It’s just a street. That’s all. A normal street running east and west through the heart of St. Louis. There’s no wall, no guard towers, no razor wire, no soldiers patrolling like Berlin in the 1960s. But which side of this four-lane road you live on can have an enormous impact on your life—including how long it lasts.
That is the power of Delmar Boulevard.
New ideas to help Eddie and others
Urban Institute researchers estimate that 30 percent, or about 68 million, of American adults had debt in collections in 2019, even before the pandemic forced millions of people out of work. By the time a debt reaches a collection agency, it’s more than 180 days past due and can be reported to credit bureaus. This succession of events can damage a person’s credit score and lead to higher credit costs, reduced access to jobs, and more.
The nation’s credit system can be harsh on anyone with little savings, a circumstance that characterizes many. According to Fed research, 36 percent of Americans would have difficulty paying an emergency expense of even $400.
While credit scores don’t use race as a factor, the long-term impact of redlining and the way in which scores are determined, such as not including rent and utility payments as a means of an individual’s establishing a payment history, often lead to Black Americans having lower credit scores than white Americans.
Efforts to bolster the credit standing of residents in low- and middle-income (LMI) communities in St. Louis, particularly minority residents, received a boost in 2019. David Stiffler served as the president of the Equifax Foundation and a funder of Prosperity Connection. Stiffler approached Prosperity Connection’s then-executive director, Paul Woodruff, with an idea: Would Prosperity Connection be willing to expand beyond its scope of providing credit counseling in order to serve as the backbone organization to build a citywide movement for financial health?
The effort would be patterned on Boston Builds Credit (BBC), a nonprofit founded in 2017 and also funded by Equifax. BBC supports credit-building programs, conducts informational campaigns, and advocates on financial issues that affect LMI communities. A person, household, or community is LMI if income is below 80 percent of an area’s median income.
“David said, ‘You might do this,'” Woodruff said. “It was an invitation from our funder to look at a different level of impact.”
BBC works with partners, including banks, to connect residents to credit-repair services. If someone with a low credit score is turned down for a loan, the bank then guides them towards help—workshops, credit counseling sessions, and one-on-one financial coaching—to help them get a “yes” the next time they apply. The client, who must do the hard work of budgeting and saving, gets support from BBC and its partners. The project also works with credit bureaus, financial institutions, and policymakers to encourage safe financial products and consumer protections. For example, its legislative priorities include a bill to regulate the use of credit reports by employers.
To start a similar effort in St. Louis, Woodruff convened other organizations that help people improve their financial health. “We had to approach this in a collective fashion,” he said. “The Boston model is built on partnerships across geographic areas.” The partners agreed to launch St. Louis Builds Credit (STLBC) as a pilot project in the Gravois-Jefferson Corridor in St. Louis City in 2020.
The Equifax Foundation provided money to help get STLBC off the ground, but the project required more financial support. Woodruff had heard about a program called Investment Connection. Events held by the Federal Reserve Bank of St. Louis saw nonprofits pitching their programs to a room full of bankers and other prospective funders.
He decided to submit a proposal.
Building bridges between banks and CRA-eligible programs
Since the Community Reinvestment Act (CRA) passed in 1977, banks have been encouraged to lend throughout their communities, including in LMI communities. The CRA was a response to redlining, the discriminatory pattern of denying credit based solely on the ethnic or racial composition of certain communities.
Banks and financial institutions provide support to community organizations through loans, investments and grants, and technical services. To receive CRA consideration, a bank must be able to show that support for a particular project meets the needs of the communities within which it operates. Bank examiners from regulating agencies such as the Federal Reserve System review each activity to determine if, in fact, the bank’s activity is eligible for CRA credit. If it is, the CRA credit is applied to a bank’s overall CRA rating, which can range from “outstanding” to “substantial noncompliance.”
A bank needs a positive CRA rating to take certain actions, such as opening a new branch. Banks have tended to be risk averse in picking CRA-eligible projects, leaning towards activities, loans, or investments that have counted for CRA purposes in the past and avoiding those outside of their regular areas of business. Investment Connection is intended to “expand the pie” of CRA funding by encouraging new, innovative ways for bankers to support the communities they serve.
