A Community Development Publication Community Affairs

No. 76 Winter 2011

PUBLISHED BY THE A COMMUNITY DEVELOPMENT PUBLICATION COMMUNITY AFFAIRS

DEPARTMENT OF THE

FEDERAL RESERVE BANK OF PHILADELPHIA CASCADE

INSIDE: Financial Reform Brings 2 — Message from the New Consumer Protections Community Affairs Officer By Amy B. Lempert, Community Development Advisor and Outreach Coordinator

3 — Management Team On July 21, 2010, President Barack Obama and Title XIV — the Mortgage Reform and Key to Charter Schools’ signed into law the Dodd–Frank Wall Anti-Predatory Lending Act. Success Street Reform and Consumer Protection Act.1 The full title of this sweeping legisla- Title X — The Consumer Financial 6 — New Jersey Community tion suggests its breadth: “An act to pro- Protection Act of 2010 Capital Strengthens mote the financial stability of the United One of the key provisions of Title X of Charter Schools States by improving accountability and the Dodd–Frank Act, known as the Con- transparency in the financial system, to sumer Financial Protection Act of 2010, is 7 — ShoreBank’s Legacy end ‘too big to fail,’ to protect the Ameri- the creation of the Bureau of Consumer and Vision Continue: A can taxpayer by ending bailouts, to protect Financial Protection. The bureau is to be Practitioner’s Reflections consumers from abusive financial services, housed within, but independent of, the and for other purposes.” The act, which Federal Reserve. The director of the bureau 8 — What Determines contains 16 sections or “titles,” touches will be appointed to a five-year term by the Automobile Loan Defaults almost every aspect of the financial ser- President with the advice and consent of and Prepayment? vices industry2 and is “arguably the most the Senate. substantial financial regulatory reform ...continued on page 11 10 — Moving Forward in a legislation since the 1930s.”3 Time of Change: The

Future of the Community This article summarizes only two sections Development Industry of the Dodd–Frank Act: Title X — the Consumer Financial Protection Act of 2010 16 — Calendar of Events

1 Pub. L. 111-203, H.R. 4173. The act is available at http://frwebgate.access.gpo.gov/cgi-bin/ getdoc.cgi?dbname=111_cong_public_ laws&docid=f:publ203.111.pdf.

2 Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates, “The Dodd-Frank Act: Significant Impact on Public Companies,” memorandum, July 21, 2010. Available at http://www.skadden.com/eimages/ The_Dodd-Frank_Act_Significant_Impact_on_ Public_Companies.pdf.

3 Jim Lyon, first vice president of the Federal Reserve Bank of Minnesota and Regulatory Reform Implementation program coordinator at the Board of Governors of the Federal Reserve System, Federal Reserve System intranet video, October 18, 2010. www.philadelphiafed.org No. 76 CASCADE Winter 2011

Cascade is published three times a year by the Federal Reserve Bank of Philadelphia’s Community Affairs Department and is available at www.philadelphiafed.org. Material may be reprinted or abstracted provided Cascade is Message from the credited. The views expressed in Cascade are not necessarily those of the Federal Reserve Bank of Philadelphia or the Federal Reserve Community Affairs Officer System. Send comments to Keith L. Rolland at 215-574-6569 or [email protected]. To subscribe, go to http://www.philadelphiafed.org/ Despite the end of the “Great Reces- Late in the summer of 2010, two publications/. sion,” the news in many segments of organizations that played important COMMUNITY AFFAIRS DEPARTMENT the economy continues to give cause roles in the history of community Kenyatta Burney for concern. We have highlighted development closed their doors. One Senior Staff Assistant some of these concerns in this issue of of these organizations, ShoreBank, was 215-574-6037 Cascade [email protected] . acquired by another entity and is now the Urban Partnership Bank. Bruce Albert Chin This issue begins with an article about Gottschall, who retired as the execu- Consumer Specialist 215-574-6461 the Dodd–Frank Wall Street Reform tive director of Neighborhood Hous- [email protected] and Consumer Protection Act, which ing Services (NHS) of Chicago after 30 Jeri Cohen-Bauman was passed by Congress and signed years, has written an interesting piece Lead Administrative Assistant into law by President Obama last sum- about the importance of ShoreBank 215-574-6458 [email protected] mer. The new law makes significant to community development lending. changes to how the American financial In many respects, ShoreBank taught Andrew T. Hill, Ph.D. Economic Education Advisor and Team Leader system will work, and many of these many of us that lending in low-wealth 215-574-4392 changes involve consumer transac- communities was possible. [email protected] tions. Although we could spend days Amy B. Lempert writing about the changes, Amy Lem- The other organization was NHS of Community Development Advisor and pert’s article delves into two areas of America. This secondary market for Outreach Coordinator 215-574-6570 great concern to our readers: the new NeighborWorks purchased loans [email protected] bureau that is being created to protect around the country. Back in the early Erin Mierzwa consumers in financial transactions 1980s when I was an NHS director Community Development Specialist and and the new mortgage and anti-pred- in Trenton, NJ, NHS of America was Administrative Coordinator 215-574-6641 atory lending regulations. Many more the only source for replenishing my [email protected] changes are expected over the coming organization’s loan funds. While I months, so we will keep you posted. always tried to arrange bank financ- Dede Myers Vice President and Community Affairs Officer ing for neighborhood homeowners, 215-574-6482 Kendra Fretz, a summer intern from not everyone was bankable. NHS of [email protected] Penn, was so intrigued by a session at America was a valuable resource — its Harriet Newburger, Ph.D. our 2010 Rethink. Recover. Rebuild: end saddens me. But it reminds me Community Development Research Advisor 215-574-3819 Reinventing Older Communities of something a banker said during [email protected] conference that she decided to conduct another recession: “When a bank’s

