Redlining Louisville Project: Early Lessons Learned

INDEX

Community-Based System Dynamics: An Essential Tool in the 5 Community Development Toolbox

Opportunity Knocks: Socially Underwriting the 8 Small-Dollar Mortgage

Communities and Capital: 9 A Foundation for Success SUMMER 2017 AND MORE >> Redlining Louisville Project: Early Lessons Learned

The Office of Redevelopment Strategies of Louisville Metro Government launched Redlining Louisville: The History of Race, Class, and Real Estate. This interactive map allows investigation of some of the ways redlining and the HOLC has affected housing, development, disinvestment and lending patterns in Louisville since the 1930s. HOLC residential security maps provided snapshots of nearly every major American city in the 1930s before urban sprawl moved into greenfield sites (an area of land, usually in the countryside, that has never had buildings on it before). The colors in a typical map represented a four-point classification system devised by the HOLC to indicate where local lenders were encouraged to make loans and where loan requests should be denied. Green (“A Grade”) was an indicator for the very best SOURCE: Redlining Louisville: The History of Race, Class and Real Estate. borrowers, followed by blue (“B Grade”) and By Jeana E. Dunlap and Joshua Poe natural disaster in its history. At the same yellow (“C Grade”). Red (“D Grade”) was time, the federal government was embarking the color reserved for areas of the city where magine if all your hard work and aspira- access to capital would be withheld. tions were crippled by a small handful of on a new mechanism to support homeowner- I ship opportunities for millions of Americans. In describing how neighborhoods were individuals with low expectations for your graded in the 1937 Louisville residential future success, credibility or worth. Redlin- The Home Owners’ Loan Corp. (HOLC) was also attempting to mitigate risk for the property survey, the HOLC, along with local ing practices in America did just that. In the realtors, lenders and other real estate profes- latter months of 1937, the city of Louisville, financial institutions that would help deploy billions of dollars in mortgage capital across sionals, offered the following explanation: Ky., had recently recovered from the Great >> continued on Page 3 Flood of 1937, the single most significant the country.

THE FEDERAL RESERVE BANK of ST. LOUIS | CENTRAL TO AMERICA’S ECONOMY Calendar

Money, Purpose, Success: Bridges is a quarterly publication of the SEPTEMBER 2017 14 Women’s Empowerment Summit Community Development Office of the Federal Regional Food Systems: Driving Reserve Bank of St. Louis. It is intended to 14 Cleveland, Miss. Entrepreneurship and Small- inform bankers, community development Sponsors: Higher Purpose Co., Business Development organizations, representatives of state and local Federal Reserve Bank of St. Louis government agencies and others in the Eighth Webinar Visit: www.higherpurpose.co/ District about current issues and initiatives in Sponsors: Federal Reserve Board community and economic development. The moneypurposesuccess of Governors, Federal Reserve Bank Eighth District includes the state of Arkansas The Financial Diaries: How and parts of Illinois, Indiana, Kentucky, of St. Louis 24 American Families Cope in Mississippi, Missouri and Tennessee. Visit: https://bsr.stlouisfed.org/ connectingcommunities/#63/ a World of Uncertainty St. Louis, Mo. COMMUNITY DEVELOPMENT STRUCTURE: regional-food-systems-driving- entrepreneurship-and-small- Sponsors: Federal Reserve Bank Policy and Analysis Team business-development of St. Louis, Washington University • Daniel Davis, Community Development in St. Louis Officer, Bridges Managing Editor Delta Communities – The 21 Visit: http://www.cvent.com/d/ • Michael Eggleston, Senior Community Transformative Potential of Development Specialist – Community z5qbbf Affordable Housing Development Development Finance • Lisa Locke, Senior Community Development on Communities and Families in Specialist – Small Business the Delta NOVEMBER 2017 • Jeanne Marra, Senior Community Clarksdale, Miss. SAVE THE DATE! Development Specialist – Financial Access, Sponsor: Federal Reserve Bank 15 Capability and Empowerment Delta Communities Convening • Drew Pack, Senior Community Development of St. Louis Clarksdale, Miss. Visit: http://www.cvent.com/d/ Specialist – Workforce Development Sponsor: Federal Reserve Bank ktqn76 • Faith Weekly, Senior Community of St. Louis Development Specialist – Neighborhoods and Banking and the Economy: Housing 27-28 Investment Connection A Forum for Minority Bankers 16 CRA Team Memphis, Tenn. Kansas City, Mo. • Yvonne Sparks, Assistant Vice President, Sponsor: Federal Reserve Bank Community Affairs Officer, Bridges Executive Sponsors: Federal Reserve Board of of St. Louis Editor Governors, Federal Reserve banks Contact: Teresa Cheeks Wilson at • Teresa Cheeks Wilson, Senior Community of Atlanta, Kansas City, Minneapo- Development Specialist – CRA [email protected] lis, Philadelphia, Richmond and • Kathy Moore Cowan, Senior Community Development Specialist – CRA St. Louis Visit: www.kansascityfed.org/ DECEMBER 2017 Center for Household Financial Stability events/2017/forum-minority- • Ray Boshara, Director and Assistant Vice 7 SAVE THE DATE! President bankers-9-27-17 Delta Communities Convening • William R. Emmons, Lead Economist and Clarksdale, Miss. Assistant Vice President OCTOBER 2017 • Lowell R. Ricketts, Senior Analyst Sponsor: Federal Reserve Bank of St. Louis Support Team 4-6 Investing in America’s Workforce: • Maureen Slaten, Senior Editor, Bridges Editor Improving Outcomes for Workers • Jim Swimm, Administrative Assistant and Employers For contact information, please visit www.stlouisfed.org/ Capstone Conference community-development/staff-directory. Austin, Texas Sponsors: Federal Reserve System, The views expressed in Bridges are not necessarily those of the Federal Reserve Bank of St. Louis or the Federal Rutgers University, Ray Marshall Reserve System. Material herein may be reprinted or Center for the Study of Human abstracted as long as Bridges is credited. Please provide the editor with a copy of any reprinted articles. Resources, W.E. Upjohn Institute Free subscriptions are available by calling 314-444- for Employment Research 8761, emailing [email protected] or Visit: www.investinwork.org visiting www.stlouisfed.org/subscriptionspage. Redlining Louisville Project >> continued from Page 1

