Betty Joyce Nash

English

Research Papers in Economics

Fall 2004 • Region Focus 9
SHORTT AKES
SERVING THE UNBANKED
La Cooperativa
Educates Members
M
attress banking” has
a competitor in North
Carolina — the Latino Com-
munity Credit Union
(LCCU), known informally
as La Cooperativa.  
In  the central North
Carolina Triangle area of
Raleigh-Durham-Chapel
Hill, criminals know that
working-class Latinos may
keep cash at home or in
wallets instead of in a 
bank account. According
to  John Herrera, chairman
of LCCU’s board of direc-
tors, the credit union is 
a community response to
increasing crime against
the Latino population in
Durham, N.C.
People without a deposit
account at a bank, credit
union, or thrift usually have
below-average incomes.
Alternate sources such as
check-cashing outlets pro-
vide money orders, wire
transfers, and other finan-
cial services that the 
“unbanked” require. But
often fees are higher than
those incurred by customers
who have bank accounts.   
LCCU’s mission is to
serve the unbanked, says
Herrera. The credit union's
target audience is “hard-
working people with
muddy boots.” They are
landscapers, hotel workers,
dishwashers,  and people
with the repetitive manu-
facturing jobs — those
who are most likely to be
unbanked.   
Ac onference in 2002 on
the unbanked at the
Chicago Fed noted that  “...
recent immigrants … make
up a significant proportion
of the unbanked popula-
tion.”   Although LCCU is
open to anyone, members
are principally from
Mexico, Puerto Rico,
Honduras, and El Salvador.
Because the members are
shareholders, they own the
credit union. That concept
is familiar to many Latino
people who have partici-
pated in Mexican “tandas,”
informal credit associations
built on community trust.
LCCU gets technical
assistance, access to
lawyers, and admission to
credit union groups from 
its founders — community
leaders and organizations.
Local churches play a sig-
nificant role by providing
information about LCCU
to the community.
While realtors have
coined the phrase, “loca-
tion, location, location,”
LCCU’s motto is “trust,
trust, trust.”  That must be
earned by partnering with
area churches and commu-
nity-based organizations.
According to Herrera, the
primary form of advertising
is word of mouth.  LCCU
speaks to the community 
in English and Spanish.
From the services of man-
agement and tellers to
deposit tickets to mortgage
documents to its web site
www.cooperativalatina.org,
the credit union's business 
is bilingual.  
LCCU offers the usual
array of credit union prod-
ucts and services, and places
a big emphasis on financial
education. “Everything we
do is financial education.
From the time an account
is opened or a check
cashed, it’s an opportunity
to  teach,” says Herrera.
The approach to financial
education is equivalent to a
product cross-selling strat-
egy. Employees always look
for opportunities to pres-
ent new or related financial
education information.  
Free financial literacy
classes are available to 
members and nonmembers.
According to Herrera, more
than 85 percent of the credit
union’s members have never
had a bank account, and
new members may not
understand what it means to
earn interest on deposits.
“You can’t start out sell-
ing them a CD,” he says.
“You have to explain these
things first.” Credit union
members who want to open
interest-bearing accounts
need a social security num-
ber or taxpayer identifica-
tion number for tax report-
ing. Classes are offered on
obtaining a taxpayer identi-
fication number and filing a
tax return, budgeting, and
managing a checking
account. More advanced
topics include consolidat-
ing debt and home-buying.
Classes may be required as
part of the application for
some services. Members
are also given a phone num-
ber so they can call from
the comfort and privacy of
their home for answers to
personal finance questions. 
As members become
better informed about
money management, they
develop opportunities to
increase personal wealth 
by creating a clean credit 
history.  Responsible mem-
bers can apply for a 
small, collateralized loan.
The Latin0 Community
Credit Union (LCCU) serves
central North Carolina’s
growing Spanish-speaking
population.
C
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U10 Region Focus • Fall 2004
On-time payment of the
loan leads to a good credit 
history and credit score,
which are needed to qual-
ify for bigger loans or
mortgages.
In  the four years since
LCCU began serving the
unbanked of central North
Carolina, the Latino popu-
lation has shown its trust.
Herrera says membership
has been growing at the
rate of about 1,300 cus-
tomers every month. There
are now five branches in
central North Carolina,
with total assets of $17 mil-
lion. LCCU has been so
successful in its mission
that banks and credit
unions from across the
country have been calling
Herrera for information
and advice on starting their
own programs to serve the
