Group Title: Affordable housing issues
Title: Affordable housing issues ; vol. 15 no. 3
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 Material Information
Title: Affordable housing issues ; vol. 15 no. 3
Series Title: Affordable housing issues
Physical Description: Serial
Language: English
Creator: Shimberg Center for Affordable Housing
Publisher: Shimberg Center for Affordable Housing
Place of Publication: Gainesville, Fla.
Publication Date: April 2005
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Bibliographic ID: UF00087009
Volume ID: VID00032
Source Institution: University of Florida
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AF F O RD A B L E


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M.E. Rinker, Sr., School of Building Construction College of Design, Construction & Planning PO Box 115703,
University of Florida, Gainesville, FL 32611-5703 TEL: (352) 273-1192 SUNCOM: 622-7697 FAX: (352) 392-4364


Volume XV, Number 3


April 2005


A description of Individual Development Accounts (IDAs) is presented in the February
2005 issue of Insights published by the Controller of the Currency (see: www.occ.treas.gov/
ftp/release/2005-25a.pdf). An IDA is described as a tool for lower-income households to save
money and build assets for goals such as the purchase of a home or starting a small business.
In addition to describing IDAs, the paper discusses why the IDAs are of interest to banks,
how an IDA works, the risks associated with IDAs, who is in the IDA business today, and
how the cost structure works. Since the number of IDA programs in the US has grown from
only three in 1995 to over 500 in 2002 with over 20,000 account holders, organizations in
Florida may wish to investigate Individual Development Accounts for their communities.


An IDA is reminiscent of matching arrange-
ments in 401(k) plans. That is, the IDA is a
matched-savings account established for a
specific purpose (e.g., buying a home, forming
a small business, furthering an education)
usually for a term of one to four years. Federal,
state, and local governments or non-profit
organizations provide matching account contri-
butions typically ranging from one to three


dollars for every dollar contributed by the
account holder. This arrangement offers more
encouragement to low-income families for asset
accumulation than the typical tax incentives of
IRA or 401(k) deferrals because the lower-
income families lack the financial resources
necessary to take advantage of them. In addi-
tion, by combining economic incentives and
education, more people will be encouraged to
save for a particular financial goal.


H 0 S N












Banks and other financial institutions clearly
are key players in IDA programs. Their deci-
sion to participate, however, typically stems
from recognition of the sound business oppor-
tunities presented.
Market expansion and customer develop-
ment comprise one such opportunity. As IDA
participants achieve their financial goals, they
will need additional savings and credit services.
Those same customers, who may be experienc-
ing their first relationship with a bank as an
account holder, will also bring new customers
to the bank. There is also the potential for
participation in IDAs to be a CRA consideration
under the three tests for CRA credit: lending,
investment, and service. Since non-profits often
act as sources of matching funds for the account
holders, they are service providers for the IDA
initiative and can bring additional banking and
customer relationships to the bank. Finally, the
banks that are aggressive IDA participants may
view participation as a positive community
economic development initiative.




IDA programs typically involve three main
parties and each has a clearly defined role.
Program Participants The program par-
ticipants are by definition low- or moderate-
income people who enter the program because
of the marketing or recruiting efforts by the
nonprofit provider administering the program.
Once in the program, the participant commits to
save a specified amount of money over a de-
fined period. All programs have limitations on
the number of missed deposits during the
contract period. In addition, no funds may be
withdrawn from the IDA prior to reaching the
agreed upon goal amount, except for emergency
needs. In addition to meeting savings goals, the
participants are generally required to attend
financial literacy training. Participants may also
be required to attend training geared to their


particular asset goal, such as homebuyer educa-
tion or micro-enterprise entrepreneurial training.
Nonprofit Service Providers The non-
profit service provider drives the IDA product
and process. These partners, who also take on
the responsibility for marketing and outreach to
potential IDA clients, generally perform pro-
gram administration. They are involved in
fundraising for both operating and match dol-
lars. They also conduct the screening of IDA
applicants by reviewing their financial histories
and the banks generally rely on the recommen-
dations of the non-profit. The service provider
also provides education, training, and technical
assistance to program participants.
Financial Institutions The banks hold the
savings accounts for the program participants
and generally either waive or substantially
reduce initial deposit requirements and account
fees. The IDA program participants are paid
market interest rates. Banks generally send
regular account statements to the participant and
a duplicate statement to the nonprofit service
provider. Banks also may provide program
support through employee participation on
boards and advisory committees for the non-
profit service providers, and by assisting the
non-profit in providing financial literacy training
and technical assistance to program participants.
A number of banks also assist the non-profit
partner with the operational work involved in
allocating match funds to individual accounts.
Partnership Model Non-profits are usually
the initiators of the dialog with a bank about
starting an IDA program. The non-profit usually
is interested in providing IDAs to its clients or in
its service area. Approximately 70 percent of
IDA partnerships are the result of an on-going
relationship between a non-profit and a financial
institution. The majority of IDA partnerships are
structured in accordance with a formal agree-
ment. These agreements outline the specific
responsibilities of each party. The bank usually
handles the financial transactions while the non-
profit handles the marketing and management.
The agreement describes how accounts are
opened, account features and fees, how deposits
are made, and when withdrawals are permitted.