Keith L. Rolland her own unscientific, but interesting, customers face hard times, so does Community Development Advisor study on the topic that the panelists the bank.” The subprime crisis taught 215-574-6569 discussed — the future of community us that if you give marginal borrow- [email protected] development. She interviewed 19 com- ers loans they cannot afford, trouble Marvin M. Smith, Ph.D. munity development leaders about occurs. But NHS of America’s closing Community Development Research Advisor 215-574-6393 their thoughts and came away with a is a lesson to all advocates that even [email protected] consistent view of where the industry when you make good loans to low- Brian Tyson must head. and moderate-income people, they Community Affairs Research Assistant still face bumps in the road that they 215-574-3492 [email protected] Automobile loans are an important may not be able to handle. part of many families’ debt profile, but John J. Wackes different types of lenders provide dif- Community Development Specialist 215-574-3810 ferent financing. In his column, Marty [email protected] Smith summarizes a study that looks Todd Zartman at who defaults on car loans and how Economic Education Specialist the underwriting might be improved. 215-574-6457 [email protected] Management Team Key to Charter Schools’ Success By Sara Vernon Sterman, Executive Vice President, Community Investment and Capital Markets, The Reinvestment Fund, Philadelphia

Charter schools are increasingly being recognized for the educational alternatives they provide, particularly in low-performing urban school districts. Since the first charter school law was passed in Minnesota in 1991, 40 states and the District of Colum- bia have passed similar legislation. According to the National Alliance for Public Charter Schools, there are almost 5,000 charter schools serving an estimated 1.66 million students.

Charter schools are independent public schools that operate under contracts, or “charters,” for a fixed period of time. The charters are The Reinvestment Fund has provided usually authorized by local school financing to Mastery Charter Schools in Philadelphia. This student is one of over districts or sometimes by state de- 4,000 students who attend Mastery Char- partments of education, universities, ter Schools in this city. Mastery currently or independent chartering boards. operates seven schools in Philadelphia, Tuition-free and nonsectarian, charter including the Thomas Campus (right). schools are to be open to all students on a first-come, first-served basis. If demand exceeds capacity, students well as their smaller school and class settings.3 Charter schools serve a dis- are enrolled by a lottery system.1 sizes makes charter schools a popular proportionately high number of eco- choice for both parents and students. nomically disadvantaged students Unlike traditional public schools, (as measured by the percentage of charter schools have flexibility over When it comes to academics, charter students receiving free and reduced fiscal, operational, and curricular school students often do better than lunches).4 Compared with traditional issues, giving them the ability to their district public school peers.2 public schools, charter schools have implement innovative practices that This is especially true of poor and fewer safety issues and experience provide diverse educational options. minority students who most fre- fewer behavior problems;5 they This increased curriculum option as quently fall behind in traditional ...continued on next page

1 No Child Left Behind Act of 2001. Title V, Part B, Subpart 1, Section 5210(1), available at http://www2.ed.gov/policy/elsec/leg/esea02/pg62. html#sec5210.

2 Caroline M. Hoxby, Jenny Kang, and Sonali Murarka, “How New York City’s Charter Schools Affect Achievement, September 2009 Report,” The New York City Charter Schools Evaluation Project, available at http://www.nber.org/~schools/charterschoolseval/how_NYC_charter_schools_ affect_achievement_sept2009.pdf.

3 Caroline M. Hoxby, Jenny Kang, and Sonali Murarka, “How New York City’s Charter Schools Affect Achievement, September 2009 Report,” The New York City Charter Schools Evaluation Project, available at http://www.nber.org/~schools/charterschoolseval/how_NYC_charter_schools_ affect_achievement_sept2009.pdf.

4 National Alliance for Public Charter Schools, “Public Charter School Dashboard 2009.” June 2009, available at http://www.publiccharters.org/files/ publications/DataDashboard.pdf.

5 Jon Christensen, “School Safety in Urban Charter and Traditional Public Schools,” National Charter School Research Project, March 2007, available at http://www.crpe.org/cs/crpe/download/csr_files/wp_ncsrp_safety_mar07.pdf.

3 also have higher attendance rates building strong schools that outper- sary services to their communities.8 and lower dropout rates.6 form the local district and meet or Many are open around the clock and exceed state standards. on weekends, offering their facilities An emerging trend in the charter for community education and rec- school industry is the replication of Charter schools are also important reation outside of traditional school successful charter programs (e.g., community assets. In urban neigh- hours. Knowledge Is Power (KIPP), Mas- borhoods, they can play a role in tery, Aspire, Achievement First) by revitalizing communities by encour- A Leading Charter School high-performing regional or national aging young middle-income families Lender charter management organizations to stay in their homes.7 Many charter The Reinvestment Fund (TRF), a (CMOs). These models frequently schools transform dilapidated or 25-year-old community development originate in low-performing urban abandoned buildings into state-of- financial institution (CDFI) serving school districts where CMOs are the-art facilities and provide neces- the mid-Atlantic region (i.e., Pennsyl- vania, New Jersey, Delaware, Mary- land, and the District of Columbia), has been lending money to charter TRF’s Charter School Investments in Philadelphia schools since charter school legislation passed in Pennsylvania in 1997. TRF’s first charter school borrowers were community development corporations (CDCs) with which TRF had established financing relationships for affordable housing, child care, and other social service or small business loans. These CDCs felt that improving the educational options in their communities was the next essential step in their plans to strengthen their communities. TRF agreed that high-quality educational alternatives are an essential component of any strategy to strengthen communities, and financing charter schools has become a core part of TRF’s lending portfolio. Through September 30, 2010, TRF has provided $189 million in financing to 65 schools serving over The Reinvestment Fund’s 30,000 students in Pennsylvania, charter school investments New Jersey, Delaware, Maryland, Highest concentrations and the District of Columbia. Most of of student poverty the students served at TRF–financed schools qualify for free or reduced- price lunch. TRF has had one default PolicyMap; www.policymap.com with no charge-offs and no losses.

6 Mike Embry, “UH Study Reflects Better Attendance, Behavior at Charter Schools,” University of Houston, March 1, 2010, available at http://www. uh.edu/news-events/stories/2010articles/March2010/0301CharterSchools.php.

7 Robin Halsband, “Charter Schools Benefit Community Economic Development,” Journal of Housing and Community Development. (November/ December 2003), pp. 34–38, available at http://www.ncbcapitalimpact.org/documents/JHCDeduarticle2003_RH.pdf.

