Bridges - Autumn 2006

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PUBLISHED QUARTERLY

BY THE COMMUNITY

AFFAIRS DEPARTMENT OF

THE FEDERAL RESERVEBANK OF ST. LOUIS

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

Bridges w w w . s t l o u i s f e d . o r g5 spa h rd c m x c Ca l l fsP p a l

continued on Page 2

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By Lyn HaralsonCommunity Affairs SpecialistFederal Reserve Bank of St. Louis

In the 1980s, prepaid cards,as they were called, rstemerged in the long-distance telephone servicemarket. By the mid 1990s,large retailers realized the cost-saving possibilities o storedvalue cards and began issuing

them in place o traditional,paper gi t certi cates. Overthe past decade, the storedvalue card market has grownexponentially. Today, storedvalue cards are being used

or many purposes, includingpayroll, general spending, travelexpenses, government ben-

e t payments, retailer-speci cspending, and employee bene tand reward payments. Cardissuers include nancial institu-tions, individual retailers,

government agencies and non-bank nancial service providers.

Stored value cards all intotwo categories: closed loop andopen loop. (See chart, page 4).Closed-loop cards can only beused or the issuers productsor or other limited purposes.Open-loop cards are morewidely accepted and can beeither nonbranded or brandedwith a bank associations logo,

such as Visa, MasterCard and,most recently, Discover. Theycan be used to make purchasesor pay bills virtually anywherethe brand is accepted.

General Spending, Payroll CardsTwo o the most common

stored value cards issued by

nancial institutions are payrollcards and reloadable generalspending cards.

General spending cardsare typically branded, open

loop and reloadable, allowingpurchasers to load and deplete

unds multiple times during aspeci ed period.

Many parents are choosing toprovide unds to their teens witha general spending card insteado cash. Besides being sa erto carry than cash, these cardsallow parents to easily monitortheir teens spending habits byusing online technology.

New Americans and migrantworkers nd general spendingcards an inexpensive way tosend money to relatives in theirnative countries. Dollars canbe loaded onto the card in theUnited States, and the recipientcan access the unds in theircountry using a duplicate access

card. Fees or this service aver-age $6 per ATM withdrawal asopposed to $15 to $40 or thesame transaction using money

Stored Value Cards: Opportunities, Risks

sp c al zm a :ga f Cha c ?

s val caresemble a ty ical debitcard, using magnetic-stri e technology to storein ormation and track

unds. Ho ever, unliketraditional debit cards,stored value cards are

re aid, roviding consum-ers ith immediate undavailability and little risko overdra t. In addition,there is no hysicalaccount at a fnancialinstitution in the nameo the stored value cardholder. This virtual exis-tence o the cards backing

raises questions aboutFDIC insurance coverageand consumer rotectionregulation coverage.

i N d e X 2


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transmitter services or tradi-tional wire trans ers.

Payroll cards are anotherorm o stored value card gain-

ing acceptance in the market-place. For an employer, payrollcards have a cost advantage.

A typical electronic undstransmittal (whether direct to adepository account or a payrollcard) is 20 cents. Conversely,the cost to process and distrib-ute a payroll check is roughlybetween $1 and $2. Cost sav-ings or a ull-time employee

or one year range between $20and $50, depending on the

requency o pay periods.Closed-loop payroll cards and

ATM-access-only payroll cardsprovide limited access to undsat a nite number o locations.Since 2001, the majority o pay-roll cards issued are branded,open-loop cards that allowrecipients to withdraw cashat ATMs, pay bills and initiateboth personal identi cationnumber transactions and signa-ture transactions at point-o -saleterminals. Branded, open-looppayroll cards are similar to a

depository account.Unlike gi t cards and general

spending cards, payroll cardsare marketed to employersversus the end user. Employersas commercial customers o the

nancial institution are o teno ered payroll cards as part o asuite o services.

While cost savings accrue tothe employer, what about theemployee? Employees whousually opt or a payroll cardare those who do not have a

traditional bank account. It isestimated that 20 million Amer-icans do not have a traditionaldepository account (i.e., check-ing or savings account). Payrollcards provide them with a lessexpensive way to access theirpay than check-cashing outletsand money-service businesses.Payroll cards also provide a lessexpensive way to pay bills thanthe customary money order.

As with general spending cards,consumers can request twocards so amily members in

other countries have access tothe payroll account.

Regulatory ConsiderationsThe rapid growth o the stored

value card, both in volume andvaried uses, has raised questionswith the regulatory agencies.

This trend triggers discussiono whether these entities shouldbe considered deposit accounts

or purposes o insurance andconsumer regulation coverage.

Stored value cards o any typeoperate in a virtual reality at theissuer level. Funds underlyingstored value cards are tradition-ally commingled and do notexist in accounts set up underindividual names. Proposedregulatory changes and guidanceissued by the nancial institu-tion regulatory agencies include:

Regulation DReserve Requirementsof Depository Institutions

The Federal Reserve Boards

Regulation D sets uni ormrequirements or reserves thatdepository institutions arerequired to maintain or acili-tating the implementation o monetary policy by the FederalReserve System. Institutionsshould note that, to the extent

stored value or other electronicmoney represent a demanddeposit or transaction account,the provisions o Regulation Dwould apply to such obligations.

Regulation EElectronic Funds Transfer Act

The Federal Reserve BoardsRegulation E implements theElectronic Funds Trans er Act.The act provides an array o protections to consumers whouse electronic unds trans er(EFT) systems. A transactioninvolving stored value prod-ucts is covered by Regulation Ewhen the transaction accessesa consumers account, suchas when value is loaded ontothe card rom the consumersdeposit account at an electronicterminal or personal computer.