If the bank is providing match funds, the agree-
ment will specify the match rate and the maxi-
mum contribution per account.





It was found that the average monthly net
deposit of a participant was $25.42 and that on
average participants made a deposit in seven of
12 months. With an average match rate of 2:1,
participants accumulated assets at rate of $75
per month or $900 per year.
Communication among the bank, the non-
profit, and the participant regarding the
progress being made by the participant has
been found to be a critical element of successful
IDA programs. Until an IDA customer com-
pletes the program and achieves their financial
goal, a participating bank's primary customer is
the non-profit service provider. Although the
accounts are established in the individual
participants' names, the accounts typically
require dual signatures of both the individual
participant and the non-profit for any type of
withdrawal. Generally, a separate master trust
account is established to hold the match funds
with sub-accounts identifying the individual
participants' share. The master accounts often
hold hundreds of thousands of dollars in match
funds on deposit, as they are received from the
funding source. A bank may hold either the
individual bank accounts, the master account
for the match dollars, or both.




Because IDAs are deposit accounts, there is
minimal associated credit risk as long as proper
transaction controls are in place. However, as a
deposit account, banks must comply with all of
the traditional disclosures called for under the
Truth in Savings Act (implemented under the
Federal Reserve's Regulation DD), as well as
any other relevant regulations associated with
the type of savings accounts established for a
specific IDA program.


Banks will face reputation risk and possible
penalties if they fail to perform their duties
properly as custodian for IDA funds. Such
failures would include permitting early or
unauthorized withdrawals from the IDA ac-
count. IDAs are established to encourage
participants to save their funds for an important
asset goal, rather than using the funds for
discretionary purposes. Therefore, banks and
their non-profit partners usually establish some
level of controlled access to the funds in the
accounts to prevent withdrawals not associated
with the asset accumulation goal. As a result of
this risk, banks with large numbers of branches
typically select targeted branches to administer
an IDA program for control purposes.
In considering whether to implement a new
IDA program, banks evaluate whether IDAs
will fit into their overall business plans. As with
any product or service offered by a financial
institution, careful due diligence must be ex-
ecuted prior to implementation. For example,
banks should ensure that the non-profit partner
is reputable and has sufficient resources to
execute its responsibilities related to the IDA
program in a proper fashion. Banks should
clearly understand what their own role will be
in the program and have a realistic estimate of
the extent to which bank resources will be
devoted to the program.
Regarding customer identification concerns,
the Customer Identification Program (CIP) rule
implementing Section 326 of the USA Patriot
Act outlines procedures for banks to follow in
order to verify the identity of a customer that
opens an account. It is essential the participat-
ing banks continue to perform these back-
ground checks as directed by the Act.




Banks comprise 81 percent of the financial
institutions sponsoring IDAs and credit unions
account for the remainder. Most of the pro-
grams are small (e.g., have less than 100 ac-
counts) and are structured in partnerships with
non-profit providers and financial institutions.








Programs generally include a financial literacy
component that is considered to be key to
achieving any measure of financial success.
Larger banks are more likely than smaller
banks to offer IDA programs. While banks with
assets of less than $1 billion sponsor nearly half
of all programs with 50 accounts or less, banks
with assets greater than $1 billion sponsor 79
percent of programs with 51 to 100 accounts,
and 84 percent of programs with more than 100
accounts.
Many of the Federal Home Loan Banks
(FHLBs) sponsor structured savings programs
for mortgage down payments that are similar to
IDAs. Once participants have saved their target
amounts, their deposits are matched at mort-
gage closing. Other programs that assist people
with asset growth, and are conceptually similar
to IDAs, include the Family Self-Sufficiency
Program that incorporates HUD Section 8
Homeownership funding.


Individual Development Accounts (IDAs) are
a tool that can provide banks with a means of
tapping new markets of customers that tradi-
tionally they have had difficulty reaching and at
the same time supporting community develop-
ment. Although IDA holders initially will have
only a small savings account relationship with
the bank, the expectation is that they could
become profitable customers in the future as
they develop greater comfort with financial
products. While IDAs are currently individual
programs offered primarily through locally
based partnerships between financial institu-
tions and nonprofits, IDAs have the potential to
achieve greater appeal if they became a more
standardized product with greater financial
incentives for banks to participate, less opera-
tional burden for all parties involved, and larger
and more stable sources of match funding.


Affordable Housing ISSUES is prepared bi-monthly by the Shimberg Center for Affordable Housing for the purpose of
discussing contemporary issues facing affordable housing providers. Reproduction of this newsletter is both permitted and
encouraged. Comments or questions regarding the content are welcome and should be addressed to Robert C. Stroh, Director.


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