8 Robin Halsband, “Charter Schools Benefit Community Economic Development,” Journal of Housing and Community Development. (November/ December 2003), pp. 34–38, available at http://www.ncbcapitalimpact.org/documents/JHCDeduarticle2003_RH.pdf. 4 TRF’s work with charter schools pri- the strength of a school, marily involves financing real estate. regardless of its track re- TRF provides acquisition, construc- cord. Charter schools are JPMorgan Chase Provides tion, and permanent financing to founded by a variety of Financing to Charter Schools charter schools. In keeping with its individuals interested in mission to support sustainable devel- and committed to educa- In the spring of 2010, JPMorgan Chase an- opment, many of TRF’s loan packag- tional reform, including nounced a $325 million initiative to pro- es include loans for energy-efficient educators, community vide financing to high-performing charter construction or energy retrofits; organizers, social service schools. Chase is partnering with The Reinvest- every dollar saved in utility expenses organizations, and busi- ment Fund (TRF), along with the Low-Income increases the amount available for ness leaders. In TRF’s ex- Investment Fund and NCB Capital Impact, to the school’s educational program. perience, it is the breadth create New Markets Tax Credit (NMTC) financ- and depth of the team ing pools. This commitment by Chase to the TRF works with early-stage schools — rather than a single growth of charter schools expands TRF’s abil- and continues to support the real entrepreneurial founder ity to finance strong schools, even in today’s estate efforts of charter schools as — that is a key determin- challenging credit environment. TRF intends they mature. Many charter schools ing factor in a school’s to provide an additional $50 million in loans to start off in rented space. Therefore, capacity to navigate the finance real estate projects for high-performing, TRF provides leasehold improve- academic, political, finan- established charter schools that are acquiring, ment loans; some of these loans are cial, real estate, and legal renovating, or expanding their facilities. Charter essentially unsecured, and others challenges to operating a schools that are replicating or expanding to ad- are secured by recorded leasehold successful program. ditional locations are also eligible for financing. mortgages. TRF has provided mul- Facility projects must be NMTC–eligible. tiple rounds of financing to some Opportunities and –Sara Vernon Sterman schools as they move from tempo- Challenges for Lenders rary to more permanent facilities. Provision of public educa- Relying upon credit enhancement tion services is under state provided through the U.S. Depart- purview, so charter schools are con- to be transparent and predictable in ment of Education’s credit enhance- trolled at the state level. Some states many places. Many lenders now view ment program, TRF provides subor- are considered to be more charter charter renewal in the same light dinated debt to schools as they move friendly than others. However, as annually renewing social service on to larger facilities or increase the across the country, charter schools contracts. amenities of their existing facilities. face greater financial challenges than Additionally, TRF has provided a traditional public schools. In most states, the funding received New Markets Tax Credit allocation by charter schools is less than to four charter school transactions. Charters are usually issued for a that received by traditional public period of five years, although some schools. The actual funding for- In underwriting a charter school states/authorizers, such as Arizona mula varies from state to state and transaction, TRF uses the same and the District of Columbia, issue is calculated based on the number criteria a lender would use for any charters with terms as long as 15 of students served and their grade commercial transaction: projected years. Some lenders have found it level. On average, charter schools cash flow, historical financial per- difficult to assess the risks associated receive approximately 80 percent of formance (if available), collateral, with charter renewal. In TRF’s early the per-pupil funding received by construction team (if applicable), experience, before any renewals had their district public school counter- business plan (academic program), occurred, all of its loans fully amor- parts (less than 60 percent of dis- and management capacity. However, tized over the term of their four- or trict funding in some states).9 This in TRF’s 13 years as a charter school five-year charters. But since that funding gap exists despite the fact lender, management has emerged time, many rounds of renewal have that charter schools typically serve a as a primary criterion in evaluating occurred, and the process has proven ...continued on page 15

9 Meagan Batdorff, Larry Maloney, Jay May, et al., “Charter School Funding Inequity Persists,” Ball State University, May 2010, available at http:// www.bsu.edu/teachers/media/pdf/charterschfunding051710.pdf. 5 New Jersey Community Capital Strengthens Charter Schools By Wayne T. Meyer, President, New Jersey Community Capital, Trenton, NJ

New Jersey Community Capital ly in August) through when its first ity to provide additional credit sup- (NJCC) became one of the first local and state funding checks arrive port to certain charter school facility community development financial (typically in October or November). loans where additional value was institutions (CDFIs) to offer charter NJCC offers flexible financing prod- needed or excessive risks needed to school facility financing when it ucts, including predevelopment, site be mitigated. NJCC has achieved a began making charter school loans acquisition, site renovation, and new leverage ratio of over 11 to 1 with the more than six years ago. The com- construction loans; leveraged debt federal grant. pany started making these loans for New Markets Tax Credit transac- because traditional lending institutions; bridge financing; mini-perma- NJCC believes that education is tions were unable to meet the facility nent financing; lease guaranties; and the bedrock of community change. financing needs of these schools. some working capital lines of credit. Charter schools create educational opportunities for young students in Unlike traditional public schools, NJCC provided direct financing to New Jersey’s most at-risk communi- charter schools do not receive any more than 14 charter school cam- ties. With more than 11,000 students funding for building, buying, or leas- puses with aggregate loans outstand- currently on charter school waiting ing facilities. Despite this funding ing of nearly $22 million. Since 2004, lists, the demand for charter school disadvantage, many charter schools NJCC has leveraged over $115 mil- facility financing will no doubt con- provide a real educational choice to lion in charter school development tinue to grow. families living in areas where district costs that benefit 5,500 students. schools are underperforming. For information, contact Wayne In 2006, NJCC received an $8.15 mil- T. Meyer at 609-989-7766 The most common financing request lion grant from the U.S. Department or [email protected]; www. is for working capital lines of credit of Education’s Credit Enhancement newjerseycommunitycapital.org. to bridge operating costs from when for Charter School Facilities pro- the school begins operating (typical- gram. The grant gave NJCC the abil- Joseph V. Palazzolo

Students participate in a civics class at TEAM Academy Charter School, located in the former St. Charles Borromeo School in Newark, NJ. 6 ShoreBank’s Legacy and Vision Continue: A Practitioner’s Reflections By Bruce Gottschall, Former Executive Director of Neighborhood Housing Services of Chicago