On Aug. 24, the FederalReserve Board announced itsapproval o a nal rule thatstates payroll card accounts arecovered by Reg E. The rule is tobecome e ective July 1, 2007.

Payroll card accounts can beset up either directly or indi-rectly by employers on behal o employees. The accountsreceive electronic und trans erin usions o an employees sal-ary, wages or other compensa-tion. They are managed by theemployer, a third-party proces-sor, a depository institution or

other entity.The rule does not require

nancial institutions to urnishperiodic statements or payrollcard accounts as long as theyprovide the consumer witha telephone number to callto receive the accounts bal-ance. The institution must also

provide a web site at which theconsumer can access at least a60-day history o the accountstransactions. At the consumersrequest, an institution must

continued from Page 1

Ind st y standa d p i ing an h lp ns m s mak in m d d isi ns and h lp p t ntialfnan ial instit ti n s ppli s st t a p ftabl p g am. (Source: univ sity Bank)


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also provide a written historyo transactions occurring in thepreceding 60 days.

Regulation BBCommunity Reinvestment Act

The Federal Reserve BoardsRegulation BB encouragesregulated nancial institutionsto meet the credit needs o theirentire community, includinglow- and moderate-incomeneighborhoods, consistent withthe sa e-and-sound operation o the institution.

Payroll cards have the poten-tial to quali y or credit underthe community developmentservice test o the CommunityReinvestment Act (CRA) i they are ree or low-cost andimprove access to nancialservices or low- or moderate-income individuals.

Remittance service providedeither through general spendingcards or payroll cards also hasthe potential to quali y orCRA credit.

Regulation DDTruth in Savings Act

The Federal Reserve Boards

Regulation DD implements theTruth in Savings Act, whichhelps consumers comparedeposit accounts o ered bydepository institutions, prin-cipally through the disclosureo ees, the annual percentageyield, the interest rate and otheraccount terms.

Payroll cards that oper-ate similarly to courtesy payor bounce-proo checkingaccounts all under the purviewo this regulation.

FDIC Insurance CoverageEqually di cult to address

in regard to stored value cardsis the issue o Federal DepositInsurance Corp. (FDIC) insur-ance o the underlying valueo stored value cards. In Aprilo 2004, the FDIC publishednotice and comment o a pro-posed rule to clari y the mean-ing o deposit as it relates to

unds underlying stored valuecards at insured depositoryinstitutions.

In August 2005, the FDICissued a proposed rule to clari y

whether unds underlying storedvalue cards, such as employee

payroll cards or retail store gi tcards, quali y as deposits orinsurance coverage purposes.The FDIC considers the undsthat underlie stored value cardsdeposits i a depository institu-tion has an obligation to eitherhold or trans er the unds. Inthat case, the unds quali y or

insurance coverage ollowing thesame guidelines that apply toother deposits.

Comments on this rule weredue by Nov. 7, 2005. To date,

the nal rule has not been issued.To read more on the pro-

posed rule, go to: www. dic.gov/regulations/laws/ ederal/ 2005/05cstoredval88.pd .

USA PATRIOT Act/Bank Secrecy Act/Anti-Money Laundering Laws

The USA PATRIOT Actrequires nancial institutionsto be diligent in documenting

customer identi cation. Finan-cial institutions issuing payrollcards or general spendingcards should require adequate

continued on Page 4

s Val Ca typ , F a a Capab l

Closed LoopOpen Loop

Unbranded Branded

Point-o -sale purchases YesWithin issuers network(cant use a Starbucks card at grocery store)

YesAnywhere with PIN keypador ATMs

YesAnywhere with Visa,MasterCard, American Expressor Discover logo

Reloadable Depends on issuer and typeo card

Depends on issuer and typeo card

Depends on issuer and typeo card

Direct Deposit No YesDepends on set-up YesDepends on set-up

Risk o overdra t None None SlightDepends onreconciliation

Closed LoopCan only be used or the issuersproducts or or limited purposes.Examples include the Starbuckscard, or a Borders gi t card.

Open LoopSimilar to a debit card but without a linked account. They allowa variety o uses, including bill payment, ATM withdrawals, andpoint-o -sale purchases rom grocery stores and other retailers.Open-loop cards can be branded or unbranded.

Unbranded cards are linked to point-o -sale and ATMnetworks and use PIN-based technologies or salesand withdrawals. Examples include grocery store PINnetworks and public beneft cards.

Branded cards carry the Visa, MasterCard, Discover or

American Express logo and use signature-based tech-nologies that allow users to make purchases anywherethe brand is acceptedretailers, restaurants, auto-repair shops, online retailers, etc.

(Source: Nati nal c mm nity Inv stm nt F nd.www.n i . g)


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documentation to veri y theidentity o the card recipient.

In the case o payroll cards,banks should conduct duediligence with their commercialcustomer to ensure the controlso the company are adequate toveri y identity.

Another implication o theact applies to payroll cards andgeneral spending cards where asecond card is issued or a am-ily member in another country.The challenge is in veri ying theidentity o individuals livingoutside the United States. Toaid in this process, nancialinstitutions should engage ine ective dialogue and com-municate control needs to theirpartnering institutions in theother country.

The Bank Secrecy Act (BSA)requires nancial institutionsand other nancial serviceproviders to keep certain papertrails on their customers trans-actions. Issuers, sellers andredeemers o stored value cardsare or the most part exempt

rom BSA. However, they aresubject to certain reporting

requirements under BSA toinclude cash transactions inexcess o $10,000. Due dili-gence must be employed andcontrols put in place to preventmoney laundering throughthese instruments.

