Editor's note: These remarks were
delivered to the 33rd Annual Membership Conference of the National
Congress for Community Economic Development, in Detroit, Mich., Oct.
Good afternoon. I am delighted to join you here in Detroit
to participate in your annual conference for community economic development.
Promoting economic development is, in a very real sense, the Federal
Reserve System's reason for being. The Fed is an institution created
by Congress in 1913 to promote national economic development by ensuring
the stability and efficiency of the U.S. financial system. We pursue
our various specific responsibilities—monetary policy, banking
supervision and regulation, payments system services and oversight,
and Treasury fiscal agent services—with the perspective that
they should contribute to optimal nationwide economic performance.
The Fed's core responsibilities in support of national
economic development are grounded in its "community" roots.
Each of the 12 Reserve banks is a separately chartered nonprofit corporation
with its own regional district and a board of directors drawn from
that district. This regional structure enhances the independent voice
and regional perspective that the 12 Reserve bank presidents bring
to the Fed's policy debates.
While part of our longstanding history, the Fed's attention
to economic development at the community level ratcheted up with the
passage of the Community Reinvestment Act in 1977. The CRA specifically
required the Fed and the other bank regulatory agencies to examine
banking institutions so as to ensure that these institutions meet
the financial needs of the communities in their respective market
areas. The CRA also stimulated the creation of the Reserve banks'
Community Affairs function, whose mission is "to support the
System's economic growth objectives by promoting community development
and fair and impartial access to credit."
By officially adding the word "community"
to the Fed's lexicon, the CRA brought increased attention to two broader
perspectives of economic development, over and above the Act's specific
regulatory provisions. First, it encouraged us to more carefully examine
the distribution of economic outcomes across the diverse communities
of people that comprise our nation. In particular, it directed us
to evaluate how aspects of the financial system might be contributing
to the problems of some communities whose economic performance lags
behind overall national growth. Staffs at the Reserve banks and the
Federal Reserve Board now work to provide this understanding through
a combination of outreach, technical assistance and analysis.
Second, the CRA caused us to look at low-income communities
not just as "in need," but also as active participants
in spurring their own economic development. It encouraged us to adopt
a broad perspective on how people in their neighborhoods and communities
organize themselves to participate, sometimes effectively and sometimes
not, in our fast-paced financial system and market-oriented economy.
Participation in free markets is assisted by a host of institutions-schools,
banks, government agencies, voluntary and nonprofit service organizations,
even informal personal networks—whose presence, accessibility
and effectiveness can vary significantly from one community to another.
For this afternoon, I want to emphasize the Fed's longstanding
market-oriented approach to economic development with some tangible
examples. At the same time, I readily acknowledge that we believe
it is important to identify and to strengthen the national, regional
and community institutions that help low- and moderate-income individuals
participate more fully and successfully in the marketplace. In other
words, the goal is to give the members of these communities the capacity
to succeed in the marketplace, and the method is to build up the institutions
that provide and maintain that capacity. Let me explain that approach
further and then illustrate how it works in practice at the Minneapolis
Fed. Let me also remind you that I am speaking only for myself, and
not the Federal Reserve, on these matters.
Open participation in efficient markets is critical
to economic development. Markets effectively promote choice, efficiency,
investment and aggregate growth. Public policy helps markets promote
community development by widening market participation. To be sure,
markets may not address short-run distributional concerns, and these
issues can be handled through tax/transfer policies determined by
elected officials. And certainly, antidiscrimination and consumer
financial regulations provide legal protections to ensure that markets
are open to all. The Federal Reserve and the other financial regulators
take seriously their responsibility to implement and enforce these
Effective market participation assumes a set of premarket
skills and institutions, and supporting those institutions is at the
core of the Minneapolis Fed's community economic development strategy.
Neither our mission nor our resources allows us to make direct monetary
grants. Instead, we use our skill base to make more indirect but,
we trust, significant contributions to institutional performance.
Today, I want to highlight these contributions in four areas: (a)
strengthening legal underpinnings, (b) promoting financial awareness,
(c) curbing predatory lending and (d) conducting research within specific
local communities to achieve a deeper understanding of the institutional
foundations of community economic development. During the remainder
of my remarks I will provide examples of contributions in these areas.
a. Strengthening legal underpinnings
First, we try to strengthen the underpinnings that the
legal system provides to the marketplace in low-income communities.
On this subject, I would highlight our contributions toward a model
commercial code for sovereign Indian reservations. We think this is
important because a clear and consistent legal code is almost a precondition
for the efficient functioning of markets in general, and especially
for financial markets.