“In establishing the grade of an area, such HOLC Neighborhood Descriptions

factors as these are considered—Intensity of A First Grade B Second Grade C Third Grade D Fourth Grade the sale and rental demand; percentage of home ownership; age and type of buildings; economic stability of area; social status of the population; sufficiency of public utilities; accessibility of schools, churches and business centers; transportation methods; topography of the area; and the restrictions set up to protect the neighborhoods. The price level of the homes is not the guiding factor.” The process of considering race and class in real estate appraisal did not begin or end with the HOLC. In the 1930s, it was a commonly accepted notion in the real estate industry that the socioeconomic characteristics of a neighborhood determined the value of housing to a much greater degree than physical characteristics. These notions were widely upheld by the Federal Housing Administration’s (FHA) underwriting manuals far into the 1970s. Average Residential Property Values by Census Tract The FHA’s underwriting system used such > $295k to $509k > $164k to $295k > $56k to $164k $0 to $56k standards as “protection from adverse influ- ences and inharmonious racial groups.” The FHA manual warned that “older properties in ^ The site features an a neighborhood have a tendency to accelerate interactive slider that the rate of transition to lower class occu- allows the user to overlay pancy” and suggested that apartment owners the HOLC map with the comparative data. should look to the suburbs, preferably a site “set in what amounts to a privately owned and privately controlled park area.” The “restrictions set up to protect the neighborhoods” referred to deed restrictions prohibiting the sale of property to people of color regardless of their income, accumulated wealth or ability to repay their loan. These restrictions were mentioned in the assess- ments more often than physical characteristics (e.g., topography or quality of structures). For instance, several affluent neighborhoods were described as the best areas of the city SOURCE: Redlining Lousiville: The History of Race, Class and Real Estate. in large part because they were also “one of the highest restricted areas.” Predominantly >> continued on Page 4

