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Financing Low Income Communities

Financing Low Income Communities

Julia Sass Rubin Editor
Copyright Date: 2007
Published by: Russell Sage Foundation
Pages: 344
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  • Book Info
    Financing Low Income Communities
    Book Description:

    Access to capital and financial services is crucial for healthy communities. However, many impoverished individuals and neighborhoods are routinely ignored by mainstream financial institutions. This neglect led to the creation of community development financial institutions (CDFIs), which provide low-income communities with financial services and act as a conduit to conventional financial organizations and capital markets. Edited by Julia Sass Rubin, Financing Low-Income Communities brings together leading experts in the field to assess what we know about the challenges of bringing financial services and capital to poor communities, map out future lines of research, and propose policy reforms to make these efforts more effective. The contributors to Financing Low-Income Communities distill research on key topics related to community development finance. Daniel Schneider and Peter Tufano examine the obstacles that make saving and asset accumulation difficult for low-income households—such as the fact that tens of millions of low-income and minority adults don’t have a bank account—and consider solutions, like making it easier for low-wage workers to enroll in 401(K) plans. Jeanne Hogarth, Jane Kolodinksy, and Marianne Hilgert review evidence showing that community-based financial education programs can be effective in changing families’ saving and budgeting patterns. Lisa Servon proposes strategies for addressing the challenges facing the microenterprise field in the United States. Julia Sass Rubin discusses ways community loan and venture capital funds have adapted in response to the decreased availability of funding, and considers potential sources of new capital, such as state governments and public pension funds. Marva Williams explores the evolution and recent performance of community development banks and credit unions. Kathleen Engel and Patricia McCoy document the proliferation of predatory lenders, who market loans at onerous interest rates to financially vulnerable families and the devastating effects of such lending on communities—from increased crime to falling home values and lower tax revenues. Rachel Bratt reviews the policies and programs used to make rental and owned housing financially accessible. Rob Hollister proposes a framework for evaluating the contributions of community development financial institutions. Despite the many accomplishments of CDFIs over the last four decades, changing political and economic conditions make it imperative that they adapt in order to survive. Financing Low-Income Communities charts out new directions for public and private organizations which aim to end the financial exclusion of marginalized neighborhoods.

    eISBN: 978-1-61044-481-1
    Subjects: Finance, Sociology

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
    (pp. ix-x)
    (pp. xi-xii)
  5. CHAPTER ONE Introduction
    (pp. 1-10)
    Julia Sass Rubin

    Access to affordable capital and basic financial services is a critical component of healthy communities. Without them, individuals cannot pay bills, save for retirement, or buy a house. Developers need capital to build and rehabilitate housing, commercial properties, and community facilities. Entrepreneurs need equity and debt capital to start and expand their businesses. Yet low-income communities and individuals have always had limited access to financial services, affordable credit, and investment capital. This has hampered efforts to improve conditions in these areas.

    Numerous products, programs, organizations, and policies have been designed to address the financial exclusion of low-income individuals and communities....

  6. Part I Creating Personal Assets

    • CHAPTER TWO New Savings from Old Innovations: Asset Building for the Less Affluent
      (pp. 13-71)
      Daniel Schneider and Peter Tufano

      Although the rich and poor both have the need and the desire to build financial assets to enable them to meet important life goals, there is a false dichotomy that is captured in the epigraph. Taken from an exchange with a successful financial services executive, it signifies the perception that the rich invest, but the masses at best only save. What differentiates the wealth-building activities of the rich and the rest of society to justify this semantic distinction? Is it because the less affluent tend to save in banks and the rich invest in mutual funds and hedge funds or...

    • CHAPTER THREE Financial Education and Community Economic Development
      (pp. 72-94)
      Jeanne M. Hogarth, Jane Kolodinsky and Marianne A. Hilgert

      Over the last several years, the issue of financial literacy and financial education has risen on the agenda of educators, community groups, businesses, government agencies, organizations, and policy makers. It seems that nearly everyone is talking about it. For example, in November 2004 the GAO released the highlights of a forum on the federal government’s role in improving financial literacy (2004). And it’s not just happening in the United States—the United Kingdom, the EU, the OECD, and Japan all have substantial initiatives targeted toward financial education (see, for example, Organization for Economic Cooperation and Development 2005).