Our 50 states have traditionally respected the model
commercial codes proposed by the legal experts who draft the Uniform
Commercial Code (UCC). But even when adopted in all 50 states, these
codes do not necessarily facilitate lending on Indian reservations,
which are sovereign from state commercial law and find it difficult,
for cultural and administrative reasons, to simply adopt the state
code. The lack of a common code or insufficient set of tribal codes
has proven to be a significant concern and impediment to the extension
of credit on the reservation by off-reservation lenders. And since
many reservations are too small to support a lending institution that
serves only the reservation, access to off-reservation lenders is
Our work at the Fed has been directed at overcoming
existing barriers through extensive education of both lenders and
reservation borrowers on how to conduct business via the existing
tribal laws and administrative structures. Notwithstanding the successes
we have achieved under the existing legal framework, our experience
has led us to also seek to improve that framework. Accordingly, in
the mid-1990s, we cosponsored an initiative to draft a model tribal
UCC for all Montana tribes. In 2002 the National Conference of Commissioners
on Uniform State Laws created a committee to draft a version of UCC
Article 9, which governs transactions secured by collateral, that
could serve as a model code for reservations nationwide. The earlier
initiative we had cosponsored in Montana provided a model, and we
are now very involved in the national drafting effort as well. Assuming
completion of the draft in 2004, we expect to remain involved in the
next phase, a rollout and marketing effort to persuade tribes nationwide
to adopt the model tribal UCC Article 9. I would regard this as a
very significant step toward making financial markets work for Indian
b. Promoting financial awareness
The second area of contribution I'd like to highlight
is supporting institutions that give low-income consumers the information
and knowledge they need to make sound decisions. Without that knowledge,
they cannot participate effectively in the modern financial marketplace.
To be sure, we have specific responsibilities as a regulator to ensure
that banks comply with requirements to truthfully and conveniently
disclose information about the costs and nature of the financial services
they provide, and our Consumer Affairs examiners meet those responsibilities.
But our experience shows that it is not enough to give consumers numbers,
for they need training to know how to interpret information and to
apply it to their own circumstances. The growing complexity of financial
services, the greater responsibility placed on individuals to plan
for their own future and the rapid increase in immigrant populations
with limited formal education only deepen this need for financial
training and education. And research shows that individuals with less
education and less financial experience benefit the most from education
on how to make financial decisions.
Partly for that reason, I have long been a supporter
of education in general, and of economic and financial education in
particular. Currently, I chair the board of directors of the National
Council on Economic Education. Other officers of the Federal Reserve
Bank of Minneapolis serve with the boards of the Minnesota and Montana
councils. The councils have been good partners for us, because their
train-the-teacher approach to disseminating materials such as their
"Financial Fitness for Life" curriculum leverages our
resources and helps us reach, albeit indirectly, thousands upon thousands
Chairman Greenspan shares this commitment to financial
education and, in recent public service announcements, has thrown
his support behind a Federal Reserve System effort to promote financial
education for everyone. My staff and I support this effort with several
initiatives. We are taking leadership roles within the Native American
Financial Literacy Coalition and the St. Paul Foundation's project
on responsible use of credit card debt. We are also just beginning
a first-of-its-kind partnership with the Minnesota Personal Finance
Center, a joint effort of the Minnesota Extension Service and the
Minnesota Council on Economic Education. The partnership will coordinate
resources to efficiently deliver financial education to low-income
adults throughout Minnesota.
c. Curbing predatory lending
Financial education and research help us strike a favorable
balance as a regulator of consumer financial markets, as illustrated
by our approach to curbing predatory lending. Although predatory lending
is hard to define or measure precisely, we are all aware of incidents
in which borrowers appear to have been taken advantage of in contracts,
with high interest rates and fees or other provisions that strongly
favor the creditor, often with very negative consequences for the
borrower. However, we need to remember that bringing individuals with
low incomes or problematic credit histories into the credit market
has been a longstanding public policy objective that has been substantially
achieved in recent years, mainly by means of legitimate loans with
above-average rates and restrictive provisions aligned with the borrower's
higher risk profile.
