Getting to “We Have a Deal” through Investment Connection

This post is adapted from “The Pitch,” the first of three chapters in a series about the Investment Connection program, which offers a bridge between community-based organizations and programs and investors. This story, which has been edited for length, was originally published March 4 by Fed Communities, a project that amplifies the Fed's work in low- and moderate-income communities and other underserved areas across the U.S.

Tamika Staten was born and lived much of her childhood in North St. Louis City, where her “mom, grandma and great-grandma were raised,” she said. “North St. Louis will always have a special place in my heart. A lot of people look at North St. Louis and see a poverty-stricken area with dilapidated homes and abandoned businesses. I see all of my childhood memories and a bunch of neighbors from the same background as me. I love North St. Louis City, and I serve it proudly.”

North of Delmar Boulevard is home to most of the city’s Black history. For generations it was the only place in St. Louis open to people of color. Black Americans created businesses and joined professions and built stately brick Victorian homes for their families. Then came the 1930s, when banks began using redlining to deny mortgages to prospective borrowers in predominantly Black neighborhoods. The same story played out in cities around the country with the same ugly results.

Today, most of the vacant lots in St. Louis City are concentrated north of Delmar. Redlining policies have contributed to broader inequities—in unemployment, income and life expectancy—as well. A 2014 study found that 95% of residents living in the 63106 ZIP code in North St. Louis City were Black, 24% of residents were unemployed, and 54% lived below the poverty line, with a $15,000 median household income and a life expectancy of 67 years. In the 63105 ZIP code, just 10 miles away in the St. Louis County suburb of Clayton, 78% of residents were white, 4% were unemployed, and 7% lived below the poverty line, with a median household income of $90,000 and a life expectancy of 85 years. (See infographic.)

In 2014, when she was 25, Staten began work as a teller at a credit union. She later moved over to Prosperity Connection as a financial education coach. The nonprofit affiliate of the credit union provides financial literacy and credit coaching services.

When Eddie, a new client, arrived at Staten’s office, she felt an immediate bond. Eddie was from North St. Louis, too, and he needed help. He’d maxed out his credit cards, had loan debt to his bank and unpaid medical bills in collection, and owed a friend several thousand dollars. Eddie, who is about 40, had three jobs, but he was still drowning.

Tamika Staten, financial education coach, Prosperity Connection

On top of that, his ancient car appeared near death, and his credit union had just turned him down for an auto loan in language that was very direct. “He went home and cried about it,” Staten said. Fortunately, the loan officer didn’t just say “no.” He referred Eddie to St. Louis Builds Credit (STLBC), which connected him with Prosperity Connection—and to Staten, who understood how poverty felt.

When Eddie arrived, Staten helped him create a budgeting regimen. Eddie began working on improving his credit. Within a year, Eddie had transformed his finances. His credit score is 725, up from the low 500s. He has no personal loan debt, very little credit card debt, and the beginnings of some savings. Best of all, when he returned to the credit union that had initially turned him down, he signed for a car loan at the lender’s lowest rate at the time.

Eddie reaches out occasionally to let her know how he’s doing. Staten is confident he will be financially stable. “I love that for anybody, but it feels really good helping somebody from the community I’m from,” she said.

New ideas to help Eddie and others

Efforts to bolster the credit standing of residents in low- and moderate-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 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% 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.”

To start a similar effort in St. Louis, Woodruff convened other organizations that help people improve their financial health. The partners agreed to launch 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 largely 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.

The Federal Reserve Bank of Kansas City started Investment Connection in 2011, loosely modeling its 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. The total is more than $60 million for the eight participating Reserve Banks, which include the Atlanta, Cleveland, Dallas, Minneapolis, New York and Richmond Banks in addition to the St. Louis Fed and Kansas City Fed.

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.

Stacy Clay, director of community affairs, First Bank

Stacy Clay agrees with Woodruff’s thinking

Stacy Clay is director of community affairs with First Bank, a family-owned bank that has served the St. Louis metro area for more than 100 years. He attended the Investment Connection event where Woodruff made his pitch. While Clay says it’s personally satisfying to see the results of CRA-related investments, that’s not the goal.

“It’s not my money,” he said. “We want to be able to say to our senior leadership, ‘Here’s what the investment has yielded.’”

Before joining First Bank, Clay was deputy superintendent for the St. Louis Public Schools, a large urban school system. Before that, he directed a college-access nonprofit called College Summit and taught kindergarten and first-grade students. “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 (PDF) 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.

Clay reached out to Woodruff 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.

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.

Jim Enright, a senior bank examiner with the Kansas City Fed, was the first examiner to work with Ariel Cisneros, a community development advisor at the Bank’s Denver branch, to test the new Investment Connection model. Cisneros and Tammy Edwards, senior vice president of the Community Engagement and Inclusion Division at the Kansas City Fed, developed the program. Enright has since reviewed almost all 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.

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.

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% are loans, 30% are grants, and 25% 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?”

Neelu Panth, community development advisor, CRA, St. Louis Fed

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.

For an unabridged version of “The Pitch” and the two following chapters in the Investment Connection series, visit Fed Communities.