      Many have written...

    • CHAPTER FOUR Making U.S. Microenterprise Work: Recommendations for Policy Makers and the Field
      (pp. 95-120)
      Lisa Servon

      Microenterprise development is a relatively broad term that refers to the activity of supporting very small businesses through training, counseling, small loans, or some combination of these. Microfinance and microcredit, as the terms imply, are more focused on the credit aspect of supporting small business.¹

      Initiated in the mid-1980s, the U.S. microenterprise development industry is now approximately twenty years old. With more than 550 programs, the field has grown substantially since its inception. With this growth have come significant achievements and vexing challenges.

      At the same time, the policy environment for microenterprise development has shifted in important ways. Programs that...

  7. Part II Building Institutions

    • CHAPTER FIVE Financing Organizations with Debt and Equity: The Role of Community Development Loan and Venture Capital Funds
      (pp. 123-158)
      Julia Sass Rubin

      Community development financial institutions (CDFIs) are intermediaries that help redress the financial exclusion of low-income communities. CDFIs consist of community development loan funds (CDLFs), community development venture capital funds (CDVCs), community development banks, and community development credit unions. This chapter focuses on community development loan and venture capital funds. Chapter 6 reviews community development banks and credit unions.¹

      CDLFs and CDVCs provide debt and equity capital for transactions that conventional capital sources consider too risky. They primarily fund organizations, including businesses, housing and real estate developers, and nonprofit community groups that need facility or operating loans, with the objective of...

    • CHAPTER SIX The Un-Banks: The Community Development Role of Alternative Depository Institutions
      (pp. 159-182)
      Marva E. Williams

      One of the most important functions of financial institutions is to provide services such as checking and savings accounts. These accounts are the most basic financial assets that most households own (Williams and Hudson 1999) and, when held in insured depository institutions, provide a safe place to keep money, create opportunities to build wealth, and often serve as prerequisites for obtaining other forms of credit. Households without such transaction accounts face a number of financial disadvantages. They typically have to use currency exchanges to cash checks. They also have difficulty establishing the credit history necessary to purchase a home or...

    • CHAPTER SEVEN Financing Production of Low-and Moderate-Income Housing
      (pp. 183-226)
      Rachel G. Bratt

      Housing is a central component of community development. It is critical to neighborhood vitality, to family well-being, and, indeed, to the economy at large.¹ Yet low- and moderate-income households continue to face considerable obstacles locating decent quality housing that they can afford.² Consider the following statistics about the various housing challenges these groups encountered in 2003:

      About 5.18 million unassisted renter households with incomes below 50 percent of area median income paid more than half their income for housing or lived in severely substandard housing. This group, according to HUD, had “worst case housing needs” (2005, 1).

      Nearly 70 percent...

    • CHAPTER EIGHT Predatory Lending and Community Development at Loggerheads
      (pp. 227-262)
      Kathleen C. Engel and Patricia A. McCoy

      For decades, cities have invested in decaying neighborhoods, trying to revitalize blighted areas and stimulate economic growth. Where their efforts have been successful, homeowners have experienced appreciation in their homes, safer streets, and improved neighborhoods. Cities, in turn, have benefited from increased affluence and tax revenues. Rising home values, and as a consequence increased homeowner equity, have made these “comeback” neighborhoods prime targets for predatory lenders,¹ who focus on financially unsophisticated homeowners with equity in their homes and no relationships with traditional lenders.

      Predatory lenders often make loans on terms that borrowers cannot afford. Some borrowers lose their homes. Others...

  8. Part III Evaluating Progress

    • CHAPTER NINE Measuring the Impact of Community Development Financial Institutions’ Activities
      (pp. 265-310)
      Robinson Hollister

      This chapter reviews both attempts to evaluate the impacts of community development financial institutions (CDFIs) and methods of evaluation. Some may find it highly negative about whether the impact can be measured. I therefore begin by explaining the rationale for presenting the material this way.¹

      It seems that many of those calling for estimates of the impact of CDFIs—primarily funders—have unrealistic expectations about both the magnitude of change CDFIs are likely to be able to achieve with their investment activities and the degree to which reliable estimates can be obtained of those changes that might have occurred. To...

  9. INDEX
    (pp. 311-332)