unbanked. 
—AILEEN WATSON
SAVES TIME AND MONEY
Check Images
Replace Paper
C
ome this fall, the na-
tion’s check collection
system will fully enter the
21st century.
On October 28, the
Check Clearing for the 21st
Century Act, also known as
Check 21, goes into effect.
The legislation will make 
it easier for financial insti-
tutions to process checks
electronically by removing
some of the legal impedi-
ments to the process.
While electronic present-
ment has been possible for
many years, it previously
required a standing agree-
ment between two institu-
tions.
The process, which
involves the truncation and
scanning of an original
paper check and passage of
its information via elec-
tronic image, is projected to
save the industry more than
$2 billion a year once it
becomes commonplace.
Financial institutions will
save time and money by
avoiding the physical trans-
portation of paper checks
and by either transmitting
the electronic image when
there is an agreement or by
providing a substitute check
printed from the electronic
image if there is no agree-
ment. Under the legislation,
these “substitutes” will have
the same legal standing as
the original paper checks.
The Federal Reserve
System clears nearly half of
the current 39 billion checks
written annually. As a result,
the Fed has adapted its 
services to meet the change
in processing trends ex-
pected to be brought on by
the legislation.
Financial institutions
processing through the Fed
will continue to have the
option of making either
paper or electronic check
deposits. Those institutions
with imaging capabilities
that submit electronically
will benefit from later pro-
cessing deadlines and
national fees, rather than
those based on geographic
location.
For those items pro-
cessed electronically, the Fed
will print substitute checks
and also offer the service of
electronic return, giving
financial institutions faster
access to funds and greater
protection against fraud.
If  institutions do not
have scanning and imaging
capabilities, the Federal
Reserve Bank will offer
additional services to help
them also realize savings
from Check 21. Those com-
panies can elect to have
checks above a certain dol-
lar amount sorted and pro-
cessed electronically.
In  the end, consumers
may also see the benefits of
the new legislation. Reduced
costs and faster processing
for financial institutions
could mean greater customer
service innovations and
extended deposit times for
their customers. Check 21
does come with a price,
though — with faster pro-
cessing consumers can ex-
pect to see a shorter float
period from the time they
write a check to the time the
funds are withdrawn from
their account.
—ALICE FELMLEEL
GRUNDY MOVES ON
Town Relocates To
Avoid Floods
S
ome communities have
given up the fight to 
control the rivers on which they
were built. They’ve sought re-
fuge from severe and repeated
flooding by making a perma-
nent move to higher ground.
Grundy, a former coal
mining boom town in South-
west Virginia, will soon be
one of those communities.
After enduring damaging
floods almost every 20
years, from 1937 to 1993,
Grundy is moving its busi-
ness district across the
Levisa River to a 13-acre 
site donated by Norfolk
Southern Corp.
Relocating Grundy is
tough because of the lack of
flat land. “Most communities
that have flooded have acres
of level land to go back a cou-
ple of miles from the river,”
says Grundy’s town manager
Chuck Crabtree. “The way
we  were nestled between
mountains, railroad tracks,
the river, and U.S. Route 460,
we  had no level land. So
floodproofing Grundy is
very unique in itself.”
The move is paving the
way for a long-awaited 
highway project too. At 
one time, Grundy, the seat of
Buchanan County, stood 
in the way of the Virginia
Department of Trans-
portation’s (VDOT) plan 
to continue Route 460 to the
Kentucky state line. But
bypassing Grundy would
have cost VDOT $150 mil-
lion to $160 million, Crab-
tree says, and building the
roadway through Grundy
would have destroyed its
downtown. And, there was
little space for existing bus-
inesses to relocate in the
mountainous terrain.
Thanks to a partnership
with the U.S. Army Corps
of Engineers (USACE) and
VDOT, relocating Grundy
and extending Route 460,
once financial impossibili-
ties, are becoming realities.
VDOT’s routing U.S. 460
through the old downtown
will cost $77 million — $73
million to $83 million less
than the original proposed
cost. And USACE’s cost inFall 2004 • Region Focus 11
preparing the relocation
site for development fell
from somewhere between
$200 million to $300 mil-
lion to about $110 million
as  a result of the partner-
ship, according to Crabtree.
Moving a town may
seem like a radical measure.
But for Grundy — with its
dwindling population and
an economy that never re-
bounded from the flood of
1977 — relocating may be
its only chance. Many
buildings were abandoned
after the ’77 flood, causing
