3D.	Designing an AFI Project: Account Mechanics and Participant IDAs PDF Version (661KB)
	AFI Account Mechanics Participant IDAs

AFI Projects must manage funds on multiple levels. Federal grant funds, and nonfederal dollars that match the Federal grant, must be administered correctly. Client or participant funds - that is, the IDA s - must be overseen in terms of what clients contribute, what the Project matches, and how the funds are deposited and withdrawn. These "account mechanics" have many rules that you must learn. For more discussion on elements to include in the design of your AFI Project financial structure, see Appendix D.

AFI Account Mechanics

Every AFI Project will involve at least two types of financial accounts: the Project Reserve Account and participants' Individual Development Accounts. These types of accounts are different from each other, but closely related.

• The Project Reserve Account holds the federal grant funds plus at least an equal amount of nonfederal funds that are committed to the AFI Project. This is illustrated in Figure 1. All funds-Federal and nonfederal-that are deposited into the Project Reserve Account are subject to OCS rules for the AFI program. AFI regulations impose important restrictions on this account. Not less than 85 percent must be available to match participant IDA savings. Of the remaining 15 percent, up to 13 percent may be used for administrative purposes and up to 2 percent for data collection and evaluation (see Figure 4: Uses of AFI Project Funds).

• Project Participants' Individual Development Accounts are either custodial or trust accounts established by the AFI Project organization. The IDA s must be maintained in one or more Federally-insured financial institutions (or, where a Federally-insured institution is not available, a State-insured institution). Participants make regular savings deposits into these accounts, and a portion of the Project Reserve Account is allocated for each participant deposit. This is illustrated in Figure 2.

 

Tip: Only when nonfederal funds are deposited in the Reserve Account can the AFI Project access ("draw down") the Federal AFI grant funds. The AFI Project manager may request AFI Federal funds up to the amount of nonfederal funds deposited in the Reserve Account. Remember this when you discuss access to the nonfederal money with your nonfederal grant funders because some funders like to hold onto their funds.

Many AFI Project organizations maintain a third "account" or budget that holds funding in addition to the nonfederal resources that are deposited into the Project Reserve Account. Project agencies use this third budget to support various participant services and to augment the portion of the Project Reserve Account that is set aside for program administration, financial education, and other vital services (by law, AFI limits the amount used this way to only 15% of the Reserve Account). Quite simply, the 15% of the Reserve Account is often not sufficient for program needs. Therefore, many AFI Project administrators rely on additional resources. Figure 1 illustrates this arrangement-the Project maintains the Project Reserve Account supported by Federal and nonfederal resources, as well as a separate source of funds and in-kind resources that supplements the work of the Project, represented as an additional box underneath the Project Reserve Account. AFI Projects are usually not required to report uses of these funds to OCS.

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Participant IDAs

While training and support help clients learn about managing finances and building assets, IDAs enable participants to set aside the savings needed to achieve a life goal. There are several basic steps your organization should take with clients to set up IDA s, including setting a target savings rate for clients, selecting a time frame for client savings, selecting a match rate (the amount the AFI Project contributes for each dollar a client saves), and monitoring withdrawals.

Target Savings Rate

Part of setting up your AFI Project IDA s is deciding on the parameters for client savings. Ordinarily there are two levels set on these accounts. First is the overall maximum amount a participant can save and have matched by the program. Second is a minimum and maximum amount of their income that the clients must contribute to their IDA s in periodic time intervals (e.g., monthly or quarterly). When determining these levels, consider the following questions:

• What is the maximum amount of savings your AFI Project will match?
• Will you require participants to save monthly, quarterly, or over some other period?
• What is the minimum that participants can deposit each period? What is the maximum?
• If participants do not save according to your organization's guidelines, what are the consequences?
• Over what time period should participants be allowed to save?

What AFI Says: The AFI Program rules stipulate that participants must be enrolled in a project for at least six months before they may withdraw funds from their IDAs. If your organization's program is for "fast trackers" (participants who can and will be motivated to complete training and other requirements, save aggressively, and purchase their asset within 12 months), be prepared to accommodate this rule.