Investment Connection, now offered by 8 of the 12 Federal Reserve Banks, serves many functions. The program builds a bridge between nonprofits and banks seeking CRA-eligible projects. It teaches nonprofits about the CRA and what bankers are looking for in those projects. It identifies for banks an array of CRA-related needs in the community. Philanthropies and governments also participate, helping to connect bankers and the larger funding community, and facilitating additional collaboration on the funding side.
The Federal Reserve Bank of Kansas City started Investment Connection in 2011. Community development team members saw that bank portfolios were concentrated in a narrow range of projects and heard that nonprofits were having a hard time connecting with financial institutions. They decided a bridge would help. The Kansas City Fed loosely modeled its Investment Connection events on the Shark Tank program, an American reality television series where entrepreneurs pitch their ideas to a panel of investors.
Ten years after holding the first Investment Connection event, the Kansas City Fed can trace more than $52 million in loans, investments and grants, and technical services to Investment Connection. That amount is more than $60 million for the eight participating Reserve Banks.
The St. Louis Fed was the first Reserve Bank to adopt the model Kansas City developed. Since 2017, St. Louis has held events in seven cities. These events have yielded $2,726,020 in grants, loans, and investments for community and economic development projects.
Before the event convened in October 2019, similar to its other Investment Connection events, the St. Louis Fed reached out to banks and nonprofits, conducted training on the CRA, and requested proposals for funding. St. Louis Fed examiners vetted all proposals to be sure they appeared eligible for CRA credit. Organizers chose 10 proposals they felt were the strongest, and they invited representatives from the organizations that made these proposals to pitch their ideas for investments to bankers, philanthropies, and government officials invited by the Reserve Bank.
Paul Woodruff’s proposal to invest in the STLBC program was among those that made the cut. Now it was time for him to make the pitch.
“I understood the link between strong communities, strong families, and strong people”
“I understood the link between strong communities, strong families, and strong people. It’s hard to get a strong, healthy student coming out of a rundown, dilapidated environment. These characteristics are bundled, they just are.” The 18-year gap between the life expectancy of residents in North St. Louis and Clayton is just one example.
In the case of STLBC, what impressed Clay was the chance to change the credit system, which determines how credit scores are assigned and used. Clay appreciated that Woodruff’s pitch for STLBC didn’t just talk about providing a new pathway to credit counseling. Instead, Woodruff talked about a community-wide movement to improve credit health, something that could improve credit scores of individuals and, at the same time, reduce income inequality and the racial wealth gap.
According to figures provided by the St. Louis Fed, there is a distinct racial wealth gap in St. Louis when housing values are used as a proxy for wealth. In St. Louis City, the median house value for white residents is $170,000. For Black residents, the median house value is $65,000. In St. Louis County, the median house value for white residents is $250,000. For Black residents, the median house value is $100,000, according to the American Community Survey, 1-year estimates for 2019.
First Bank’s Clay said that his employer looked for CRA-eligible investments that would benefit the individual and also have an impact on the credit system.
“St. Louis Builds Credit was positioning itself to do individual credit counseling so John Smith can get his credit score up to buy a house,” he said. “They were also looking at the system, and how we build a program so we’re having an impact on John Smith and Jane Smith and Sally Jones and all these folks. That was very intriguing to us and something we wanted to support.”
Clay was impressed with Woodruff’s proposal. He reached out with an offer of $50,000 paid over two years. The two entered into a service agreement that involves a credit coach with STLBC and a First Bank loan officer working with bank customers to help them improve their credit scores to the point that they’re eligible for a small business or mortgage loan.
Investment Connection was the agent that brought the two together.
Woodruff appreciates that Investment Connection provided a high-profile platform to spread the word about his group’s regional effort to build residents’ financial health. The Fed’s program gave STLBC an opportunity to highlight the importance of credit in improving the financial condition of people and businesses in LMI communities. “It was part of that process of moving from the STLBC coalition to the larger community,” he said. First Bank, he added, was the first financial institution to go all in to support STLBC.
Clay now serves on the organization’s steering committee. He said that his level of involvement was a direct result of Investment Connection. “St. Louis Builds Credit was a new program,” he said. “While most people in the room knew of Prosperity Connection, they had not heard of this program.”
Which means the Investment Connection event did exactly what it was intended to do.