property values to fall.
Federal laws have also
changed, requiring that no
more than half of a build-
ing’s appraised value be
spent on repairing it. In
most cases, the amount
allotted was insufficient to
do the necessary work.
“People started going
outside of Grundy for busi-
ness,” Crabtree said. “We
had an outflow of people on
the weekends, and when
people started going out,
they liked the community
they were going to, and
they started moving.”
Although Grundy’s citi-
zens gave up on the town a
long time ago, the proposed
new Grundy is attracting
new commerce already. A
new Comfort Inn has
almost quadrupled the
taxes paid by previous
downtown businesses, pay-
ing out about $50,000
annually, and has created
jobs as well. Verizon has
chosen Grundy as a pilot
project for creating a wire-
less community. Ground-
breaking on the relocation
site is slated for fall 2006,
and retail businesses have
already spoken for the
future buildings, according
to Crabtree.
Grundy has now given
the river back to itself and
reopened the river channel,
transforming the Levisa
into an asset instead of a lia-
bility, Crabtree noted.
“It’s not one big fix. It is
a puzzle,” Crabtree said.
“No one would believe the
benefits that have come out
of this. I think we’ll have
the most unique small town
in the country.”
—JENNIFER SPARGER
GREYFIELD REDEVELOPMENT
Old Malls Seek
New Life   
N
ot far from the shop-
pers strolling through
the bright corridors of Clover-
leaf Mall, there are three 
eerily empty buildings filled
with the echoes of times past.
Every department store has
abandoned this once-thriv-
ing regional mall in Chester-
field County, Va., along with a
movie theater chain and most
of the food court tenants.
County officials want this
underused, 78-acre property
to  be replaced with a mix 
of offices, storefronts, and
housing within walking dis-
tance of each other. Other
declining malls across the
Fifth District known as
“greyfields” also need some
form of redevelopment.
The rise and fall of
regional malls parallels the 
suburbanization of America
during the 1950s and 60s.
Department stores followed
shoppers out of downtown
districts as development
spread beyond cities. Even-
tually, retailers realized that
putting a few anchor stores
like Sears or J. C. Penney and
an assortment of specialty
stores under one roof created
a safe, climate-controlled en-
vironment that suburbanites
liked.
This clustering of retail
gave regional malls an advan-
tage. “From an economic
point of view, [it] reduced
search and information
costs,” notes Mark Eppli,
who holds the Bell Chair in
Real Estate at Marquette
University. Because the mall
offered a plethora of
choices, shoppers could be
confident of finding the
quality or price they wanted.
The result was that stores
could generate more sales
collectively than they could
earn individually.
However, regional malls
in aging, filled-out inner-ring
suburbs have lost customers
as development has contin-
ued its outward expansion.
Outer-ring suburbs have
space available for new resi-
dential and commercial
development that meets the
market’s needs.
Some of this develop-
ment has supported new
retail formats that have
taken market share from
regional malls. For example,
Cloverleaf Mall competes
with Regency Square and
Chesterfield Towne Center,
two “superregional” malls
that provide greater variety
in 800,000 square feet or
more of retail space. Then
there is Stony Point Fashion
Park, a “lifestyle center” that
is somewhat smaller, but has
an open-air design and the
kind of upscale food and
fashion offerings that used
to  be confined to cities.
Finally, big-box retailers 
like Dick’s Sporting Goods
and Circuit City stores pro-
vide wider selections of 
specific product categories.
Some regional malls have
renovated or replaced some
of their tenants to keep pace
with change. In 2002,
Pennsylvania Real Estate
Investment Trust (REIT)
bought the Roses depart-
ment store at Magnolia Mall
in Florence, S.C., and recon-
figured it for occupancy by
The business district in Grundy, V a., will be relocated to a 13-acre site
across the Levisa River.
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SBest Buy, a new food court,
and additional specialty
retailers. Other malls have
been radically remade — in
1998, Talisman Companies
tore down the walls of a fail-
ing regional mall in Towson,
Md., and created a strip 
center of big-box stores.  
In  some cases, however,
the whole mall may have to
be scrapped. “There may not
be demand, the neighbor-
hood may not have stepped
up over time, or the other
retail is too close and they
can’t compete,” says Eppli.
While it could be obso-
lete for retail use, a regional
mall has other qualities that
make it attractive for rede-
velopment. According to
Douglas Grayson, executive
vice president of develop-
ment at Pennsylvania REIT,
a mall sits on a large parcel
within a well-populated sub-