Other Considerations

State payroll laws vary andshould be reviewed by nancialinstitutions to ensure compli-ance in the structure o anypayroll card o erings. Some

states have laws requiring thatemployees have access to payat no cost. Other laws governwhether direct deposit can beo ered or mandated.

The person who receives agi t card or general spendingcard and never uses it up cancause a problem or nancialinstitutions in states wherestrict laws govern abandonedproperty. Despite the cardexpiring, there are dollars le tunspent. Financial institutionsshould ollow the same proce-dures they would in the caseo an abandoned depositoryaccount to ensure compliancewith the law.

Concerns or ConsumersConsumers who choose to

use stored value cards shouldunderstand how they work andbe aware o possible ees.

Stored value cards may haveentrance/activation ees, main-tenance ees, point-o -sale ees,domestic ATM transaction ees(in and out o network), trans-action limit ees, bill payment

ees, phone or online transac-tion ees, reload ees, money

trans er ees, international ATM transaction ees, inactivityees, overdra t ees, overdra t

protection ees, payday advanceees, credit-reporting ees and

dispute ees.The issuers o gi t cards and

general spending cards caneasily disclose ees at the time

o purchase to the purchaser.However, the trans er o thesecards rom the original recipientto another party raises disclo-sure concerns regarding the ees

and other terms associated withthe card, such as the expirationdate, the amount or existenceo maintenance or other typeso ees, and in ormation aboutwhere to call or assistance.

Cost-conscious consumersshould compare the cost o using the more common reload-able general spending cards inlieu o a checking account orother alternative nancial ser-vices, such as a check-casher ormoney-trans er service. Check-ing account ees, money orderpurchase ees and check cashing

ees should all be considered.

ConclusionFor nancial institutions,

the opportunity to reach newcustomers or expand services toexisting customers has a positivepotential or the bottom line.However, nancial institutionsdeveloping a stored value cardproduct must consider howthey will provide disclosures,notices, periodic statements anderror resolution procedures.

A survey o stored value cardproviders conducted by theCenter or Financial Services

Innovation was inconclusive asto what makes a stored valuecard product pro table. How-ever, a common denominator

or most was scale.To develop a pro table stored

value card system structure,providers should complete amarket analysis to determine

card volume potential, cardload potential, anticipatedrequency o use, break-even

analysis o requency o use andpotential foat volume.

continued from Page 3 REFERENCES

Prepaid Cards: How Do They Func-tion? How Are They Regulated?2004. Mark Furretti. FederalReserve Bank o Philadelphia,

con erence summary.Legislative Update. Stored Value Cards

and Payroll Cards. Payment CardsCenter. Federal Reserve Bank o Philadelphia.

Stored Value Cards: An Alternativeor the Unbanked? O ce o

Regional and Community A airso the Federal Reserve Bank o New York.

Community Developments Insights.Paper rom the O ce o theComptroller o the Currency,Community A airs Department.

June 2005. Samuel Frumking, William Reeves and Barry Wideset al.

Banking the Poor: Policies to BringLow-Income Americans Into theFinancial Mainstream. MichaelS. Barr. Metropolitan Policy Pro-gram. The Brookings Institution.

Stored Value Cards: Challengesand Opportunities or ReachingEmerging Markets. April 2005.

Working paper. Center or Finan-cial Services Innovation. Kathy

Jacob, Sabrina Su, Sherrie L.W.Rhine, and Jenni er Tescher.

Prepaid Cards: An ImportantInnovation in Financial Services.Consumer Interests Annual. 2006.

Julie S. Cheney and Sherrie

L.W. Rhine.


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continued on Page 6

Those returning to thehome-buying market a terseveral years will be sur-

prised by the ba fing array o mortgage products. Choosingthe right mortgage is no longeras simple as knowing the di -

erence between a conventionaland FHA loan or a xed rateversus adjustable rate.

On the contrary, specializedproducts such as the piggybackand interest-only mortgage arebeing o ered to all segments o the market rom the rst-timehome buyer to the more sophis-ticated investor.

Many o these products havebeen developed in response tothe demand rom home buy-

ers or an a ordable mortgagethat requires little or no downpayment on a home purchase.Other eatures o er more fex-ibility to accommodate the li e-style changes o certain marketsegments over time. Althoughthis industry shi t has accounted

or a signi cant increase in

home ownership, what potentialpit alls await home buyers? Isthe fexibility worth the risk?

Piggyback Loans A piggyback loan is a com-

bination o a rst and secondmortgage closed at the sametime. O ten involving 100 per-

cent nancing, the rst mortgageloan can cover 80 percent o thecost o the home with a piggy-back second mortgage valued atthe remaining 20 percent.

The most common type,however, is the 80-10-10 inwhich the second mortgageproduct accounts or 10 percento the purchase price and theborrower invests 10 percent asa down payment on the loan.

Although the second mort-

gage carries a higher rate thanthe rst mortgage and extendsor a shorter term, the advan-

tage o the piggyback mortgageis that the interest expenseis potentially tax-deductiblewhile the mortgage insurancepayment (typically required orloans exceeding 80 percent o

the homes value) is not. According to a survey by theNational Association o Real-tors, 25 percent o all homebuyers nanced 100 percent

o the purchase price o theirhome. Forty-two percent o

rst-time home buyers boughtwith no money down.

Popular Alternative to PrivateMortgage Insurance

The popularity o the pig-

gyback loan has been partlyueled by home buyers whowant to avoid private mortgageinsurance (PMI). PMI is cir-cumvented by keeping the rstmortgage amount at 80 percentor less, and taking out a secondmortgage or the remainder.