Bridges Summer 2017 | 3 Redlining Louisville Project opportunity. When thriving minority busi- to develop innovative strategies and new >> continued from Page 3 nesses and successful entrepreneurs on Old resources that provide parity, possibilities and white residential areas were often described as Walnut Street in Louisville’s historic Russell wealth-building opportunities for our entire “well restricted” and having “restrictions well neighborhood were forced to shut down by community. observed.” The HOLC residential security urban renewal in the late 1960s, the poten- We invite you to visit our interactive story- maps were made available to private lenders tial for intergenerational wealth building map, Redlining Louisville: The History of and realtors but otherwise were kept confi- and progressive role modeling was adversely Race, Class and Real Estate, where you can dential. Some of these maps, including those impacted. Those of a certain generation can experience the impacts of historical redlining for Washington, D.C., are still missing from only imagine what west Louisville might look practices on poverty, segregation, property the national archives. like today if those displaced business own- abandonment and other neighborhood The first and perhaps most fundamen- ers and their families had been able to get characteristics. tal lesson we’ve learned is that redlining is the financing needed to set up in other local neighborhoods. Jeana Dunlap is the director of Redevelopment Strat- not fiction. In fact, the practice began as egies at Louisville-Jefferson County Metro Govern- Our last lesson is that redlining can be a a suite of federal policies that set the stage ment. Joshua Poe is an urban planner and indepen- for lending practices that still impact urban state of mind. When consumers are unin- dent researcher using GIS and planning principles communities today. Redlining was reality; formed about their options and investors to facilitate social justice and revitalization. He are uninformed about their opportunities, developed the interactive map that was the impetus the impacts of the policy are still felt today. for the Redlining Louisville project. For many of the families that survived World market failures can be a reality. It is impor- War II and the civil rights era, redlining was tant to examine the notion of implicit bias and to abandon “redline thinking.” Each of Harvard University’s Map of the us should consider what we are willing to Month: Redlining Louisville wager, whom we are willing to wager on, and Redlining was reality; the “Redlining Louisville: The History of why that is so. These questions enable us to Race, Class and Real Estate” is the first impacts of the policy are open our minds to the possibility of making selection by the Ash Center for Demo- bold, courageous, game-changing decisions still felt today. cratic Governance and Innovation at on how we invest our resources and where we Harvard’s John F. Kennedy School of Gov- spend our time. Doing otherwise is to impose ernment in its effort to recognize “best- a self-fulfilling prophesy on many members of in-class data visualizations created by all difficult to prove. Even if the practice could our community. units of government as well as nonprofit be substantiated, the likelihood of obtaining Let’s acknowledge that systemic organizations.” The Map of the Month a just outcome or holding the offending party devaluation and disinvestment in urban- contest was introduced in June; Louisville accountable was fairly low. multicultural communities was based on was selected out of several dozen sub- Another lesson learned is that redlining race and class. Let’s recognize that both missions. A selection committee scored policies are contagious. What started out as a public and private entities are in a position and ranked the entries based on criteria mortgage lending tool eventually led to risk to help facilitate a concentrated effort toward such as the ability to make policy impact management and underwriting standards reinvestment in these areas. Let’s understand with a map, its public value and use as an for everything from property insurance to that strategic, mission-based, equitable invest- education tool. Redlining Louisville was pizza delivery. Stories and experiences shared ments can become a remedy for violence and selected for its “outstanding use of data by residents and stakeholders have under- a catalyst for hope in resilient neighborhoods. combined from multiple sources, includ- scored the need to explore systematic barriers The Redlining Louisville project has ing historical data, its creativity and for wealth creation in underserved areas. opened up honest dialogue on our com- effective communication to the public Financial stability for millions of Americans munity’s collective history. Over the next and the policy implications it is likely to is often predicated on the ability to open a several months, Louisville Metro will join have moving forward.” For more informa- bank account, find a neighborhood banking forces with numerous community partners tion, please visit http://datasmart.ash. branch or doctor’s office, or insure a home. to continue the dialogue on the impact of harvard.edu/news/article/map-of-the- We’ve also learned that we can’t ignore past and present redlining practices. We month-redlining-louisville-1062. or undo the damage from lost time and will engage the community in an effort

4 | Bridges stlouisfed.org FRESH PERSPECTIVES IN COMMUNITY DEVELOPMENT

Community-Based System Dynamics: An Essential Tool in the Community Development Toolbox

By Ellen O’Neill mobilization of communities to advocate models more explicit and test assumptions. for, and implement changes based on, Often, the process of developing the model he world of community development is 1 Toften complex, requiring savvy profes- these insights. leads to counterintuitive insights about the sionals able to navigate a complicated web A mental model of a system, it is worth structure and behavior of a system, which of interdependent issues such as housing, noting, is a cognitive representation of leads to solutions that challenge conven- generational poverty, financial capability, the real system. We use mental models to tional wisdom and approaches to community social and economic mobility, employment navigate the world from the time we wake development. and education. As community development up to the time we fall asleep. Frequently, we Recently, the Federal Reserve Bank of professionals, we trade in systems—systems rely on mental models to solve a wide variety St. Louis convened six CBSD sessions— of complex social problems hosting many of problems and to make sense of the world two each in St. Louis, Evansville, Ind., different actors, policies, programs, assets around us. Mental models of a system can be and Memphis, Tenn.—to discuss financial and resources. Donella Meadows, a scholar very useful. For example, an accumulation in the field of system dynamics, defines a of dirty dishes in the sink is accompanied by system as a set of things—people, cells, a mental model of the system that produced Perhaps it is time to apply an excess of dirty dishes. This mental model molecules, etc.—interconnected in such a a new tool to community way that they produce their own pattern of could include the presumption that someone behavior over time. The communities we else will do the dishes, a supposed scarcity of development that allows dish soap or a perceived lack of time to clean serve are not facing challenges accompanied us to challenge our by simple solutions. We operate in complex the dishes. The factors that comprise our systems, no matter which community we mental models dictate how we approach solv- mental models, help us ing the problem, regardless of the accuracy of call ours. This is whycommunity-b ased uncover sources of system system dynamics (CBSD) is a critical tool our model. in our professional community development There is nothing wrong with relying on behavior and empower our mental models. In fact, it would be impos- toolbox. communities to advocate CBSD brings stakeholders together in a sible to successfully navigate an entire day calculated, structured facilitation designed without relying on our own personal models. for change in the process. to improve our understanding of systems at However, there are times when flawed mental play in our communities. It is a participa- models can contribute to the problems we are tory approach that includes communities in experiencing. In these situations, specifically the process of understanding and changing pertaining to community development, we decision-making and well-being among systems from the endogenous perspective of are making decisions relying on the wrong set underserved populations. Each session was system dynamics. Informal maps and for- of assumptions, perceptions and inferences, approximately three hours long, culminating mal, simulated models are used to uncover which are, in turn, not solving problems and in the development of a model. These sessions and understand sources of behavior with the often making matters worse. allowed stakeholders to challenge and adjust goal of solving problems by improving the The focus of CBSD is on understanding their mental models of financialdecision- mental models individuals possess. CBSD is and solving problems by challenging mental making and well-being, identify unintended about engaging communities, helping them models held by individual participants in the consequences of the system and uncover create models leading to system insights and session. Informal maps and formal simulation connections between previously unconsidered solutions, stakeholder empowerment, and models provide a means to make our mental >> continued on Page 6