 

To set targeted savings rates for monthly deposits, first make a realistic assessment of what your target population can afford to save (after essential living expenses are covered). Keep in mind, the balance of the maximum savings amount and match rate should be in line with the real costs of an asset purchase in your community.

One tool to help you determine a realistic savings and match rate is the "IDA Asset Cost Due Diligence Worksheets" found in Appendix G. Also, Table 3.1 below outlines some things to consider in assessing the "correct" savings rate.

Table 3.1. Determining Savings Requirements and Match Rate

Asset Goal	Sources of Information	Key Factors to Consider
Homeownership	•  Realtors •  Real estate attorneys •  Property appraisers •  Home inspectors •  Fannie Mae Foundation (Web site) •  Affordable housing developers •  Bankers and mortgage lenders •  Nonprofit homeownership counseling and support programs •  Neighborhood Reinvestment Corporation (Web site)	•  Types of housing available for sale (single-family home, condominium, quality/age, etc.) •  Average sales price on the different types of homes •  Down-payment range for most mortgage products •  Type and amount of other costs associated with home purchase •  Cost of property taxes and homeowners' insurance •  Average monthly mortgage payment based on average sales price and down payment •  Other assistance that may be available to first time homebuyers
Microenterprise	•  Small-business lenders •  Local chambers of commerce •  Association for Enterprise Opportunity (Web site) •  U.S. Small Business Administration (Web site) •  Nonprofit small-business counseling and training programs •  Small-business support centers or business schools at local colleges •  Local government offices supporting small business	•  Average startup costs for establishing a business entity •  Available resources to assist in writing a business plan •  Average loan amounts for initial business loans •  Average startup capital required for service, manufacturing, or retail businesses •  Types of small-business ventures thriving in the community •  Essential laws regulating small businesses in the community •  Average costs for securing a storefront or other place of business •  Other grant and loan programs available to support microentrepreneurs
Post Secondary Education and training	•  Local community colleges •  Universities and four-year colleges •  Trade or vocational schools •  Nonprofit programs offering counseling and assistance to return to school	•  Two-year degree offerings •  Four-year degree offerings •  Postgraduate degree offerings •  Professional or trade credentials available •  Tuition by semester and for entire course of study •  Typical fees associated with a course of study in addition to tuition •  School supplies (books, computer) •  Availability of other financial aid (grants and loans) offered by school and government programs

 

For more insights into other incentives and limitations used by AFI Projects to structure client savings, check out the information about savings plan agreements, including some samples, in Appendix E.

Time Frame for Client Savings

Though an AFI Project grant lasts five years, your organization should not lead participants to believe that they should be depositing new savings to their IDAs over the entire period. The reason? The law requires that all funds be drawn down and expended by the end of the five-year period. If not, the funds must be returned to the Federal government. This means that if your organization has a participant who has finished saving at the end of five years, but has not yet purchased his or her asset. They will forfeit the Federal portion of the match funds.

Years of experience with AFI Projects indicate that participants need at least six months to prepare for asset purchase after they have completed their savings (this is especially true of homebuyers and micro-entrepreneurs). Thus, the clients should complete their savings by the end of the fourth year of the project, allowing for the entire fifth year to be dedicated to asset purchase.

Match Rate-A Special Kind of Alchemy

The other part of setting up an IDA is deciding how your project will match savings that clients put into their IDA s. The purpose of providing matching funds, besides being an incentive, is to provide sufficient cash resources to make asset purchase a reality for low-income participants. The match rate will enable your Project participants to obtain, for example, the down-payment and closing costs for buying a home. Programs vary in their match rates: most are $2 to $1 while a smaller number are $3 to $1 or even $1 to $1.

What AFI says: AFI limits the amount of Federal funds from one AFI Project that may be allocated to each client's account: $2,000 for an individual and $4,000 per household (where multiple household members hold IDAs).

 

Remember: It is important to set the participant's saving rate at a realistic level so that, when combined with the match, they can purchase their planned asset at the end of the savings period. The minimum savings target is used here to ensure that participants have the maximum opportunity to earn the full match allowed under the program. One of the most exasperating results possible for an IDA : A participant works hard, saves regularly, and earns match funds, yet finds that he or she does not have the funds to cover the real costs of this asset in the community. If this happens, the IDA really is too good to be true.