Piggyback loans have taken

40 percent o the market sharerom private mortgage insur-ers. According to Patrick Sinks,executive vice president o Mortgage Guaranty Insurance

Corp. (MGIC), home buyerswith FICO scores o 770 orhigher account or 80 percento the lost volume. These bor-rowers are considered to be themost desirable market segment.

Mortgage insurers are ghtingback by pushing to make PMItax deductible or amilies earn-ing up to $100,000 by develop-ing new products and by urginghome buyers to compare theadvantages and disadvantageso nancing with a piggybackloan versus a PMI loan.

Mortgage InsurersOffer New Products

In response to the piggybackloan boom, MGIC developed its

SingleFile lender-paid mortgageinsurance product. Instead o the borrower paying PMI, thelender pays the mortgage insur-ance premium, but charges theborrower or this expense eitherin the orm o a higher inter-est rate on the mortgage loan,a mortgage origination ee or

a combination o both. Whenthe lender charges a higher rateto cover the mortgage insurancepremium, it is recast into a tax-deductible interest expense orthe borrower.

SingleFile is cheaper thanother mortgage insurancebecause it is a low-risk product

o ered to borrowers who haveexcellent credit. Eligibilityrequirements include a 700credit score or higher and a

Specialized Mortgage Products: A Game o Chance?



total debt-to-income ratio o 45 percent or less. The dis-counted, lender-paid mortgageinsurance premium is 40 to 65percent less than regular bor-rower-paid insurance.

Interest-Only Loans Attract Both Wealthy and Low-Income Borrowers

One o the astest growingadjustable-rate products in thelast two years is the interest-only mortgage. As the nameimplies, interest-only mortgagesallow the borrower to pay onlyinterest on the mortgage inmonthly payments or a xedterm o usually ve to 10 years.

At the end o the xed period,the loan is ully amortized overthe remaining term o the loan.

Historically the interest-onlymortgage has been considered

a product or savvy, wealthyborrowers who pre er to use theprincipal portion o their pay-ment or more lucrative invest-ments, such as the stock market.It also provides fexibility orindividuals with cyclical income(commissions, or example) whocan make lower payments dur-

ing the lean months and repayprincipal when their incomes arehigher. Another good t is withyoung pro essionals who want toleverage uture income potential

or a larger home today. Although not a new product,

the interest-only mortgage hasmade a comeback in recent

years as mainstream borrowerstry to combat high home prices.Lower interest rates and moreinnovative nancing optionshave increased the demand or

housing and, in many mar-kets, driven housing prices up.Consequently, home buyers areseeking ways to borrow moremoney without increasing theirpayment or income.

Interest-only loans are espe-cially popular in markets wherehome prices are appreciating

astest, including Cali ornia, Arizona and Florida. However,Georgia led the nation in share

o interest-only loans in 2004even though home prices didnot appreciate as signi cantly as

in other states. More than hal o the purchase mortgagesin Georgia were interest only,compared with less than one-third nationwide. In Atlanta,

55 percent o mortgages issuedin 2004 were interest only.

The lure o the lower pay-ment does come with increasedrisk or the borrower. First,borrowers are gambling thattheir incomes will rise enoughto cover the uture increase inmonthly payments. Second,they are counting on marketappreciation rather than debtretirement to build equity in

their homes. Third, they areassuming the risk o possiblehikes in interest rates a ter the

xed term expires as well as thepotential or payment shock.

New Twist to Interest-Only Option An interest-only option can

be attached to both xed-rateand adjustable-rate mortgages(ARMs). Interest-only ARMsare gaining in popularity, butmisperceptions about thisproducts eatures can be costly

or unin ormed borrowers.One common misunderstand-

ing is that the quoted interestrate on an interest-only ARM is

xed or the entire interest-onlyperiod. This is not the case.The interest-only period is theperiod during which the bor-rower is allowed to pay interestonly. An ARM with an interest-only option also stipulates a timelimit or the initial loan rate.

In the case o ARMs with avery low initial rate, the inter-est-only period is always longerthan the initial rate period. Forexample, an ARM with an inter-est-only option or 10 years

may have an initial rate periodo six months. So a 5 percentrate today may rise to 7 percentin six months. Consequently,borrowers should not shop ora mortgage solely based on thequoted rate without assessingthe overall risk o the product.

A Cautionary NoteThis new wave o real estatebusiness poses risks to two seg-ments o potential home buyers.The rst consists o individualswho see real estate as a betterway to accumulate wealth thaninvesting in the stock market.They sell quickly or capital gain

and re nance to put equityto work, thus growing equitythrough property appreciationrather than by paying down theirloan balance. However, this

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Source: Fi st Am i an L anP man MBS/ABS s iti s databas . (D s n t in l d ag n y bank p t li l ans.)

Percentage o Interest-Only (I-O) Loans in

the Federal Reserves Eighth District StatesState Origination Year

I-O New Single-Family Home

Mortgages (%)

I-O RefnanceMortgages (%)

I-O TotalOriginationCount (%)

A a a2004 7.2 4.6 5.7

2005 11.2 6.7 8.9

ill2004 13.7 9.5 11.3

2005 21.3 15.4 18.2

i a a2004 6.0 4.6 5.2

2005 9.1 6.6 7.8

k c y2004 14.6 7.8 10.7

2005 16.7 9.8 13.2

m pp2004 8.2 4.2 6.1

2005 8.8 4.4 6.8

m2004 9.1 6.5 7.6

2005 13.5 9.8 11.5

t2004 15.3 8.8 12.0

2005 17.6 9.4 14.1



tactic ignores the act that mort-gage amortization is in the homeowners control, while apprecia-tion is not. Even the savviestborrower must bear this in mind.I the value o the home doesnot appreciate as anticipated, thebuyer will be liable to pay thedi erence out o pocket.