Bridges Summer 2017 | 5 About the Author Community-Based System Dynamics >> continued from Page 5 Ellen O’Neill is a project manager for the Center for determinants of financial health. It challenged participants to ven- Social Development at Washington University in ture outside of a traditional cause-and-effect, linear conceptualiza- St. Louis. Previously, she served as an intern in tion of the world and, as a result, to adapt their mental models the Community Development department at the accordingly. Federal Reserve Bank of St. Louis, where she was We all intuitively know how to navigate systems; we function involved in many aspects of the field, including as part of an infinite number of systems in our daily lives. The devising and conducting a system dynamics study mental models we have built as community development profes- of underserved and unbanked communities in St. Louis, sionals regarding housing, generational poverty, financial capa- Memphis, Tenn., and Evansville, Ind. She also served as a practi- bility, social and economic mobility, employment and education cum student for Prosperity Connection, focusing on issues of frequently dictate our attempts to solve these challenges. Perhaps financial health andwell-b eing for underserved or marginalized it is time to apply a new tool to community development that populations. O’Neill began her career in social work at a non- allows us to challenge our mental models, help us uncover sources profit center in Burlington, N.C., where she served as a domestic of system behavior and empower our communities to advocate violence crisis counselor. Struck by the larger systemic problems for change in the process. By engaging in rigorous contempla- facing her clients, she decided to leave direct case manage- tion of the systems and mental models driving our communities, ment to pursue a master’s in social work, focusing on economic we can begin to develop sustainable, effective social policies and and social development, policy and system dynamics. O’Neill interventions. received her master’s degree in social work from the Brown ENDNOTES School of Social Work at Washington University in St. Louis. She holds a bachelor’s degree from Elon University in North Carolina. 1 Hovmand, Peter: Community Based System Dynamics, Springer, 2014.

Thinking Big—And Thinking Small

By Ray Boshara have detracted from the field’s underlying Underlying Issues Are Shrinking and more fundamental challenge of achiev- Both Income and Wealth Shares of here’s a lot of big and bold thinking American Workers going on these days among my col- ing financial well-being in the longer term. T The challenge, Ida memorably observed, is Then in late May, my colleagues at the leagues at the Federal Reserve Bank of St. Louis Fed’s Center for Household Finan- St. Louis and the Aspen Institute Financial not unlike responding to extreme weather (hurricanes, tornadoes, floods, etc.) at the cial Stability, William Emmons and Lowell Security Program. Ricketts, publicly argued that “structural” At the Asset Funders Network confer- expense of tackling climate change, which of course contributes, in part, to extreme responses—such as permanent desegregation ence in May, Aspen’s Financial Security of housing and schools, affirmative action in Program Executive Director Ida Rademacher weather. She noted, “We cannot resolve either the short- or long-term financial challenges education and employment, and rigorous and observed that the field’swell-i ntentioned targeted financial education and consumer and commendable efforts to reduce hard- families struggle with today until we address the underlying issues that are shrinking both protection—were needed to address the large ship and make it “less expensive to be poor” and persistent racial wealth gap in the U.S., have unintentionally led to a “transactional the income and wealth shares of Ameri- can workers.” That’s correct, and of course itself heavily influenced by group norms that rather than a transformational mindset may reflect structural and systemic barriers about the goals of this work”; that the field’s requires, inter alia, a broader distribution of productivity gains, larger and more targeted accumulated over centuries. This was bold good solutions were “palliative rather than because Bill (our Center’s lead economist) curative”; and that its necessary and laud- investments in human capital development and stronger mediating institutions—all bold and Lowell (our Center’s lead analyst) sharply able efforts to respond to adverse financial challenged the predominant but debatable volatility and shocks in the shorter term and ambitious goals themselves.