ShoreBank, headquartered in Chicago, with the problem of declining areas. resources, ShoreBank changed per- was the largest community development Buying a failing bank in a declining ceptions about what was possible. If bank in the United States. In August neighborhood took foresight, cour- a small community bank in a declin- 2010, it was declared insolvent, and age, and dedication, and it also meant ing area of Chicago could demon- Urban Partnership Bank acquired Shore- taking significant risk. Indeed, many strate the viability of the neighbor- Bank’s core deposits and most of the as- people thought the task of reviving hood and the bank, there was no sets of ShoreBank Corporation’s Midwest both the bank and the neighborhood reason others couldn’t do the same. bank out of receivership from the FDIC. was impossible. ShoreBank introduced the concept ShoreBank was created at a time of The protests had focused attention of a community-based bank — local urban turmoil and neighborhood on the problem, but the enactment of knowledge and local presence — to decline. In the late 1960s and early HMDA and the CRA was essential a tough urban neighborhood from 1970s, people across the country were for encouraging banks to provide the which banks had fled. Yet it went protesting and demonstrating against credit necessary to make a differ- much further by setting up for-profit the “redlining” of minority, low- ence in neighborhoods. income, and older communities. At However, communities bank offices and at bank executives’ also needed examples of ShoreBank offered concrete evidence homes, protestors showed their dis- how this type of lending approval of banks’ lack of lending in and community devel- that private investment in declining certain neighborhoods. Furthermore, opment could actually areas could make a difference. it was then an accepted belief that be done. ShoreBank, once city neighborhoods started to through its focus on decline, the downward spiral would making credit available in a place and not-for-profit subsidiaries that inevitably continue. Decline became other institutions had written off, helped potential borrowers navigate a self-fulfilling prophecy because provided such an example. the loan process and created further many people, including bankers, investment in the community. In acted on that belief. An accompany- ShoreBank’s vision, which empha- brief, ShoreBank went beyond the ing conviction was that the only way sized leadership and the responsibil- legislative mandate of the CRA to to reverse this decline was to demol- ity of private-sector entities in regen- create financial services and credit ish the neighborhoods and start over. erating neighborhoods, changed the and lending opportunities. It of- game. In particular, the bank helped fered concrete evidence that private In the midst of this turmoil, in 1973 — to shift responsibility for reversing investment in declining areas could before passage of the Home Mortgage the decline of troubled neighbor- make a difference and showed ways Disclosure Act (HMDA, 1975) and the hoods solely from the government to to do it successfully. Community Reinvestment Act (CRA, other institutions, especially banks, 1977) — a small group of people because ShoreBank realized that the ShoreBank also created a base from bought a troubled bank in a declin- availability of credit was an essential which to leverage public and other ing African-American neighborhood ingredient for improving neighbor- investment resources to further its on Chicago’s South Side. These hoods. This concept also made a local development goals. In his book people had a dream of improving huge difference in creating new Community Capitalism, Richard Taub the neighborhood by using a small models for community investment. notes that one of ShoreBank’s major private community bank as a base. By showing that neighborhoods that strengths was its ability to mobilize That might not seem like a novel idea had been excluded from obtaining outside resources and focus them on today, but at the time, it went against credit could improve with the right the community.1 the accepted wisdom of how to deal combination of private and public ...continued on page 14

1 Richard Taub, Community Capitalism. Boston: Harvard Business School Press, 1988. 7 What Determines Automobile Loan Defaults and Prepayment?

The recent financial meltdown has chases are financed through credit, qualified borrowers with similar risk fostered a rash of loan defaults. and loans for automobile purchases characteristics [e.g., credit score and Most of the discussion to date has are one of the most common forms down payment] pay the same rate.” centered on loans in the housing of household borrowing.” Previous The point of contention is that the market. However, overlooked are studies have shown that “third party lender does not take into account the the defaults on loans for motor ve- financing (direct loans) accounts for automobile’s make and model when hicles or automobiles (cars and light the largest portion of the automobile pricing the loan. This pricing scheme trucks), which are among the largest credit market, with dealer financing is in contrast with practices presently nonfinancial assets held by Ameri- (indirect loans) second and leasing employed in the auto insurance and cans. While automobile loans — and third.” mortgage markets. The authors point automobile insurance when pricing out that “auto insurers have long rec- for risk — have some of the same un- Lenders in the automobile market ognized that automobile makes and derlying characteristics as mortgage face two main risks. The foremost models appeal to different clienteles risk is “default and that these clienteles have hetero- — that is, the geneous risk profiles and accident Given the prominence of third-party person who rates.” Consequently, automobile in- took out a loan surers take into account the make and financing in the automobile market and to buy a car or model that an applicant is insuring, the pricing method used, the authors truck fails to when pricing the automobile policy. question whether the risks are adequately pay it back.” Similarly, mortgage lenders factor While a second in “information on the underlying reflected in the price charged for the loan. important risk assets (for example, a house) as well is prepayment, as the borrowers’ personal character- where the “car istics” when originating a loan. loans, there are differences that have or truck purchaser pays off the loan important implications for lenders. early, reducing the lender’s stream of Given the importance of underlying In addition to defaults, lenders also interest payments.” assets in the pricing of products in incur an effective loss if purchasers the insurance and mortgage markets, prepay their loans. Sumit Agarwal, Given the prominence of third-party “the question naturally arises as to Brent W. Ambrose, and Souphala financing in the automobile market whether incorporating information Chomsisengphet investigated these and the pricing method used, the on automobile make and model issues.1 The following is a summary authors question whether the risks would help third party lenders refine of their findings. are adequately reflected in the price their loan pricing models.” Thus, charged for the loan. This appre- the authors propose and attempt to Lending Behavior and Risks hension arises since this segment answer the following question: “If According to the authors, “roughly of the market “relies on a ‘house we assume that the choice of auto three-quarters of automobile pur- rate’ for pricing loans, such that all make and model reveals individual