Individuals who want torealize the American dreamo home ownership, but havenot accumulated the savings

or a down payment or need alower payment to quali y ora mortgage product, are alsodrawn to these loans. Youngpro essionals who can count onrising salaries or executives whoreceive annual bonuses mayrun less risk than others, butthose who utilize one o theseproducts to buy a house theycannot otherwise a ord are tak-

ing a gamble. These loans arenot designed to address a ord-ability issues, and thus they canset up home buyers or ailure.

Although these products maypermit home purchase or littleor no money down, allow orsmaller initial payments or both,they all have costs, and they

all have risks. These productsshould be used or their intendedpurposes. Consumers must shopto see which i any o these loanswill work best or them.

This article was written bySibyl Howell, regional commu-nity development manager at theFederal Reserve Bank of Atlanta.Reprinted with permission fromPartners, Volume 15, Number 3, 2005, the Atlanta Feds Commu-nity Affairs newsletter.

n w f h F al r vKids and Money is a new booklet rom the Federal Reserve Banko St. Louis that helps parents teach their school-age childrenhow to manage money.

The booklet zeroes in on planning, budgeting and saving andsuggests un amily activities that will encourage children tothink about saving and spending responsibly.

Individuals or organizations can order Kids and Money ree o charge by calling:

314-444-8761 in St. Louis;

501-324-8296 in Little Rock, Ark.;

502-568-9202 in Louisville, Ky.; and

901-579-4101 in Memphis, Tenn.

The booklet is also available online at www. l f . /c y/ h _p b .h l

E v e r y d a y O p p o r t u n i t i e s t o T a l k A b o u t M o n e y

K ids

The Rise of Personal Bankruptcy

The number o personal bankruptcies in the United States has been escalatingdramatically in the past 25 years. For most, declaring bankruptcy happens a teran unexpected fnancial shock, such as divorce or medical bills, coupled with highlevels o debt.

Thomas A. Garrett, research o fcer at the Federal Reserve Bank o St. Louis, willdiscuss his study on the role other actorssuch as availability o credit,

bankruptcy laws and decreased consumer savingsplay in making Ameri-cans even more susceptible to bankruptcy. Garrett also will present detailedstatistics or counties in the Feds Eighth District.

Judge Barry S. Schermer o the U.S. Bankruptcy Appellate Panel or theEighth Circuit will speak about bankruptcy legislation passed in 2005 and

about who is fling or bankruptcy.For information, contact Cynthia Davis at 314-444-8761. To register online,

visit www.stlouisfed.org/community/conferences.html

Oct. 24, 2006, 7:30 a.m. to 9:30 a.m.(break ast bu et meeting)Hilton St. Louis at the Ballpark,One South Broadway, St. Louis, MO 63102



The region served by the Federal Reserve Bank of

St. Louis encompasses all of Arkansas and parts of I l l inois,

Indiana, Kentucky, Mississippi, Missouri and Tennessee.

SpANNING the regioNBowling Green, Quincy Get Nod rom DollarWise

The cities o Bowling Green,Ky., and Quincy, Ill., in theFeds Eighth District have beenawarded $15,000 grants toteach nancial education toconsumers.

Countrywide Financial Corp.donated $1 million to sponsorthe grants or ve years. Madeunder the auspices o the U.S.Con erence o Mayors NationalDollarWise Campaign, thegrants are intended to expandlocal programs that promote

nancial education.Bowling Green will use its

DollarWise Capacity Grant inseveral ways: to increase home

ownership among low- andmoderate-income residentsby teaching them about creditscores and the home-buyingprocess; to reduce personalbankruptcies by providing

nancial education classes orresidents; and to und a per-sonal nance program or high

school students.In Quincy, the money willbe used to und the PaycheckPartnership, a program devel-oped by a coalition o employ-ers, educators and city o cialsworking with the FederalReserve Bank o St. Louis.The goal is to increase nancialliteracy among teenagers andcollege students and to decreasestudent debt. The PaycheckPartnership also sponsors col-lege students to act as teachers

and mentorsabout nancialissues.

The U.S. Con er-ence o Mayors is theo cial nonpartisan organiza-tion o cities with populations o 30,000 or more. There are 1,139such cities in the country today,each represented in the con er-ence by its mayor.

Arkansas SBDC RecognizesEntrepreneurial Support

The City o Arkadelphia isthe rst recipient o the Arkan-sas Entrepreneurial Communityo the Year Award presentedby the Arkansas Small BusinessDevelopment Center (ASBDC).

The award recognizes Arkadel-phias organized e orts toassist and encourage entrepre-neurial activities.

Arkadelphias communityand economic developmentstrategy includes nurturing newand existing small businesses.

A central component o these

e orts is the completion o theRural Entrepreneurship Initia-tive survey. In 2005, the Arka-delphia Chamber o Commerce,the ASBDC, the Clark CountyIndustrial Council, the Fed-eral Reserve Bank o St. Louis,Henderson State University andSouthern Financial Partners

joined orces to conduct thesurvey. Survey results are beingused in economic developmentplanning to encourage businessretention and expansion.