urb where land is scarce and
expensive, plus it has exist-
ing infrastructure like roads
and utilities. “There is a
high intrinsic value to that
piece of property.”
Realizing that value isn’t
easy, though. “The developer
or owner of the mall almost
never has the unilateral right
to  do anything,” explains
Grayson.  “The number of
stakeholders that have to be
dealt with to reposition a
property is huge [and each
one] is looking for their
opportunity to profit.” Also,
some of those stakeholders,
or even the mall’s primary
owner, may resist any redevel-
opment that might eat into
their existing returns, how-
ever meager they might be. 
That’s why local govern-
ments often intervene.
They have the money to
assemble the necessary
property rights, tear down
mall buildings, and tie the
project into the surround-
ing neighborhood. They
also have the power of 
eminent domain to take
care of holdouts, although a
Michigan Supreme Court
decision in July may limit
future seizures of private
property for economic
development purposes.
While local governments
want to stimulate more tax-
able economic activity,
redevelopment experts say
that efforts to revitalize
greyfields and other obso-
lete properties must be eco-
nomically justified.
—CHARLES GERENA
MALPRACTICE INSURANCE
Conflict Escalates 
D
octors and lawyers, with
insurers in the middle,
continue their professional
conflict over rising medical
malpractice premiums.
At  issue are medical 
malpractice insurance rates
for certain physician special-
ties, such as obstetrics, that
some doctors say are forcing
them to quit. A Charleston,
S.C., surgeon recently made
a proposal that shocked the
legal and medical commu-
nity. Chris Hawk, who has
practiced medicine for 
26 years, suggested that 
the American Medical
Association’s House of
Delegates pass a resolution
that would encourage doc-
tors to refuse treatment to
trial lawyers. It did not pass. 
“The physician has a
right to refuse care to any-
body,” Hawk says. “The feel-
ing was that it was so damag-
ing from a political correct-
ness viewpoint they didn’t
want to do anything with it.
That may be legitimate, but
on the other hand, it did 
get a lot of attention to what 
is a very broken system.”
Physicians in many Fifth
District states have lobbied
for caps on noneconomic
damages. In West Virginia,
the state legislature lowered
in 2003 its cap to $250,000
on “pain and suffering” dam-
ages. In South Carolina, tort
reform legislation was tabled
earlier this year.
People investigating the
rising rates of malpractice
insurance would agree that
the system is broken, but
disagree about its causes
and policy options that
could help. 
The United States
General Accounting Office
issued a report in October
2003 that outlined multiple
reasons malpractice rates
have soared. First, insurers’
losses on medical malprac-
tice claims have jumped 
in some states since 1998,
more slowly in states that
limit awards. Second, insur-
ers lost money when interest
rates dropped on bonds that
comprised some 80 percent
of their investment portfo-
lios. The higher interest rates
had allowed insurers to
underprice rates in heated
competition for malpractice
business in the 1990s, rates
that did not cover eventual
losses. As a result, today
fewer insurers offer medical
malpractice and, accordingly,
there is less competition.
But the current crisis is
different from previous
malpractice rate cycles,
according to William Sage,
a physician and professor
of law at Columbia Uni-
versity. Sage suggests that
medicine’s success in treat-
ing disease has “out-
stripped the structural and
financial framework of
medical liability.”
A proposal by the
Institute of Medicine in
2002 suggests demonstra-
tion projects that would
test replacing malpractice
law with an administrative
system for compensating
patients who have experi-
enced avoidable injury. The
report cites the liability 
crisis as a key health-care
policy problem because
many cases of negligence
don’t end up in court and,
conversely, many claims
don’t relate to negligence.
Also, judgments are some-
times inconsistent with the
medical evidence. Finally,
legal and administrative
expenses eat up half the
cost of liability premiums. 
The demonstration proj-
ects could create a system
outside the courts that
would “provide timely, fair
compensation to injured
patients and promote apolo-
gies and nonadversarial dis-
cussions between patients
and clinicians.” The projects
would also encourage report-
ing and analysis of medical
errors. 
The idea is to put the
incentives to reduce error in
the right place as well as
compensate patients quickly
for avoidable injury.
—BETTY JOYCE NASH
12 Region Focus • Fall 2004

Malpractice insurance : conflict escalates

http://www.richmondfed.org/publications/research/region_focus/2004/fall/pdf/short_takes.pdf

Malpractice insurance : conflict escalates

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