1 Sumit Agarwal, Brent W. Ambrose, and Souphala Chomsisengphet, “Determinants of Automobile Loan Default and Prepayment,” Federal Reserve Bank of Chicago Economic Perspectives, 32 (Third Quarter 2008), pp. 17–28. 8 financial (or credit) risk behavior of in the analysis. In addition, the au- the borrower, what does this tell us thors knew the automobile’s make, about the borrower’s propensity to model, and year as well as whether prepay or default on his loan?” the loan was for the purchase of a used or new automobile. The authors Data and Methodology noted that their sample of loans had The authors used a proprietary data the following median values: $14,027 set from a large financial institution for the loan amount, 78 percent for to conduct their analysis. The data the LTV, 8.99 percent for the annual contain information on automobile percentage rate (APR), 723 for the loans originated by the financial credit score, $3,416 for the monthly institution and offered directly to disposable income, 40 years of age borrowers. The authors focused on for the owner, 54 months for the direct loans, since this is the market age of the loan, and four years for in which lenders can compete, as the age of the car. Further, the car’s Marvin M. Smith, Ph.D., Community Development Research Advisor opposed to indirect loans that are “blue book value (the car’s market made available through the dealer. value) at loan origination [ranged] The sample for the analysis consisted from $4,625 to $108,000.”3 • an increase in income raises the of 20,466 direct auto loans with four- probability of prepayment, while year and five-year maturities and The authors used an estimation a rise in unemployment increas- fixed rates. The authors tracked the procedure that allowed them to es the probability of default; performance of the loans from Janu- “determine how borrower consump- ary 1998 through March 2003, “such tion decisions can affect loan perfor- • a decrease in the market rate that a monthly record of each loan mance,” with a particular focus on increases both the probabilities [was] maintained until the automo- the prepayment or default on their of prepayment and default; and bile loan [was] either paid in full (at loan. loan maturity), prepaid, defaulted, • loans on most luxury cars have or [stayed] current.” Of the total Results a higher probability of prepay- loans in their sample, 4,730 were pre- The authors’ analysis produced sev- ment, whereas loans on most payments and 534 were defaults.2 eral noteworthy findings,4 including economy cars have a lower prob- the following: ability of default. The authors included several vari- ables that reflect the characteristics • a loan on a new car has a higher Concluding Observations of the loan and the borrower. In the probability of prepayment, The authors hasten to note that their former, they included “automobile whereas a loan on a used car has study has some limitations — it only value, automobile age, loan amount, a higher probability of default; considered direct auto loans that LTV [loan to value], monthly pay- were originated primarily in north- ments, contract rate, time of origina- • a decrease in the credit risk of a eastern states by a single lender. tion (year and month), and payoff borrower, as measured by the Nonetheless, their “results imply year and month for prepayment and credit score, lowers the prob- that lenders could improve the pric- default.” For the latter, they included ability of default and raises the ing of automobile loans by consider- the borrower’s credit score, age, and probability of prepayment; ing the type of car collateralizing the monthly disposable income. They loan.” also included the unemployment • an increase in the LTV increases rate in the county where the borrow- the probability of default and er resided and used the three-year lowers the probability of prepay- Treasury note rate as the market rate ment;

2 The authors defined prepayment as paying off a loan in full before maturity and default as a loan that is 60 days past due.

3 The authors point out that “these statistics [were] comparable with the overall statistics for a typical auto loan portfolio.”

4 See page 25 of Sumit Agarwal, Brent W. Ambrose, and Souphala Chomsisengphet’s study in Economic Perspectives.

9 Moving Forward in a Time of Change: The Future of the Community Development Industry By Kendra Fretz, Community Affairs Intern

The recent recession has affected government offices, private founda- ing funding to low- and moderate- many business sectors, and the com- tions, trade associations, CDCs, and income (LMI) communities has munity development industry is no intermediaries. The survey objectives become increasingly less productive, exception. Nonprofit community were: (1) to identify any patterns or yet most respondents agreed that a development corporations (CDCs), trends around the capacity of CDCs real need exists for a neighborhood community-based organizations and CBOs as effective community organization to play a catalytic role (CBOs), and community develop- development practitioners; and in community development projects. ment financial institutions (CDFIs) (2) to look for ways that the reces- have all felt the credit and economic sion and the federal government’s In this context, it appears that a crises as their funders — whether more comprehensive neighborhood new role for CDCs and CBOs has they be banks, foundations, or lo- development strategy are changing emerged — as partners with the cal, state, or federal governments the industry infrastructure. We also larger-scale developers. Under the — faced reduced revenues. Even in sought to understand how the Fed’s new model, the CDCs and CBOs can good times, the players in the com- Community Affairs Department plan the structure, manage the politi- munity development world compete could strengthen the capacity of the cal aspects, and deliver zoning and for limited resources, but today’s en- industry and support the various other entitlements, and then rely on vironment is particularly challenging. practitioners in their roles. the larger-scale developer to produce the structure. So what will it take for CDCs and The following points emerged in our CBOs to attract funding in the fu- survey: Several respondents also empha- ture? We initiated this conversation sized that the future of community in May 2010 at the Federal Reserve 1. Changing Roles development will entail partnerships Bank of Philadelphia’s Rethink. There is no doubt that the economic across disciplines, including educa- Recover. Rebuild: Reinventing Older recession has resulted in decreased tion, workforce, health, physical Communities conference. In the final funding for CDCs and CBOs. We development, and transportation. As panel, four community development also heard that the structure of the grassroots organizations, CDCs and leaders discussed the future of the community development industry CBOs know how to engage the “sys- community development industry, is evolving, as are the traditional tem” and can promote community specifically its neighborhood-based roles of stakeholders in the field. change as the facilitator for neighbor- groups’ need for funding. A key During the interviews, several lend- hood and regional stakeholders. The discussion point was the most effec- ers reported that CDCs are being forward-thinking organizations are tive role for CDCs and CBOs, given replaced as the developers of afford- already adapting to the new reality. diminished funding sources and a able housing and mixed-use projects One respondent recalls a comment recent shift in the federal govern- by for-profit entities and that smaller from a CDC executive director: “We ment’s strategy toward comprehen- neighborhood nonprofit developers no longer call ourselves a CDC, but a sive neighborhood development are being replaced by larger regional neighborhood change organization.” within a regional framework. or statewide nonprofit developers and CDFIs. The increasing role of 3. A Coherent System Having heard these leaders discuss CDFIs as the distribution channel for as a Solution their thoughts, the Community private and public funding also chal- Our survey respondents suggested Affairs Department conducted a lenges CDCs and CBOs to form new that the community development qualitative survey of 19 leading partnership structures with CDFIs. system is fragmented and lacks a stakeholders in the community de- central platform of civic leadership velopment industry through phone 2. Neighborhood Change and a unified regional strategy. or in-person interviews. The partici- Agents, Strategic Partnerships Without a center, the infrastructure pants were from all different sec- Survey participants noted that the remains thin and spread out. tors, including lending institutions, CDC-centered model for distribut- 10 Financial Reform Brings