If it were easy to distinguish these legitimate, risk-based
loans from truly abusive loans at the time that the borrower applies
for credit, then we could easily have our cake and eat it too. In
this regard, it would be ideal if we could write and enforce regulations
allowing the former, and the many benefits they bring, and banning
the latter. As we all know, it's not that easy. For regulated institutions
we face a trade-off between strict regulations that may curb more
abuses but may also deny legitimate credit to needy families, and
looser regulations, which do the opposite. At any point in time, the
Fed and the other regulators try to draft regulations that strike
a reasonable overall balance between the two. But aggressive practitioners
find loopholes in laws or migrate their activities from the regulated
to the unregulated sectors, and the anecdotal evidence suggests that
this is true of predatory lenders. Of course, to the extent that laws
or regulations are violated, we support full legal remedies against
However, if we are, over time, to have our cake (access
to credit) and eat it too (no abusive lending), we need to alter the
terms of this trade-off, and my staff and I support both institutions
that do that now as well as research into the nature of the underlying
problems (which can lead to better institutions later). The financial
education efforts I have already discussed are perhaps the best long-term
antidote to predatory lending and other credit market abuses. In the
meantime, we participate in the multi-city "Don't Borrow Trouble"
campaign that provides targeted education to help borrowers protect
themselves and also assists them in seeking remedies when problems
arise. We support and participate in efforts to analyze whether the
professional regulatory and self-regulatory mechanisms governing the
mortgage and realty industry need to be updated to reflect the many
changes in those markets in recent years, such as the greatly increased
role of independent mortgage brokers. We are also working with researchers
at two Twin Cities colleges to assess the neighborhood distribution
of foreclosures and the possible value of foreclosure data as a diagnostic
for issues like predatory lending or property abandonment.
d. Community-based research
Finally, we are increasingly turning to research in
our local communities to deepen our understanding of the financial
and related institutions that underpin market participation and community
development. This research can provide support to the institutions
that serve to encourage participation in markets. An example of this
research is the financial survey of the Twin Cities Hmong community
that the Federal Reserve Banks of Chicago and Minneapolis sponsored
a couple of years ago. This survey focused on how access to credit
and financial services was affecting a lower-income minority community
in the Twin Cities.
While data from CRA, Home Mortgage Disclosure Act and
other sources, as well as our examinations of state member banks'
compliance with financial regulations, provide a useful baseline for
assessing credit availability in low-income communities, they don't
provide an assessment of overall outcomes in the communities we serve.
Accordingly, to gain this broader understanding, we conducted financial
surveys in the Twin Cities Hmong refugee community. This study derived
from earlier work by the Chicago Fed, and others, on informal financial
networks in a Hispanic and an African-American neighborhood in Chicago.
Besides looking at a different metro area and a different ethnic group,
we added a co-located white control group and examined formal as well
as informal credit access by Hmong-owned businesses as compared to
The results, summarized in our 2002
annual report, show that the Hmong- and white-owned businesses
were generally comparable in their characteristics. More importantly,
they were comparable in their access to and use of credit. And statistical
analysis showed that the relatively small differences that did emerge
were accounted for by objective credit-related factors such as the
owner's age, education or attitude toward risk, leaving little if
any room for ethnicity or race as an explanation for the observed
borrowing patterns. To further understand the factors behind this
favorable outcome, we also conducted focus group meetings with representatives
of the Hmong business community and the lending community. The focus
groups stressed several factors that helped the lending institutions
and the Hmong businesses develop an effective relationship. These
factors were as follows:
- The lenders performed outreach in the community and came to understand
the market and the nature of the businesses that served it. For
example, they sponsored festivals and events, learned that two adjacent
businesses with similar goods might be serving two separate clans,
and so on.
- The lenders hired staff from the community and put them in positions
of public contact (tellers) and decision-making (loan officers).
- The lenders helped teach the borrowers what was expected, such
as having a formal business plan and paying on schedule.
- The lenders also learned new ways to do business. For example,
one created an affiliated community development financial institution,
or CDFI. Several others updated their lending criteria to reflect
special features typical of Hmong businesses and business owners.
The Hmong did their part and were willing to adapt to expectations
of them and committed to repayment. The Hmong study has been a success
for us not only because of the specific issues it addressed but also
because it significantly deepened our outreach into and knowledge
of the Hmong community and its development and financial needs. Based
on that success, we plan to remain involved in research on the institutional
foundations of financial market participation and economic development.
We are pressing on with our analysis and evaluation of foreclosure
data, and we are looking into further studies of credit and financial
service availability in specific lower-income communities. Over time
we hope to contribute fundamental knowledge about community development
and how it can be enhanced by institutions that reduce the financial
barriers that limit broad-based, effective participation in the market.
In conclusion, I have stressed the view that markets are the true
engines of economic development and that we take a long-term view
of community economic development that seeks to strengthen the institutions
that facilitate broad-based, effective market participation. Partnerships
with community groups and organizations engaged in similar work are
critical to our success, for the Federal Reserve Banks on their own
are not in a position to provide the depth of community presence required,
for institution building, in the community economic development and
finance arena. We are already working with some of the members of
your Congress, and we look forward to working with additional members
in the future. We share the goals of reducing poverty and developing
healthy communities, and I would hope these comments have been informative
about our approach to achieving these goals.
"Between Two Worlds:
How Do Credit Markets Work?" 2002 Annual Report
Community Development and the Federal Reserve