The ASBDC created the awardto emphasize the economicimportance o entrepreneurshipand to encourage more com-munities to engage in economicdevelopment planning with a

ocus on local businesses.In addition, Paul Shu eld

with Southern Financial Partnersin Arkadelphia was presentedwith the District Directors

Award or Service to Small Busi-nesses by the U.S. Small Busi-ness Administration. Amonghis other accomplishments,Shu eld has been involvedin the Rural Entrepreneurship

Initiative in Arkadelphia.Both awards were presented

at the 16th annual ArkansasSmall Business Awards Lun-cheon this past summer.

For more in ormation on theawards or the honorees, contactLinda Nelson at [email protected].

New Loan Fund Set Upor Tennessee EntrepreneursThe state o Tennessee and

the Department o Agriculture(USDA) have teamed up tolaunch a new revolving loanprogram or rural microenter-prises in the state. Beginningin October 2006, the TennesseeDepartment o Economic andCommunity Developments Busi-ness Enterprise Resource O ce(ECD-BERO) will administer

loans o up to $5,000 throughthe ECD-BERO Micro LoanProgram to help with startup orexpansion costs.

To apply, potential borrow-ers will need a business planand must be willing to attendbusiness training workshops atTennessee Small Business Devel-opment Centers, with locationsthroughout the state. Thecenters will provide technicalassistance to applicants, includ-ing business plan developmentand business training. Appli-cants must be located in a ruralarea as de ned by USDA and

classi ed as a microenterprise(a or-pro t small business with

ve or ewer employees, one o whom owns the business).

The ECD-BERO MicroLoan Fund is nanced with a$125,000 investment throughthe USDA Rural Business Enter-prise Grant program. Over the

next three years, 25 to 30 loansare expected to be allocatedwith additional loans made asloans are repaid.

For more in ormation, contactMichelle Proctor o the Tennes-see Department o Economic andCommunity Developments Busi-ness Services Division by e-mail,[email protected].

Tax Credits Availableto Louisville Companies

Republic Bank and Louisville



Metro Government havepartnered to create a $4 mil-lion New Market Tax Credit(NMTC) Loan Fund to supporteconomic growth in low-income areas. Through this

und, small businesses will beencouraged to expand, add new

jobs and improve Louisvilleseconomically distressed areas.

Proposed projects that dem-onstrate the greatest positivecommunity impact and thegreatest need or unding willquali y or loans, which willrange rom $250,000 to $1 mil-lion. Applications or the undsare available through RepublicBank, Louisville Metros Devel-opment Authority or at Lou-

isville Development Bancorpsweb site, www.morethanabank.com. Click twice on NewMarkets Tax Credits. Fordetails on this program, contact

Andy Powell o Republic Bankat 502-561-7118 or [email protected].

Trucker Training in Kentucky Helps Fill Industry Void A new Driving or Inner

City Development work orceinitiative recently held its rstgraduation ceremony or disad-vantaged students.

The truck-driving work orceprogram, unded by $619,317

rom the state o Kentucky,graduated seven students, whoare now ull-time employees orC.W. Johnson Xpress truckingcompany, a vested partner in

the training program. Je erson Community & Tech-

nical Colleges, the Career Acad-emy and other local communitydevelopment agencies partneredto establish curriculums thatprepare West Louisville resi-dents or careers in the truckdriving industry. The curricu-lums combine technical trainingwith a series o wraparoundservices, including assess-ments, counseling, and job andentrepreneurial opportunities.

The American Trucking Asso-ciation says the national short-age o drivers is nearly 80,000and growing. Kentuckiana-

Works, the regions work orceinvestment agency, estimates

a need or more than 12,000tractor-trailer drivers in theregion by 2012 and shows thatdrivers in the area currentlymake median annual salaries o nearly $32,000, with more than$11,000 in bene ts.

To learn more about Drivingor Inner City Development,

contact Gary Alexander at502-410-6423.

Local OrganizationsReceive CDFI Funds

Several organizations in theFederal Reserves Eighth Districtstates are among 73 recipientso ederal Community Devel-opment Financial Institutions(CDFI) Fund awards.

In August, the CDFI Fundawarded $26,373,900 to orga-nizations across the country

that serve economically dis-tressed communities, including:

Enterprise Corporation o the Delta, Jackson, Miss.,$585,000;

Federation o AppalachianHousing Enterprises, Berea,Ky., $585,000;

Mountain Association or

Community EconomicDevelopment, Berea, Ky.,$585,000;

The Illinois Facilities Fund,Chicago, Ill., $585,000;

Southern Financial Part-ners, Arkadelphia, Ark.,$585,000;

Dallas/Fort Worth Capi-tal Fund, Jackson, Miss.,$100,000; and

Kentucky Habitat orHumanity, Louisville, Ky.,$99,895.

These institutions are certi edby the CDFI Fund as com-

munity development nancialinstitutions or CDFIs. Theyprovide capital, credit and basic

nancial products, such assavings and checking accounts;and technical assistance, such as

nancial education, to commu-nity residents and businesses.

For a list or other in orma-tion regarding these awards,visit the unds web site atwww.cd und.gov.

IRS O ers TaxpayersNew Re und Program

The Internal Revenue Service(IRS) recently announced a newprogram that will allow taxpay-ers who use direct deposit todivide their re unds in up tothree nancial accounts. Theprogram will take e ect in

January 2007. According to the IRS, more

than three-quarters o thenations taxpayers receivere unds each year. Last year,the average re und was $2,171.By using a new orm, Form8888, taxpayers will be able tochoose up to three accountssuch as checking, savingsand retirement accounts orre und deposits.

The new split-re und option

will be available to all individuallers, whether they le Forms

1040, 1040A/EZ, 1040NR orany o the other 1040 series

orms. Taxpayers who want alltheir re und deposited directlyinto one account can still usethe appropriate line on theForm 1040 series.