New Consumer Protections ...continued from page 1

On September 17, 2010, the President bureau’s authority include the fol- Respondents recommended an align- named Elizabeth Warren as a White lowing: ment among various funding sourc- House advisor, as well as advisor es to create a shared vision for the to the secretary of the Treasury on • The bureau will have exclusive region. The content of the strategy consumer issues, and charged War- federal examination and primary must focus more on the challenges ren with heading the effort to set up enforcement authority for fed- of wealth creation and balancing the the bureau. As provided for in the eral consumer protection laws needs of existing and new residents. act, the secretary of the Treasury has with respect to insured deposito- It was recommended that preserva- set July 21, 2011, as the designated ry institutions and credit unions tion tools include pairing policy with transfer date when, with certain with total assets over $10 billion development as well as providing limited exceptions, rule-writing, and their affiliates. Examina- financial literacy and consumer edu- examination, reporting, and enforce- tion and enforcement author- cation so that the conversation will ment authorities will be transferred ity for those institutions under change at the community level. to the bureau from the Federal $10 billion will remain with the Policy should also address fears of Reserve and other federal banking federal banking agencies (i.e., the gentrification and displacement of agencies.4 Some of these authorities Fed, the Office of the Comptrol- long-term residents. CDCs and CBOs will also be transferred from the U.S. ler of the Currency, the Federal as community change agents might Department of Housing and Urban Deposit Insurance Corporation, present the best vehicle for imple- Development (HUD) and the Federal and the National Credit Union menting a more thoughtful approach Trade Commission (FTC). Administration). to new investment. The act does not transfer authority • In addition, with some limited 4. The Fed’s Role for the Community Reinvestment exceptions concerning the FTC’s The majority of respondents see the Act (CRA) to the bureau; therefore, jurisdiction, the bureau will have Community Affairs Department’s authority for the CRA will remain exclusive consumer examina- most effective role as that of a conve- with the federal banking agencies. tion and enforcement authority ner. Respondents noted that the Fed- for certain nonbanks, includ- eral Reserve is the only institution The bureau will be given authority ing any entity in the mortgage that can break down communica- for the major consumer protection chain, companies providing loan tion barriers among the community laws, including the Truth in Lending modification and foreclosure groups and the banking industry. Act (TILA), the Real Estate Settle- relief services, large participants Several respondents suggested that ment Procedures Act (RESPA), the in markets for financial products our conferences and meetings focus Home Ownership and Equity Pro- or services, and entities offer- more on solutions. While the re- tection Act (HOEPA), the Truth in ing private education or payday spondents acknowledged that it was Savings Act, the Fair Credit Report- loans. The authority will cover beneficial to identify problems, they ing Act, and several other consumer nonbank institutions whose also emphasized that conversations protection laws. One notable rule- conduct in providing consumer involving solutions lead to more making requirement of the Con- financial products or services, as meaningful results for all parties. sumer Financial Protection Act is to perceived by the bureau, poses a combine mortgage disclosures under risk to consumers. TILA and RESPA. • The bureau will be required to Some additional highlights of the institute procedures related to ...continued on next page

4 The federal banking agencies include the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration. The act transfers the functions of the Office of Thrift Supervision to the OCC.

11 consumer complaint responses the recommendation of regional that responsible, affordable in coordination with the other Federal Reserve Bank presidents, mortgage credit remains avail- federal banking agencies. on a rotating basis. able to consumers.”

• Several offices will be estab- Title XIV — Mortgage Reform • Subtitle B — Minimum Standards lished within the bureau, and Anti-Predatory Lending Act6 for Mortgages. Creditors are including a new Office of Fair Title XIV of the Dodd–Frank Act required to make a good faith Lending and Equal Opportunity, provides new rules for several determination, based on verified an Office of Financial Education, aspects of mortgage lending and des- and documented information, ignates that rule- that the consumer has a reason- making authority able ability to repay the loan will ultimately be according to its terms, as well as The Bureau of Consumer Financial vested in the bu- all applicable taxes, insurance, Protection will be required to institute reau. Regulations and assessments. In addition, a required under borrower can assert a defense to procedures related to consumer the title must be foreclosure against a creditor or complaint responses in coordination prescribed in their assignee when there is a viola- with the other federal banking agencies. final form within tion of the anti-steering or the 18 months of the ability to repay provisions. transfer date and are to take ef- Prepayment penalties on resi- an Office of Service Member Af- fect no later than 12 months after dential mortgages, when not fairs, and an Office of Financial the date of the issuance of the final prohibited altogether, must be Protection for Older Americans. regulations. phased out after three years. A lender who offers a residential • A new Consumer Advisory Some highlights of the Mortgage mortgage with a prepayment Board will advise and consult Reform and Anti-Predatory Lending penalty must also offer a loan with the bureau on various Act include the following: without a prepayment penalty. consumer matters. The bureau For hybrid adjustable-rate mort- will seek experts in consumer • Subtitle A — Residential Mortgage gages (ARMs), notices to con- protection, financial services, Loan Origination Standards. This sumers must include the index community development, fair subtitle defines the term “mort- and an explanation of how the lending and civil rights, and gage originator” and prohibits new interest rate and payment consumer financial products or mortgage originators from are determined; in addition, the services, as well as representa- receiving steering incentives. estimated monthly payment tives of depository institutions Broad discretionary regulatory and other terms are required to that primarily serve under- authority is granted to the Feder- be disclosed prior to six months served communities and repre- al Reserve, and after the transfer before the end of an introductory sentatives of communities that date, to the bureau, to “pro- rate period, or if the rate may re- have been significantly impacted hibit or condition terms, acts, or set within the first six months of by higher-priced mortgage practices relating to residential the loan, at loan consummation. loans. The bureau will also seek mortgage loans that the Board representation of the interests of [the Board of Governors of the • Subtitle C — High-Cost Mort- “covered persons”5 and con- Federal Reserve System, later gages. The act amends HOEPA sumers, without regard to party the bureau] finds to be abusive, and expands its coverage by affiliation. No fewer than six unfair, deceptive, predatory, including home purchase loans members will be appointed on necessary, or proper to ensure and open-end credit plans, by

5 The term ‘‘covered person’’ means either any person who engages in offering or providing a consumer financial product or service or any affiliate of that person if the affiliate acts as a service provider to that person.