6 | Bridges stlouisfed.org “post-racial” assumption among econo- rates of infectious disease; tamed the drug A Small or Modest Innovation Can Become mists—and certainly among Fed econo- industry; created a regulatory regime for Wall the Basis for State and National Policy mists—that blacks and whites face similar Street and the banking sector that prevented So, yes, think big—and think small. choices and opportunity structures, implying any need for massive taxpayer bailouts, And by small I don’t mean a small idea, but that if blacks simply chose as well as whites including the creation of the Federal Reserve a big idea that starts as a small or modest have they would have more wealth. Well, the System; stopped predatory lending; created innovation—a regulatory, product or pro- racial wealth gap is too large and too persis- credit unions; enacted the Pure Food and gram tweak (e.g., changing a savings default tent for freedom of choice and equality of Drug Act and the consumer safety move- setting from opt-in to opt-out), or a policy opportunity to be plausible; more plausible is ment; instituted the federal, progressive innovation (e.g., starting a 529 college savings that each group has distinct shared experi- income tax system; forestalled the growth account automatically at birth)—that could ences that in turn shape their opportunities of terrorism and rationalized immigration; become the basis for state and national policy. to build wealth. So we have to reshape those engineered a massive conversion to cleaner, Indeed, states have always been laboratories structures that shape opportunity—also bold cheaper energy; restored public trust in of democracy, and may even be more so in and ambitious goals. government; ended child labor; gave women the current environment. So let’s keep pursu- Thankfully, we’ve faced daunting chal- the right to vote; universalized public high ing those new, testable and scalable ideas that lenges before and yet managed to achieve school education; instilled an ethic of thrift, increase income and wealth shares for work- “bold and ambitious” ers on the wrong side reforms: in America’s of globalization. And Progressive Era, that The racial wealth gap is too large and too persistent let’s keep thinking roughly 30-year about the modest period beginning for freedom of choice and equality of opportunity to be but scalable innova- with the depression plausible; more plausible is that each group has distinct tions that reshape of the early 1890s. economic opportu- As Phil Longman shared experiences that in turn shape their opportunities nity for struggling and I describe in to build wealth. Americans. our 2009 book, The Of course, it’s Next Progressive Era, hard to know when the late 19th century the stars will align was an era of rapid technological change; conservation and public service; and left no to make it possible for modest innovations to stunning advances in science; rising funda- legacy of public debt. Not bad, huh? become big, bold national policies. But being mentalism; gaping inequality; double-digit Of course, the Progressives failed on many ready for that moment is key for, as Mark unemployment; networks of violent nonstate fronts as well. But we can be inspired by and Twain is said to have observed, history may actors; a health care system in crisis; a new era learn from them, especially their commit- not repeat itself, but it often rhymes. of infectious disease; massive consolidation ment to relentless experimentation. This Ray Boshara is a senior adviser and the director among corporations; new mediums spread- actually might be the most important lesson of the Center for Household Financial Security at ing violent and obscene images; widespread, for today’s big thinkers. Progressives certainly the Federal Reserve Bank of St. Louis, and a senior nefarious lending practices and rising debt had big, bold and ambitious ideas, but their fellow in the Financial Security Program at The levels among the middle class; and develop- national reforms were more often achieved by Aspen Institute. ment of a massive, cheap energy source along first trying and scaling up smaller innovations with mounting concerns about the environ- at the local and state levels. Among the most Reprinted from The Aspen Institute: ment. Sound familiar? prominent experiments was the “Wisconsin Boshara, R. (2017, July 6). Thinking Big— Now let me share with you some of what Idea,” which pioneered policies for worker’s And Thinking Small [Blog post]. Retrieved Progressives achieved and the enduring insti- compensation, progressive income taxes, the from www.aspeninstitute.org/blog-posts/ tutions they created. They seriously reduced direct election of senators, protections against thinking-big-small. the role of money in politics; reformed the police brutality and prohibiting pollution, to health care system; dramatically reduced name a few.

Bridges Summer 2017 | 7 Opportunity Knocks: Socially Underwriting the Small-Dollar Mortgage