An IRS spokesman saidthe split-re und program isintended to encourage consum-ers to save more and to opendepository accounts.

The IRS will work withits Stakeholder Partnerships,Education and Communication(SPEC) team to collaborate withIDA programs, VITA sites andnonpro t organizations. SPECworks with 60 national partnersand 290 community coalitions.


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

Mexican immigrantsworking in the UnitedStates send at least $20

billion annually to amily mem-bers in their home country. Thebulk o these transactions (calledremittances) are made throughstore ront money-trans er ser-vices, which, on average, chargethe sender about $10 in ees ora $300 trans er.

Recently, the Federal ReserveBanks and Banco de Mxico, thecentral bank o Mexico, intro-duced Directo a Mxico(Directto Mexico), a service bankscan use to send customers

unds rom the United States toMexico more quickly and eco-nomically. Banks that use theservice can o er remittances or

less than $5 a transaction. As Federal Reserve Chairman

( ormerly Fed Governor) BenBernanke said in 2004, main-stream nancial institutions thatprovide remittance services havea potentially e ective method

o attracting unbanked immi-grants to other services, such asdirect deposit services, savingsaccounts and consumer loans.

Targeting remittance servicesto consumers who need themcan be di cult because asmany as hal the Mexicans inthe United States do not regu-larly use a bank or remittancesor any other service, accordingto Larry Schultz, vice presidentin the Federal Reserves RetailPayments O ce.

Directo a Mxicohelps banksreach these consumers andovercome other barriers. Theservice that supports Directo aMxico, FedACH InternationalMexico Service, is priced sothat U.S. banks can o er it at

competitive rates. ACH is alow-cost payments channel andis already in place in almostevery nancial institution in theUnited States. For this reason,there are no setup costs ormost banks that choose to o er

the program. ACH also usesstandardized ormats that makeit possible or the paymentsto be channeled to Mexicoin an automated ashion anddelivered electronically to bankaccounts there.

Financial institutions alsoreceive a Directo a Mxico promotional tool kit that iscustomizable. It includes Span-ish-language templates or colorbrochures and posters, lobby/ tent cards, statement inserts,

oreign exchange in ormationand text or a radio spot. Theprograms Spanish-language pro-motional templates help smalland medium-sized nancialinstitutions produce pro essionalmaterials with minimal invest-

ment. The materials eature theconsumer bene ts that the bankscan provide using the remittanceprogram: security, speed, lowcost and conveniences.

Remittances present a strongmarket opportunity or nancial

institutions, but the decision toenter this line o business is upto each bank and is subject tothe same due diligence as anynew product. Be ore o er-ing Directo a Mxico, ElizabethMcQuerry, assistant vice presi-dent with the Federal ReserveRetail Payments O ce, suggeststhat banks consider complianceissues, such as account open-ing requirements and ceilings

or payment amounts. O er-ing remittance services, suchas Directo a Mxico, may help

nancial institutions meet theirCommunity Reinvestment Actrequirements since they areproviding a low-cost nancialproduct to immigrants tradi-tionally not using mainstream

nancial services and products.

More information onDirecto aMxico is available at: www.frbservices.org/Retail/intfedach.html.

Fed Product Helps Banks Serve Mexican Immigrants

Entrepreneurship Focuso New Online Project

The Social Science Research Networkrecently announced the creation o theEntrepreneurship Research & PolicyNetwork (ERPN).

Sponsored by the Ewing Marion Kau -man Foundation, ERPN is an online com-munity or research on entrepreneurship.

The oundation also is providing ree ERPN

subscriptions to U.S. universities and not-or-proft institutions or the frst year. To learn more, visit www.ssrn.com and

click on ERPN.

Federal Reserve AdjustsReg Z Disclosure Trigger

The Federal Reserve Board recentlymade its annual adjustment to the dollar amount that triggers additional disclosurerequirements under the Truth in Lending Act (Reg Z) or home mortgage loans that bear rates or ees above a certain amount.

The amount o the ee-based trigger has been adjusted to $547 or 2007. Theadjustment is e ective Jan. 1, 2007.

The Home Ownership and Equity Pro-tection Act o 1994 restricts credit terms,such as balloon payments, and requiresadditional disclosures when total pointsand ees payable by the consumer exceedthe ee-based trigger or 8 percent o thetotal loan amount, whichever is larger.

Credit Reporting Firms

Announce New ScoreA new credit score was introduced

earlier this year by the nations three con-sumer credit reporting companies: Equi ax,Experian and TransUnion.

VantageScore was developed inresponse to market demand or a more

consistent and objective approach tocredit scoring methodology across thethree credit reporting companies, a state-ment rom the companies said. Under thenew scoring system, credit score variancebetween the companies will be attributedto data di erences within each o thethree consumer credit fles and not to thestructure o the scoring model or datainterpretation.

The new system is expected to provideconsumers and businesses with a predic-tive, consistent score that is easy tounderstand and apply, the statement said.Scores will range rom 501 to 990.

Have you

heard


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

2004 Illinois Community Lending Fact BookPublished by WoodstockInstitute, this statewide resource or mortgage-lending and home-buying trends

includes statistics on low- and moder-ate-income home buying and high-cost lending. The book eatures in ormationon the top metropolitan areas, including Springfeld, Peoria, Champaign-Urbana,Bloomington-Normal, Rock ord, the QuadCities, Kankakee and Decatur in Illinoisand St. Louis in Missouri. In ormation

or individual metropolitan areas can beound online. The books can be purchased

online or $25. Visit www.woodstockinst.org/ actbook.