6 See “Summary of Mortgage Related Provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act,” July 21, 2010, Mortgage Bankers Association. Available at http://www.mbaa.org/files/ResourceCenter/MIRA/MBASummaryofDoddFrank.pdf. 12 lowering the interest rate and point/fee thresholds, and by Other Pertinent Provisions adding prepayment penalties in the points and fees test. Bal- Although consumer protection and mortgage reform are the focus of this article, there are two additional provisions that were outlined in Title III of the act that loon payments and prepayment were not discussed but that may be of interest to community development practi- penalties for high-cost mortgage tioners and consumer advocates: loans are prohibited, and certain fees are regulated. • The act requires the establishment of an Office of Minority and Women Inclu- sion at all federal banking and certain other federal regulatory agencies by • Subtitle D — Office of Housing January 21, 2011, that will address matters related to diversity in employment Counseling. An Office of Housing and institutional contracts. The offices will coordinate technical assistance to minority-owned and women-owned businesses and seek diversity in the Counseling within HUD will be workforce of the regulators. established to perform a wide range of activities, including • Federal deposit insurance for banks, thrifts, and credit unions was permanent- research, public outreach, and ly increased to $250,000, retroactive to January 1, 2008. policy development related to both homeownership and rental counseling. Up to $45 million is authorized for financial assis- requirements for “subprime delinquent borrowers to pay tance to HUD-approved counsel- mortgages” and appraisal inde- portions of their mortgages, with ing agencies and state housing pendence requirements. Broker $50,000 set as the maximum that finance agencies for efficient and price opinions are prohibited a homeowner can receive. successful counseling programs. from being used as the primary HUD is required to conduct basis to determine the value of An additional $1 billion is allo- a study of the root causes of property that would secure a cated to HUD under the Neigh- foreclosures using empirical data residential mortgage loan, in borhood Stabilization Program and to establish and maintain cases in which the property is for assistance to states and local a database on foreclosure and purchased by a consumer as a governments for the redevelop- defaults that would be collected, principal dwelling. ment of abandoned and fore- aggregated, and made available closed properties. at the census tract level. • Subtitle G — Mortgage Resolution and Modification. HUD is autho- The act authorizes $35 million • Subtitle E — Mortgage Servicing. rized to administer a program to for fiscal years 2011 and 2012 For first lien mortgages on promote the transfer of proper- to establish grants to state and principal dwellings, repayment ties with five or more units that local organizations to provide analysis must include taxes, are at risk of foreclosure. The foreclosure-related legal services insurance payments, and “other scope of the Protecting Tenants to low- and moderate-income periodic payments.” TILA is at Foreclosure Act is expanded homeowners and tenants. amended to require the creditor and extended from 2012 to 2014. to establish escrow accounts for Summary certain first lien mortgages for a • Subtitle H — Miscellaneous Provi- The Dodd–Frank Act is a far-reach- minimum of five years, or until sions. ing overhaul of the U.S. financial sufficient equity is reached (or regulatory system. Because of the other specified events occur). The Emergency Homeowners’ law’s scope, as time goes on con- Relief Fund is to be established sumers will continue to learn more • Subtitle F — Appraisal Activities. within HUD with $1 billion about its specific implications. The act establishes appraisal for grants and loans to certain

13 ShoreBank’s Legacy and Vision Continue:

A Practitioner’s Reflections ... continued from page 7

Throughout the 1980s and early the community development arena. leadership role in providing access to 1990s — a time when the community President Clinton recognized it in his credit for low- and moderate-income development lending infrastructure remarks at the signing ceremony for residents and for people of color. was being built — the financial press the CDFI legislation: “[ShoreBank is] Mark Willis, who in 1989 moved ran numerous articles describing a place that I visited, got to know, and from the public sector to head up how ShoreBank was able to make got to understand. I’ve long admired Chase Bank’s community develop- loans that led to real improvements the way they steered private investment efforts in New York, said that in the community without losing ments into previously underprivi- upon taking up the post at Chase, money. This was an important time leged neighborhoods, to previously one of his first trips was to Chicago in the development of neighborhood- undercapitalized and underutilized to meet with ShoreBank staff in or- lending expertise because the CRA Americans, proving that a bank can der to gain insights that would help was being enforced more rigorously, be a remarkable source of hope.…” him in his work for Chase. and examples of how to make the act work were vital to furthering com- Certainly, ShoreBank’s efforts Obviously, ShoreBank’s leader- munity development and building inspired those of us who developed ship and innovations in commu- a lending infrastructure to support the Neighborhood Housing Services nity development lending — both it. ShoreBank’s success countered (NHS) of Chicago partnership in nationally and internationally — are the claim that there were no lending 1974–75. ShoreBank’s example of far-reaching. This article does not opportunities in these neighborhoods leading neighborhood revitaliza- touch on ShoreBank’s many other and dispelled the myth that there tion from a community-based bank leadership roles and innovative was no good banking business to be was important in the development efforts that encouraged others. One done there. Through its pragmatic of NHS Chicago. Those of us en- area worthy of special mention is example, ShoreBank engendered gaged in this process believed that, ShoreBank’s groundbreaking work institutional changes within banks following ShoreBank’s example, it in lending to owners of small multi- that led to increased lending to these would be possible to create a part- unit residences to fix up and manage neighborhoods. nership among banks, neighborhood these critical but difficult investment residents, and the government to properties. Over the years, Shore- Of course, ShoreBank’s influence address community lending and Bank made loans on 55,000 units of reached far beyond Chicago and investment issues. This helped to rental housing and created hundreds led to one of its most noteworthy develop a sound partnership base of minority entrepreneur–investors. achievements. In 1986, working with led by private resources to serve a In addition, ShoreBank’s legacy Bill and Hillary Clinton in Arkansas, range of low- and moderate-income includes, among other things, hun- ShoreBank staff developed the South- neighborhoods and residents. dreds of community development ern Bank Corp., an institution mod- banks and credit unions, Neighbor- eled after its own work in Chicago. Many other bankers have described Works organizations, not-for-profit This important institution demon- their visits to ShoreBank and their loan funds, and hundreds of CDFIs strated the value of the ShoreBank conversations with its leaders as crit- that are building on the groundwork model. In addition, the relationships ical to their own work. For example, laid by ShoreBank. The bank’s lead- that developed out of this effort led Thomas Fitzgibbon, a banker who ership in many other areas is also to one of ShoreBank’s single greatest would become a leader in commu- unquestioned, for example, socially contributions to community de- nity development banking, came to responsible investing and environ- velopment: its leadership in creat- Chicago in the late 1970s to observe mentally conscious lending, the ing the legislation that established ShoreBank’s activities and use them idea of a double and triple bottom community development financial as a guide for his work in St. Paul/ line, micro-finance, innovative retail institutions (CDFIs) and the Bank Minneapolis (and later in Washing- savings products, and innovation on Enterprise Award (BEA) in 1994. ton, D.C. and Chicago). He described extending services to the unbanked. This achievement has been acknowl- ShoreBank as proof that banking And ShoreBank’s influence is still edged by many people who work in institutions can and should play a being felt today. ShoreBank, like all 14 Management Team Key to Charter