By Roshun Austin and Carla Jarrell also been exacerbated by the global financial Safe Loans program generated more than hen Pinnacle Bank entered the crisis and resulting new regulation, some of $1.2 million in total loans and received WMemphis market through their which had the consequence of making it less FHA certification. Unfortunately, this acquisition of Magna Bank, the commu- likely that financial institutions would origi- program was discontinued due to the global nity development team began to meet with nate these types of mortgages. In a laudable financial crisis. However, The Works gained community leaders. They kept hearing one effort to eliminate predatory lending, fees valuable experience in the implementation thing over and over again: “We need a source and closing costs are included in the calcula- and administration of an effective mortgage for small-dollar mortgages. We have a lot of tion of the consumer’s effective interest rate. loan program. homes that are available for sale for less than Because many of these costs are fixed (legal, As a pilot program, Pinnacle Financial $50,000, but we can’t find a lender that will appraisal, etc.), they are a larger percent of Partners, the second-largest Tennessee-based make these mortgages.” The Pinnacle team the smaller mortgage amount. Therefore, bank, provided $500,000 in initial fund- immediately started to focus on how to get small-dollar loans may give the false impres- ing for the Home Loan Opportunity Fund. that money into the market. They worked sion of being predatory. However, the intention is to expand the with two nonprofits in the Memphis area to program with additional funding based on begin small-dollar mortgage pools. This is its success and market demand. Working the story of one of those partnerships. directly with individuals, The Works will Many people, despite provide credit counseling and assist in the Home Loan Opportunity Fund having acceptable credit application process. The organization will Pinnacle Financial Partners and The also continue to be involved with mortgage Works Inc. have formed a unique partner- and the ability to repay, find clients as an ongoing resource. Pinnacle, in ship to provide small-dollar home loans to it difficult to obtainfirst- concert with The Works, will provide servic- ing for the loans that are originated. low- and moderate-income (LMI) individu- mortgage loans at all, let als. Many people, despite having accept- Structure able credit and the ability to repay, find it alone at reasonable rates. difficult to obtainfirst-m ortgage loans at Pinnacle’s initial investment financed all, let alone at reasonable rates. Given this the mortgage loan pool through Tennessee’s reality, there is a tremendous need for a new Community Investment Tax Credit program. solution in Memphis. Solution The investment was priced at prime minus The current lack of availability of these One solution is the partnership between 4 percent, which resulted in the investment loans is the result of a number of factors. The Works and Pinnacle. The Works is a having an interest rate cost of 0.25 percent to Given their small-dollar amount, these long-standing not-for-profit organization The Works based on current rates. The invest- mortgages offer financial institutions little with deep roots in the community and ment has an initial term of seven years with return for the same level of underwriting specific experience in mortgage loan origi- automatic one-year extensions until other- effort and administration as larger loans nation, credit counseling and loan servic- wise notified by Pinnacle. Once notice has that provide a greater return. These loans ing. The organization became a nonprofit been provided, a repayment structure will be are often more difficult to underwrite than mortgage brokerage in early 2006 through agreed upon and the loan set on an amortiz- a typical larger-dollar transaction in more their Safe Loans program. In February 2007, ing term note. affluent communities with higher median The Works was licensed as the first nonprofit As payments are received on the individ- incomes. The challenges for financial institu- mortgage brokerage in both Tennessee and ual mortgage loans, they will be applied to tions in originating these small loans have Mississippi. In one year of operation, the any interest due on the Pinnacle investment

8 | Bridges stlouisfed.org CDAC SPOTLIGHT with the remainder contributed to the loan loss reserve fund. The reserve fund will be owned by The Works and Communities and Capital: pledged as collateral to the investment. The reserve fund was prefunded and A Foundation for Success maintained at a level of 10 percent of the outstanding mortgage loan pool. By Deborah Temple 45 percent of the persistent poverty counties These funds are available to cover any Communities Unlimited—Our Story in the United States, this is a bold mission actual losses incurred on the individual ver the last three years, Communi- that drives CU’s work every day. mortgages. Excess reserve funds are ties Unlimited (CU) has forged new Communities Unlimited—Our CDFI available to The Works to increase the O approaches to community economic devel- It is easy to see differences between an program, cover operating costs or apply opment that are built on the passion and organization working with water and waste- to other programs. decades of experience within Community water systems and another working with Results Resource Group—a nonprofit that helped small businesses. Instead, our leaders saw The Home Loan Opportunity Fund rural communities solve water and wastewa- opportunities. One of the biggest surprises was officially launched in January 2017. ter problems—and alt.Consulting—a non- of the merger was the similar history and Since the initial meeting with potential profit that providedon-s ite training and man- approach of the two CDFIs. Both organiza- borrowers in January, 58 borrowers agement assistance to small businesses. These tions got their start by offeringon-s ite techni- have applied, and the approval rate is two nonprofits and community development cal assistance and training, and both decided 24 percent (14 loans). Applicant pre- financial institutions (CDFIs) merged in to begin making loans when their target approval loan amounts ranged from October 2014 to create an integrated service market could not access the needed capital $35,000 to $50,000, with the majority delivery model for rural communities in the to ensure safe drinking water or to grow receiving $50,000. The first two loans South to address infrastructure needs, drive small businesses. Both organizations worked closed in late May 2017, less than six economic development through entrepre- to solve concrete problems, both believed in months after the program was initi- neurship, and support community leadership expanding resources for at-risk communities ated. The Works will maintain detailed teams implementing development plans. and both were passionate about their mission. information on the applicants and CU’s mission is to move communities Growing the newly combined CDFI is one loan performance to build a case for in areas of persistent poverty toward sus- strategy for deepening CU’s impact in com- small-dollar mortgages and to encour- tainable prosperity. In a seven-state target munities, in part because of our collaboration age CRA-qualified investment from market from Texas to Tennessee that includes >> continued on Page 10 other financial institutions into similar loan pools, expanding opportunity for Persistent Poverty Counties LMI borrowers.