Farmers Market Resource Guide The USDA Agricultural Marketing Servicesguide lists grants, programs and other fnancial and in ormational resources avail-able rom public and private organizations.It is available online at www.ams.usda.gov/

armersmarkets/Consortium/ResourceGuide.htm or in printed orm by contacting the Agricultural Marketing Service in Wash-ington, D.C., at 202-720-8317.

Moving Home: Manu actured Housing in Rural America Although ewer than25 percent o all homes in the UnitedStates are located in rural areas, hal o all

manu actured houses are located there. Thisstudy rom the Housing Assistance Counciltakes a look at who purchases manu acturedhousing, how the purchases are fnanced,public perception o manu actured housing and other issues. The study is availableonline at http://216.92.48.246/in oReportsAlpha.php#movinghome. Printed copiesare available or $3 each, to cover postageand handling, rom Luz Rosas at the Housing Assistance Council, 202-842-8600, ext. 137.

Reaching New Heights The NationalCongress or Community EconomicDevelopment has released its f thnational census measuring the quantita-tive achievements o community-baseddevelopment organizations. The censusshows signifcant increases in home andapartment production, commercial andindustrial development and job creationby community development organizations.Read the report online at www.ncced.org.

Community Development FinancialInstitutions: Providing Capital, Build-ing Communities, Creating Impact

The publication analyzes data rom 517

community development fnancial institutions(CDFIs) or the fscal year 2004. An industryoverview and fve supplemental brochuresprovide in-depth analysis o communitydevelopment banks, community develop-ment credit unions, community development loan unds, community development venturecapital unds and microenterprise unds.

The publication is the work o the CDFI DataProject, an industry collaborative supportedby the Fannie Mae Foundation, the FordFoundation and the John D. and Catherine

T. MacArthur Foundation. Project partnersinclude the Aspen Institute, Association o Enterprise Opportunity, Coalition o Com-munity Development Financial Institutions,Community Development Venture CapitalAlliance, CFED, National Community Invest-ment Fund, National Federation o Com-munity Development Credit Unions,and Opportunity Finance Network. Visit www.opportunityfnance.net/customer/home.php or more in ormation.

BridgesBridgesis a publication o the Com-munity A airs department o the FederalReserve Bank o St. Louis. It is intendedto in orm bankers, community develop-

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

Glenda WilsonCommunity A airs O cer, Assistant

Vice President and Managing Editor314-444-8317

Linda FischerEditor314-444-8979

Community Affairs staff

St. Louis: Matthew Ashby314-444-8891

Jean Morisseau-Kuni314-444-8646Eileen Wol ngton314-444-8308

Memphis: Ellen Eubank901-579-2421Dena Owens901-579-4103

Little Rock: Lyn Haralson501-324-8240

Amy Simpkins501-324-8268

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

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

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

Please contact the editor.Free subscriptions and additional copiesare available by calling 314-444-8761 orby e-mail to communitya airs@stls. rb.org.

octoBer

11Leading or Change: Toward the Greater GoodLouisville, Ky.Sponsor: Center or Nonproft Excellence(Sixth Annual Leadership & Awards Con erence)www.cnpe.org

28 Womens Money Matters WorkshopCrystal City, Mo.Sponsors: University o Missouri Extension,Federal Reserve Bank o St. Louiswww.stlouis ed.org/community/con erences.html

30-N . 2

The Power o OpportunityWashington, D.C.Sponsor: The Opportunity Finance Networkwww.opportunityfnance.net

NovemBer

15-17Church-Based Community Development

Training SymposiumFt. Lauderdale, Fla.Sponsors: BB&T, Freddie Macwww.bbandttraining.com or 704-954-1108

16-17 Arkansas Venture Con erenceRogers, Ark.Sponsor: Arkansas Venture Forumwww.arkansasventure orum.com

30Mid-South Delta SummitTunica, Miss.Sponsor: Federal Reserve Bank o St. Louiswww.stlouis ed.org

decemBer

7Community Development RoundtablePine Blu , Ark.Sponsor: Federal Reserve Bank o St. Louiswww.stlouis ed.org/community/con erences.html

11-15NeighborWorks Training InstituteNew OrleansSponsor: NeighborWorkswww.nw.org/network/home.asp

JaNuary

31-F b.22007 Community DevelopmentCon erenceSponsor: Missouri CommunityDevelopment Societywww.mocds.org

caleNdar

resources


12/12

Exploring Innovation

Were looking or breakthroughs in communitydevelopment fnance, in access to capital,and in scale and sustainability or communitydevelopment organizations.

Do you have an innovate process or result youwould like to share with us? It must relatedirectly to community development fnancethat most e ectively improves communities.

Examples o presentation topics include, butare not limited to:

How do you encourage innovation in thecommunity, and under what conditionsdoes it occur?

How do you build and sustain a high-per ormance community developmentorganization?

How do you measure success in

innovation?

Its easy to submit your presentation idea!Simply fll out the online orm atwww.stlouis ed.org/community/innovation.This site also has more details about possibletopics and selection criteria or proposals.

Call or Session Proposals

DEADLINE TO SUBMIT PROPOSALS:

NOv. 30, 2006

The Federal Reserve Bank o St. Louis

is seeking presentation proposals or a

con erence on community development

fnance rom May 2-4, 2007, in St. Louis.

Share your knowledge, experience

and ideas with your peers!

Exploring Innovation

a con erence on community de elopment fnance

May 2-4, 2007St. Louis

Documents

Bridges - Autumn 2006