Schools’ Success ... continued from page 5 pioneers, opened new territories as it greater number of students eligible Financing facilities for charter paved new paths to community im- for free or reduced-price lunch than schools is a critical piece to mak- provement and investment for others traditional public schools.10 ing quality educational alternatives to follow. Current practitioners in accessible to all. It is also a key community development investment Few states offer capital dollars to community development strategy, are truly following in the footsteps charter schools for facilities, and as these schools bring educational of those who came before as they typically charter schools cannot opportunities to many low-income continue to expand the territory, access capital funding streams used families, serve as community assets, widen the paths, and build knowl- by district schools. Therefore, they and bring new institutional actors edge and program infrastructure. must pay for rent and debt service into public education. TRF is com- Today’s practitioners are also work- from operating cash flow. Locating mitted to being a reliable source of ing to recognize the current barriers an affordable and suitable facility is capital to charter schools. and myths that impede community one of the most persistent challenges investment and to develop strategies cited by charter schools. School For information, contact Sara Vernon to overcome them. In short, com- districts are frequently unwilling to Sterman at 215-574-5800 or sara. munity development practitioners share facilities, and even when they [email protected]; www. are heeding the lessons learned from do, significant renovations are re- trfund.com. ShoreBank’s almost four decades quired to meet the demands of a 21st of success and inspiration while century educational experience. moving forward with their efforts to build successful communities. 10 National Alliance for Public Charter Schools, “Public Charter School Dashboard 2009,” June 2009, available at http://www.publiccharters.org/files/publications/DataDashboard.pdf. Perhaps an article on ShoreBank that appeared in The Economist sums it up best: “Mainstream banks are now in TRF Lending Case Study partnership with these community- based institutions so as to tap their The Reinvestment Fund (TRF) has provided short- or long-term financing to expertise at lending to businesses in more than half of the charter schools in the School District of Philadelphia (SDP). difficult environments. ShoreBank Among them, TRF worked with Mastery Charter Schools, a network of middle may have failed, but the movement and high schools that has managed the turnaround of three troubled district it once led is stronger than ever.”2 schools into high-performing Mastery Charter Schools. With participation from Wachovia Bank (now part of Wells Fargo), TRF financed the conversion of all Bruce Gottschall was executive director three of these facilities. In 2006, the SDP invited Mastery to convert Shoemaker of Neighborhood Housing Services of Middle School in Philadelphia into a charter school. Poor maintenance and Chicago from 1975 to 2009. He devel- extraordinary wear-and-tear had contributed significantly to the school build- oped the NHS program in 1974 as a ing’s dire condition. An $11 million construction loan from TRF helped Mastery charter member of the NeighborWorks upgrade the HVAC and electric system as well as reconfigure hallways to reflect Network. Mastery’s hub system, which limits spaces where students are out of public view. Shoemaker — once among the most violent schools in the district — is now a model school with its students showing dramatic improvements in discipline and 2 “ShoreBank: Small Enough to Fail: The academic performance. In state testing conducted in 2006, prior to the conver- Sorry End to a Bold Banking Experiment,” sion, only 30.6 percent of Shoemaker’s eighth graders scored proficient or above The Economist, August 26, 2010. in math, and only 42.8 percent scored proficient or above in reading. In 2008, proficiency rates increased to 76 percent in math and 79 percent in reading. Over 80 percent of its students qualify for free or reduced-price lunch. –Sara Vernon Sterman

15 CASCADE PRESORTED STANDARD Federal Reserve Bank of Philadelphia 100 N. 6th Street U.S. POSTAGE PAID Philadelphia, PA 19106-1574 Philadelphia, PA PERMIT No. 529 Address SERVICE Requested

Calendar of Events

Foreclosure Prevention and Assistance March 4, 2011, Federal Reserve Bank of Philadelphia For information, contact Kenyatta Burney at 215-574-6037 or [email protected].

2011 Federal Reserve Community Affairs Research Conference The Changing Landscape of Community Development: Linking Research with Policy and Practice in Low-Income Communities April 28–29, 2011, Arlington, Virginia Crystal Gateway Marriott The Community Affairs officers of the Federal Reserve System are hosting the seventh Federal Reserve Community Affairs Research Conference. The goal of the conference is to highlight new research that informs community development policy and practice. For information, go to http://www.frbsf.org/community/conferences/2011ResearchConference/. SURVEY Community Outreach Survey

Starting January 2011, the Community Affairs Department of the Federal Reserve Bank of Philadelphia will be sending some of our key stakeholders an electronic survey. This survey will ask your opinion about the needs of low- and moderate-income households in Delaware, New Jersey, and Pennsylvania.

The responses will be completely confidential, and we will release survey results only in aggregate form.

If you receive the survey, please complete it within one week of its receipt.

If you have any questions about the survey, please send an e-mail to the Community Affairs Department at [email protected].