Roshun Austin is the president and CEO of The Works Inc. Carla Jarrell is the community development officer at Pinnacle Financial Partners.

According to the latest U.S. Census Bureau data, CU’s target market contains 45 percent of the persistent poverty counties in the nation. SOURCE: USDA, Economic Research Service; data from U.S. Census Bureau

Bridges Summer 2017 | 9 Communities and Capital • $32,000 to a multistakeholder coopera- • Entrepreneurship—Helping small busi- >> continued from Page 9 tive in the Arkansas Delta to expand a nesses grow, sustain and create jobs with many lenders across our target market biodiesel business in a very rural • Environment—Clean and safe drinking and the expertise they share. Bankers com- farming town. water and sanitary wastewater disposal for prise the majority of our commercial loan Communities Unlimited—Our Work communities committee and they provide invaluable guid- At the heart of our work is the vision of Tools and services (e.g., loans through our ance and feedback to help us manage risk vibrant, thriving communities and neighbor- CDFI), together with technical assistance while making the difficult loans—from the hoods in which all individuals can sustain to communities and businesses, training startup loan to an entrepreneur attempting to their livelihoods, enjoy a good quality of life and GIS mapping are integrated to provide lift a family out of poverty to the emergency and build wealth. CU supports this work deeply impactful assistance to enable sustain- loan needed by a rural town to continue to through an integrated service delivery model able growth. provide safe drinking water to its citizens that targets three mission areas: For more information about our work, after a flood washed out the waterlines. please visit www.communitiesu.org. The unique value that CU provides is our • Community Sustainability—Strategic busi- deep connection to the borrower through ness and community development strategies technical assistance. Our team works with the business and/or community to clearly understand their financing need, cash flow, pricing and accounting to ensure they can repay their loan through profits. These relationships allow CU to take more risk and fill gaps by making multiple loans that grow with the client over time and by leveraging larger loans through our network of lending partners in the region. Using this model, CU works closely with existing and new partners serving our target market. These partnerships support our CDFI Among other projects, Communities Unlimited has provided loans to build infrastructure and to expand a biodiesel business in a rural farming town. work and include program-related investments (PRIs) from foundations like the Mary Reynolds Babcock Foundation, the Winthrop CDAC Member Spotlight Rockefeller Foundation and the Arkansas Community Foundation, which made its first Deborah Temple is the director of entrepreneurship at Communities Unlimited PRI to benefit CU’s loan fund. These invest- (CU), leading the entrepreneurship team and managing its business lend- ments work in concert with loans from ing. She has extensive experience in business and banking and has used financial institutions like Bank of Amer- her background in small-business development and management to build ica, Wells Fargo and Arvest. With these strong capital programs for small-business lending. funds, CU has made loans ranging from Over the past 13 years, Temple has been an integral part of the growth $2,500 to $450,000. Examples include: of the entrepreneurship work of CU, including the development of business • $45,000 to a small heating and air condi- lending models and the expansion into regional economic development initiatives tioning business that increased sales, lead- that work with entire communities, creating a framework for supporting many small- ing to three new jobs in a rural town; business owners. She is a member of the Community Development Advisory Council • $152,000 to build infrastructure to con- (CDAC) for the Federal Reserve Bank of St. Louis. nect 11 rural households with problem CDAC members are experts in community and economic development and financial education. They wells to the city of Fayetteville’s water complement the information developed through outreach by the Eighth District’s Community Develop- system; and ment staff and suggest ways that the St. Louis Fed might support local efforts. A list of current members is available at www.stlouisfed.org/community-development/community-development-advisory-council.

10 | Bridges stlouisfed.org CRA: AN EXAMINER’S PERSPECTIVE

Reviewing Community Development Activities for the Four Ws

This article is part of a series on CRA best practices from an examiner’s perspective. Although this intermediaries) and website addresses that are column focuses on CRA best practices for financial institutions, the content may provide insights to relied on for information. community development organizations working with financial institutions to meet credit and community development needs. As a disclaimer, this series is only meant to represent best practices; financial Douglas Yarwood is a senior examiner at the Fed- eral Reserve Bank of St. Louis. institutions should consider the information presented in context of the requirements or guidance of their primary regulator and the business needs of their financial institution. ENDNOTES

