Profitwise News and Views

Spring 2003 Issue

• High Profile Predatory Lending Cases
• Research Methodologies Identify Deal Flow Finding the Intersection Between Compliance and New Markets
• FLLIP's "Your Money & Your Life" Financial Education Program Reports High Marks after First Year
• CEDA Community Development Fund ATM Demonstration Project
• Financial Institutions and Participation in Individual Development Account Programs
• From the Editor
• Around the District
• Calendar of Events

Research Methodologies Identify Deal Flow Finding the Intersection Between Compliance and New Markets
By Mari Gallagher

Can banks "do the right thing" and make money? Metro Chicago Information Center (MCIC) held two events on December 6, 2002, to help answer that question.¹ The first event, hosted by the Federal Reserve Bank of Chicago, was a half-day Community Banking Forum attended by 100 community banking representatives interested in the relationship between the Community Reinvestment Act (CRA) and new market opportunities. The second event took place later that day in Rogers Park and drew over 40 community development practitioners, nonprofit and for-profit lenders, and city planning representatives to exchange advice and learn about MCIC's latest research tools and techniques for quantifying community needs and market dynamics.

Featured at both events was market profiling work conducting by MCIC for TELACU Community Capital (TCC), a certified community development financial institution (CDFI) serving small businesses in Orange and Los Angeles Counties in California, one of the most dynamic lending markets in the country.

TCC retained MCIC in April 2002 to conduct a phone survey and market analysis of small businesses in Spanish and English. The survey produced 400 properly completed surveys.² The results of the survey and market analysis are helping TCC and its financial partners assess the viability and needs of its target market. It is also helping them identify deal flow in three distinct markets:

• The micro-business market, with annual company revenues of $100,000 or less, an important but high-risk segment of TCC's traditional portfolio. Armed with strong market data, TCC will now be able to identify sustainable businesses more quickly. This segment comprised 11 percent survey respondents.
• The small-but-stable business market, with annual company revenues of $100,000 to $1 million. This segment comprised 56 percent of survey respondents and is the anchor of TCC's long-term portfolio strategies.
• The ready-to-take-off business market, companies with annual revenues of $1 million or more. This segment comprised 33 percent of respondents, many of whom indicated only loose ties to banks. TCC sees this segment as an un- tapped opportunity for new bank referrals and partnerships.

Approximately half of all survey respondents intend to pursue capital or credit in the next three years for business expansion, new technology, and other uses, and 53 percent expressed interest in receiving a follow-up call from TCC. The findings also suggested that most respondents do not have strong ties with traditional lenders.

"This is an excellent example of a research study that generates valuable, strategic information for banks, not-for-profit lenders and community development practitioners," said MCIC senior researcher and consultant Mari Gallagher. "Pooled surveys are a cost effective way to address multiple user needs and broader public policy issues." While the TCC study did not originate as a pooled survey, banks are finding value in the findings, especially data and cross tabulations generated from probing questions on small business attitudes about and experiences with specific, traditional lenders.

Building a Business Pipeline
Based on the survey findings, MCIC developed a formula for identifying additional small business prospects within the original sample of 8,500 businesses that fit TCC's risk tolerance band. "Because the original sample was developed with such care, the data just kept getting better and better the more we drilled down," said Riddle. In addition to business profiles by size, MCIC also developed special sub-profiles, such as Latino and women-owned businesses. Prospects for each target category include company name, CEO, detailed business data, and tract designation (low, moderate, middle, and upper income). "We have a special commitment to lend to viable but under-banked businesses in low-to-mod income tracts." Riddle continued, "Now we know exactly where those businesses are."

With nonprofit and for-profit lenders asking how to locate and reach their customers, new opportunities emerge for a broader group of change agents to collaborate on market information and intervention strategies.

Leveraging These Findings Further
TCC's parent, The East Los Angeles Community Union (TELACU), was also able to build off this foundation of work. TELACU is a nonprofit community development corporation founded in 1968 to address economic inequality. Today, the TELACU umbrella includes a family of for-profit and nonprofit companies that comprise more than $400 million in assets. Together they are one of the most prominent and catalyzing forces in the Latino banking, real estate, community development, education, and philanthropic communities.

TELACU retained MCIC in August of 2002 to develop a small business profile suited to New Markets Tax Credits (NMTC) opportunities based on quantitative, third party data and analysis, NMTC project criteria, and TELACU's community development mission and impact goals. TELACU's objectives were to:

• Assess NMTC market demand
• Develop a "pipeline" of immediate NMTC business targets
• Leverage existing community development and alternative lending partnerships and investments.

Industries considered suited to expansion were more heavily weighted than those deemed less likely to successfully expand, particularly where expansion might require land, building, and equipment acquisition. This refined sample was then manually reviewed record-by-record. Industries that might be considered volatile or not suited to NMTC opportunities were excluded. MCIC identified 226 ideal candidates for the NMTC program in select areas of Los Angeles and Orange Counties located in eligible tracts. Combined, their average gross annual revenue is $2,263,786 and the median is $1,600,000.

Financial Services Needs in the Chicago Metro Area
The Community Banking Forum also featured MCIC findings from its recently released 2002 Metro Survey. The survey asked 3,000 households in the six-county area about their attitudes and practices regarding financial services, among other topics.

The study found that, during the past 12 months, 37 percent of Chicago respondents used a currency exchange to purchase money orders, compared to 23 percent in the metro area, 18 percent in suburban Cook County, and 11 percent in the collar counties. When divided by income and race, distinctions become greater. Low-income households represent 51 percent of all Chicago respondents that use currency exchanges to purchase money orders. Thirty-six percent said the reason was more convenient hours and locations. Only seven percent mentioned the need to get cash faster.

The 2002 Metro Survey also asks detailed questions on practices concerning checking and savings accounts, IRAs, mutual funds, wire transfers, home ownership, and other indicators and can be sorted by race, income, and custom geography. An accompanying CD-ROM contains the new 2000 Chicago Ward map, a comprehensive list of publications available for download, and a variety of Metro Survey tabulations. Additionally, users may link directly to MCIC websites mcic.org and the interactive data and mapping website mcfol.org.

MCIC has initiated discussions with Chicago area banks and other entities concerned with small business lending about conducting a study, similar to the TCC study, in the six-county Chicago metro area.

Notes
¹MCIC is a nonprofit research and consulting firm founded in 1990 by the MacArthur Foundation and the Chicago Community Trust.

²The survey results have a sampling error of ±4.9 percent at the 95 percent confidence level.

For more information on standard or custom Metro Survey tables or MCIC's research and consulting services in the financial services sector, call Mari Gallagher, Senior Consultant and Director of Communications, at (312) 580-2591.

Mari Gallagher is a senior consultant with the Metro Chicago Information Center. Ms. Gallagher previously directed the Emerging Neighborhood Markets Initiative, a two-year Chicago pilot project spearheaded by Social Compact. Ms. Gallagher earned an M.A. from the University of Illinois, School of Urban Planning and Policy, and a B.A. in Political Science from DePaul University.