoy this edition’s special insert featuring excerptsfrom the 1999 National Conference on Community DevelopmentInvestments. You’ll find solid technical information, and practicaltips for today’s shrewd CRA investor.
A P U B L I C A T I O N O F T H E C O M M U N I T Y A F F A I R S U N I T O F T H E F E D E R A L R E S E R V E B A N K O F S A N F R A N C I S C O
2000 CRA ROUNDTABLE DATES
Seasons Greetings from the Staff of Community Affairs
99December
Financial institution CRA officers and bank community development staff are invited to participate in the Roundtables.These meetings are valuable sources of information about CRA regulatory compliance and
about local community credit, service and investment opportunities.