In 1998, the Federal Reserve Bank of San Francisco's Community Affairs unit embarked on an initiative to increase access to credit in Indian Country. The work began with seven Sovereign Lending workshops, at which the greater tribal and banking community discussed the barriers and solutions to lending. Sovereign Lending task forces then were formed out of these workshops.

The task forces, with representatives from different tribes, financial institutions, government agencies, and community-based organizations, held meetings at over 50 Indian reservations throughout Washington, Oregon, Idaho, and Utah. At these meetings, participants learned about each tribe's economic development plans, identified needed banking services, and collaborated on joint projects.

The initiative is necessary because nearly half of all homes located in Indian Country are overcrowded and have serious physical deficiencies; it is estimated that over 200,000 housing units are needed immediately. Compounding the housing crisis are high poverty and unemployment rates. Without housing opportunities, savings incentives and overall capital formation are stifled. Without access to the traditional mortgage market, those who seek homeownership may end up with high loan interest rates and fees, normally much higher than those from a traditional mortgage lender.

The task forces identified and then worked to ameliorate five primary barriers to lending in Indian Country:

Tribal Lending Laws

A lack of guidelines for procedures such as evictions and foreclosures presents an unknown situation for lenders, which is perceived as a risk. A number of tribes have now used their sovereignty to adopt laws promoting real estate and commercial lending.

Remoteness

The remote location of many Indian reservations is a challenge for lenders. Several tribes decided to offer direct deposit service, enabling their employees to accrue interest on funds and access cash from ATMs or via point-of-sale service at local stores.

Land Status

Land ownership on Indian reservations can be complex, but lending products exist for different ownership structures. The 184 Loan Guarantee Program of the Department of Housing and Urban Development is designed for use on tribal land. In addition, several lenders have been working on special housing programs with individual tribes, and one task force is exploring how to improve access to state housing programs.

Communication

Traditionally, there have been limited opportunities for communication between many tribes and the finance community. In response, directories of bank and tribal personnel to contact on financing matters have been developed. Also, community-based organizations that have not previously offered affordable housing technical assistance have participated in task force meetings.

Borrower Characteristics

Widespread unemployment, nontraditional forms of income, lack of assets, and low education levels are issues that task force members have begun to address by launching financial literacy programs. Also, banks began to accept alternative forms of income verification and hold first-time homebuyer seminars, and two task forces are lobbying for legislation to allow residents access to Individual Development Accounts, designed to help people save for their first home, education, or to start a new business.

The Community Affairs unit has held meetings at a total of 49 Indian reservations, made presentations at numerous conferences, spearheaded six Housing Ordinance Workshops, and supported many efforts by financial institutions and intertribal organizations. Several tribes now have adopted new laws to allow tribal members access to mortgage loans. In 2001, the unit will hold five Sovereign Lending workshops in the states of California, Nevada, and Arizona, and hopes to experience similar success to that in the Northwest.

Adapted from an article by Craig Nolte: "Sovereign Lending: Bringing Housing to Indian Country," in the May 2000 issue of Community Investments, a publication of the Community Affairs unit of the Federal Reserve Bank of San Francisco.