Tip: In New York City, a family seeking to buy a home requires at least $12,000 for down payment and closing costs-even in the most affordable neighborhoods. Offering a savings and match rate to meet this amount may strain an organization's fundraising ability. Or, it may require a savings target that is impossible for participants to meet. Consequently, AFI Projects in New York identify other sources of subsidy and support (e.g., home assistance programs) that are available for their target population and then work with the organizations sponsoring these sources of support to offer additional subsidies to AFI Project participants. The key is that the program includes information and access to these additional funds, thereby ensuring a sufficient chance of success for the participant.

Participant Withdrawals

Participant withdrawals are allowed under AFI for two reasons: 1) asset purchases and 2) emergency needs that arise while in the project. According to AFI law, participants must save for at least six months following the date of account opening before making a withdrawal.

Withdrawals for Asset Purchase. Preparing withdrawals for asset purchase is one of the most exciting and anxiety-producing endeavors for both AFI Project staff and participants. It represents the culmination of months or years of hard work on the part of the participant and ongoing encouragement and attention from staff. Everyone wants the purchase to succeed, but that requires ensuring the participant is properly prepared and has had all of his or her questions answered. Further, much of the paperwork and final approvals must be done within a tight time frame to meet the expectations of the vendors receiving the payment (such as the lender, the realtor, the mortgage company, or the university's registration office).

Ensuring that everyone knows the basic guidelines for what constitutes an eligible purchase is critical to keeping this exciting time more fun than stressful. Table 3.2 shows the definitions for an eligible purchase.

Table 3.2. Defining the Asset Goal

Asset Goal	How Is This Goal Defined?	What Costs Can Be Paid by the IDA?
Homeownership	•  First-time homebuyer only (defined as having had no ownership in a home for three years before entering a sales contract on an AFI-qualified home). •  The home being purchased must be the participant's main residence. •  The sales price of the house should not exceed 120% of the average price for a home in that area.	•  Down payment •  Settlement fees •  Loan fees •  Inspection fees •  Other closing costs •  Reconstruction of the newly purchased home
Microenterprise	•  The business should be legally established and not in violation of any law or public policy. •  The owner must have a business plan that has been reviewed and approved by a financial institution, microenterprise development organization, or nonprofit loan fund.	Expenditures indicated in the Qualified Business Plan such as •  Capital •  Plant •  Equipment •  Working capital •  Inventory •  Licenses
Postsecondary education or training	•  Expenses are paid to an eligible educational institution. •  The institution is either a college/university or a vocational school as defined by the Higher Education Act or by the Carl D. Perkins Vocational and Applied Technology Education Act.	•  Course fees •  Books and supplies •  Test fees •  Costs of courses for preparations for professional licensing examinations •  Special equipment, including a computer and software •  Tuition and fees (associated with enrollment or attendance at the school)

 

An AFI Project participant may also transfer his or her funds into an IDA of another family member, such as a spouse or a child (namely one the participant claims on his or her taxes). This new IDA holder would then be eligible to use these funds for any of the three qualified asset goals listed above.

Withdrawals for Emergency Purposes. There are only three circumstances where participants may withdraw IDA savings for non-asset purchase. These are when the funds are needed: 1) for medical expenses, 2) to pay rent or mortgage to prevent eviction or foreclosure, or 3) to pay for vital living expenses (e.g., food, clothing, shelter, utilities, heat) following a job loss. A participant may withdraw funds for these expenses if they are incurred for the participant, a spouse, or a dependent, but they may only withdraw amounts they have deposited. They may not withdraw the matching funds.

Tip: Many AFI Projects provide access to other types of emergency fund programs (such as one-time emergency rent payment programs) to support participants during crises, relieving the pressure to make emergency withdrawals and enhancing the likelihood of success in the AFI Project.

 

After an emergency withdrawal has been made, AFI requires that the participant reimburse her or his account for the full amount of funds withdrawn within 12 months. If the participant does not replenish these funds as required, they may not continue in the project. Any remaining IDA savings are to be returned to the participant, and all matching funds allocated for that participant are to be returned to the Reserve Account for use by another account holder.

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