Investment Connection grows from its beginnings in Kansas City Fed
Examiners at all 12 Federal Reserve Banks conduct CRA evaluations. A decade ago, Kansas City Fed officials overseeing that work reached out to their colleagues in the Bank’s Community Development Department asking for help. Ariel Cisneros, a community development advisor at the Denver branch, responded to the request. “[The examiners] were seeing a lot of banks whose portfolios of CRA activities were very focused on the affordable housing space,” Cisneros said. “They asked, ‘Can you help us to diversify, to help the banks’ CRA officers understand the breadth of CRA opportunities that are out there?'”
Examiners wanted to reduce concentrations of risk by spreading loans and investments into areas beyond housing. They had a broader goal, too. “It was also about the fact that the banks’ CRA officers are supposed to look at the needs in the community,” Cisneros said. “You can put 100 percent into affordable housing, but wouldn’t it be great to show your CRA examiner and your community that you’re in tune with them by meeting diverse community needs?”
Cisneros and his boss, Tammy Edwards, senior vice president of the Community Engagement and Inclusion Division, met at the Kansas City Fed’s Denver branch office. They found a meeting room, shut the door, and didn’t leave until they had developed a framework for a new program to support diversified use of the CRA. The program they shaped as Investment Connection offered three elements:
- Information for nonprofits about the CRA and what banks were seeking.
- Proposals pre-vetted for CRA eligibility by the Kansas City Fed’s examiners.
- An opportunity for banks and other prospective funders to hear pitches from up to 10 nonprofits with vetted proposals. Later, the Kansas City Fed added a searchable online database to make all vetted proposals available to funders.
After that, Cisneros said, “I talked with community groups and funders to ask, ‘What do you think of testing it?'” He held the first Investment Connection event in Denver in the fall of 2011. Since then, the Kansas City Fed has held some 60 Investment Connection events that matched more than $52 million from funders with CRA-eligible projects in the Kansas City District. Cisneros, the founder of Investment Connection, leads a working group of staff members from Reserve Banks that use the program.
Seven other Reserve Banks have adopted the Investment Connection model, often tailoring the program to unique circumstances in their parts of the country. These seven are Atlanta, Cleveland, Dallas, Minneapolis, New York, Richmond, and St. Louis.
Pre-vetted proposals make it easier for banks to diversify investments
When a bank considers investing in a project for CRA credit, its CRA officer vets both the nonprofit organization and the proposal. This preliminary process for assessing CRA creditworthiness can take hours for a single proposal. Even then, the bank doesn’t know for sure if an investment will receive CRA credit until the examiner arrives to do the evaluation, which could be as much as five years later. If the examiner finds the activity ineligible, if the activity is large enough, it could result in a negative CRA rating, even if the activity itself was good for the community.
Investment Connection flips that process around. CRA examiners vet organizations and proposals before banks invest, reducing the risk they take in committing time and money to a project.
“The idea that we would have an audience with nonprofit partners [already] vetted by the Fed was very exciting and intriguing to us at First Bank,” said Stacy Clay, the bank’s director of community affairs. “We’re a midsized bank, and we don’t have the community development personnel to rigorously vet every nonprofit partner. The fact that the Fed had done that [diligence], and [the nonprofit] had met some fairly high standards, gave us a lot of comfort.”
Jim Enright, a senior bank examiner with the Kansas City Fed, was the first examiner to work with Cisneros to test the new Investment Connection model. He has since reviewed almost all of the nearly 1,500 proposals submitted in the Kansas City Fed District since 2011. Enright likes that CRA rules offer flexibility by recognizing that a bank’s performance varies based on the markets that they are in. “[Evaluating the performance of a bank is] a gray area, it’s not black and white. It really forces the examiner to use their judgment in evaluating an institution.” The rules recognize that one bank differs from another bank in another part of the state or country. “But the banks also want metrics and hard-and-fast rules, so they know they’re going to get credit for certain activities,” Enright said.
That subjective element of the regulation is the reason why no Reserve Bank will guarantee that an Investment Connection activity will receive CRA credit. Instead, the Reserve Banks offer a yay or nay on whether the proposal appears eligible. Proposals on the bubble don’t get moved forward.
“If the CRA examiner says ‘no,’ then you don’t put it on the Investment Connection website,” said Cisneros. “There’s a lot on the line. If a bank makes a loan or investment and they don’t get credit, that could come back to bite us. But that hasn’t happened. We take it seriously, that review.”