1 CRA Q&A disaster areas§___ .12(g)(4)(ii) By Douglas Yarwood in communities affected by high levels of 2 CRA Q&A distressed and underserved areas §___.12(g)(4)(iii) ust as in other areas of examination, peri- foreclosures and designated as target areas Jodic review and monitoring of CRA com- in plans approved by the U.S. Department munity development activities makes sense. It of Housing and Urban Development allows an institution to gauge its current level The review of “when” is important to HAVE YOU of performance and adjust as necessary to ensure the activity benefits the assessmentHAV E YOU erd achieve its CRA goals at the next evaluation. area during the evaluation period. Clear Heard identification of “when” helps examiners ? Successful community development programs include periodic reviews and monitor- determine the responsiveness of activities in 2017 Prosperity ing of activities to ensure they address what consideration of related performance context Now Scorecard I term the Four Ws (Who, Where, When regarding significant needs of the assessment Available and Why). area. Additionally, time limits on disaster Released annu- Proactive processes begin with clearly areas1 and criteria for distressed and under- ally, the Prosperity identifying the “who” and “where” of the served nonmetropolitan middle-income Now Scorecard activity and how these factors were consid- areas2 should be considered to ensure new (formerly the CFED Assets & Opportunity ered according to the five CRA community activities will still qualify. Similarly, review of Scorecard) equips advocates, policymak- development purposes: “when” helps these institutions identify the ers, service providers and others with • Affordable housing for low- and moderate- impact of maturing qualified investments in data on how residents in states, coun- income (LMI) individuals consideration of their CRA investment goals. ties and cities across the nation are Lastly, the monitoring process should faring when it comes to their financial • Community services targeted to LMI ensure documentation clearly captures health, as well as on state-level poli- individuals “why” the activity was considered respon- cies that could be enacted to put all • Activities that promote economic develop- sive, innovative and/or flexible in meeting U.S. households on stronger financial ment by financing small businesses and the specified needs of the assessment area footing. The measures—many of which small farms at the time of occurrence. By performing are disaggregated by race to help close • Activities that revitalize or stabilize LMI periodic monitoring of activities for “why,” the racial wealth divide—span five geographies, distressed or underserved institutions are more successful in capturing distinct issue areas: Financial Assets nonmetropolitan middle-income geogra- essential supportive details of the activity that & Income, Businesses & Jobs, Housing phies, or designated disaster areas were not captured at the time of occurrence. & Homeownership, Health Care, and • Loans, investments and services that sup- The periodic monitoring of documentation Education. For more information, visit port, enable or facilitate Neighborhood alleviates the frustrations associated with http://scorecard.prosperitynow.org. Stabilization Program-eligible activities changes in key players (e.g., loan officers or

Bridges Summer 2017 | 11 P.O. Box 442 St. Louis, MO 63166

SPANNING Resources the Region The region served by the Federal Reserve Bank of St. Louis Regional Research encompasses all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. The St. Louis Fed’s Economic Research department has created a webpage that hosts all of the Bank’s regional research reports. It highlights notable data releases and includes blog Harvesting Opportunity: The Power of Regional Food posts and other regional reports. Regular updates include the System Investments to Transform Communities Housing Market Conditions report, The Quarterly Debt Moni- tor, The Beige Book, Agricultural Finance Monitor, The Regional The Board of Governors of the Federal Economist industry profile and The Regional Economist District Reserve System, the Federal Reserve Bank overview. Visit https://research.stlouisfed.org/publications/ of St. Louis and the U.S. Department of regional-research. Agriculture have released this publication, which focuses on regional food systems as State Workforce and Economic Development: a means for enhancing economic oppor- Opportunities for Collaboration tunity. It explores new insights into the The Urban Institute released a report and fact sheet on states’ potential for regional food systems to pro- efforts to integrate workforce development programs with mote economic growth for both rural and economic development interests. Several case studies are sum- urban communities through the creation marized as best practices. The fact sheet is available at www. of new or the enhancement of existing jobs and businesses. It urban.org/research/publication/state-workforce-and-economic- also highlights how appropriately targeted policies and support development-collaboration; the full report can be downloaded can harness regional food system investments to advance the at www.urban.org/sites/default/files/publication/86131/2001004- economic and financial security of low- and moderate-income state-workforce-and-economic-development-opportunities-for- households and communities. collaboration_1.pdf. Harvesting Opportunity can be viewed separately by chapter First-Time Homebuyer Market Report or downloaded in its entirety on the book’s webpage— Using a combination of government and mortgage industry www.stlouisfed.org/harvesting-opportunity. data, this report provides estimates of the size of the first-time homebuyer market going back to 1994 (20.1 million). The data provides a historical perspective on the first-time homebuyer market as well as important recent trends. Access the report at https://miblog.genworth.com/wp-content/uploads/2017/06/ Genworth-FTHB-Market-Repor t- 6.17.pdf.