An organization does not have to be one of the presenters at an Investment Connection event to benefit from the CRA review. Once its proposal is vetted and placed on the Investment Connection website, the organization is free to shop it around to banks, and banks can search the website for vetted projects at any time.
Sharks don’t always take the bait
If there is one frustration for the eight Reserve Banks that sponsor Investment Connection events, it’s that most of the organizations presenting proposals do not get funding. Cisneros found that prior to the pandemic, 30 percent of Kansas City Fed presenters got funding after an in-person Investment Connection event.
“If you’re in the venture capital or angel investor space, they’re not going to fund every proposal that they see,” Cisneros said. Still, the opportunity for presenters to share information about their organizations with many potential funders at one time can yield a meaningful payoff. “If you do get a bite,” Cisneros notes, “your return on investment is quite high.”
In 2020, the pandemic forced events online. While a virtual Investment Connection event can pull more funders from around a state or district, it lacks the collegial feel of in-person events, during which funders encourage peers to support a favorite project and where presenters can chat informally with funders. Some Reserve Banks say they’ve been disappointed in the funder response to virtual Investment Connection events.
Even before the pandemic, Reserve Banks were looking at ways to structure the program to boost the chances that presenters would receive funding.
All Reserve Banks provide coaching and information for presenters, helping them speak to the specific needs of bankers. Some Reserve Banks have narrowed the geographic scope to areas of greatest need or where the community appears particularly ready. Others have held Investment Connection events in rural areas, where bankers have more trouble finding investments. The Cleveland Fed, for example, held events in Slade, Kentucky, and Nelsonville, Ohio.
The St. Louis Fed has used regular evaluations and surveys to help it structure the program for nonprofits and bankers to achieve maximum impact.
St. Louis Fed measures progress, adds to the Investment Connection model
Neelu Panth brought a background in social work and program evaluation to her work with the St. Louis Fed, and she applied it to Investment Connection. When the St. Louis Fed adopted the program in 2017, she and her colleagues worked with the Brown School of Social Work at Washington University to develop a logic model—a structured set of results they hoped to achieve—that guides the program to this day.
Since then, Panth and her colleagues have fielded several surveys to assess whether and how well Investment Connection was helping to create a bridge for nonprofits and funders to meet community needs. The results prompted the team to add meetings and other resources to the Investment Connection process. The goal is to build relationships and partnerships that strengthen the system within which CRA investments happen.
The St. Louis Fed’s District includes all of Arkansas and parts of six other states. That’s a lot of ground to cover. Results improve when the team gets to know a community before holding an Investment Connection event there. “Every Investment Connection has a coffee and conversation series in advance of it,” Panth said. “It allows us to understand the environment and to understand what relationships already exist and how we can leverage those for Investment Connection.”
The team gets high marks from other Reserve Banks for the quality of their CRA Investment Connection training. The St. Louis Fed provides information about the CRA, then bankers and nonprofits provide advice based on previous Investment Connection events. Both the in-person training and a series of six training videos build capacity and add value for nonprofits.
The team offers one-on-one coaching to be sure the pitch and the ask are on point. A lot of nonprofits want a grant, Panth said. Banks are more interested in loans. “We would say, we think you have assets that you can leverage towards a loan or a program-related investment,” Panth said. Of the types of funding made through their program so far, 45 percent are loans, 30 percent are grants, and 25 percent are equity investments.
In reviewing program participation, the St. Louis Fed team found that bankers and foundations were not talking to each other. “How do we increase communication?” Panth asked. “How do we grow the capital stack for nonprofits through diverse sources?” When a survey showed the need for funders—including more diverse funders—at the table for Investment Connection, the St. Louis team made that happen.
“We invited foundations, corporations, and banks,” Panth said. “We saw an immediate connection. A banker was saying, ‘I did not realize this funder was in the same neighborhoods working with the same organizations. How can we partner?'” Now named the St. Louis Community Development Funders Forum (CDFF), this group was inspired by a similar effort that the St. Louis Fed began in the Mississippi Delta region in 2019.
The CDFF meets every month. “We look at how to, as a diverse funding community, come together and look at our region from an aligned perspective and leverage federal and local funding,” Panth said. The forum also builds a cohort of funders likely to participate in future Investment Connection events.