[Senate Hearing 107-946]
[From the U.S. Government Publishing Office]
S. Hrg. 107-946
BRINGING MORE UNBANKED AMERICANS
INTO THE FINANCIAL MAINSTREAM
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING ISSUES RELATED TO IMPROVING ACCESS TO AFFORDABLE AND
CONVENIENT BANKING SERVICES AND PRODUCTS FOR THOSE INDIVIDUALS
CURRENTLY LACKING A RELATIONSHIP WITH AN INSURED DEPOSITORY
INSTITUTION. A REVIEW OF THE TREASURY DEPARTMENT'S EFFORTS TO IMPROVE
ACCESS TO BANKING ACCOUNTS THROUGH ITS IMPLEMENTATION OF THE FIRST
ACCOUNTS PROGRAM
__________
MAY 2, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
88-055 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Daris Meeks, Republican Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
?
C O N T E N T S
----------
THURSDAY, MAY 2, 2002
Page
Opening statement of Chairman Sarbanes........................... 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 3
Senator Stabenow............................................. 12
WITNESSES
Sheila C. Bair, Assistant Secretary for Financial Institutions,
U.S. Department of the Treasury................................ 4
Prepared statement........................................... 37
Michael S. Barr, Assistant Professor of Law, University of
Michigan Law School............................................ 16
Prepared statement........................................... 45
Fran Grossman, Executive Vice President, Shorebank Advisory
Services....................................................... 19
Prepared statement........................................... 52
Jaye Morgan Williams, Senior Vice President and Managing Director
of Community Investment, Bank One Corporation.................. 23
Prepared statement........................................... 55
Marva E. Williams, Senior Vice President, Woodstock Institute.... 26
Prepared statement........................................... 57
Rufino Carbajal, Jr., Manager, West Texas Credit Union, on behalf
of Credit Union National Association (CUNA).................... 29
Prepared statement........................................... 61
Additional Material Supplied for the Record
Statement of Clifford N. Rosenthal, Executive Director, National
Federation of Community Development Credit Unions.............. 66
(iii)
BRINGING MORE UNBANKED AMERICANS
INTO THE FINANCIAL MAINSTREAM
----------
THURSDAY, MAY 2, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:10 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
I am very pleased to welcome before the Committee this
morning the very able Assistant Treasury Secretary for
Financial Institutions, Sheila Bair, who will testify about
issues surrounding the unbanked and specifically discuss the
Treasury's implementation of the First Accounts Program.
She will be followed by an able panel of witnesses
representing academic and financial institutions, and community
groups, and we will get the benefit of their perspectives on
this important issue of trying to bring more unbanked Americans
into the Nation's financial mainstream.
This morning's hearing will examine the challenges that the
unbanked face and explore the roles that policymakers,
financial institutions, nonprofits, community-based
organizations, and others can and should play in bringing more
Americans into the financial mainstream.
Millions of families in the United States lack access to
basic banking services that I think most of us would regard as
essential for individuals seeking to fully participate in our
financial and economic system.
According to the Federal Reserve's 1998 survey of consumer
finance, almost 10 percent of families do not have any form of
an account with an insured depository institution. The number
is even higher for families that have no checking account.
Thirteen percent of all American families do not own a checking
account, almost one out of every seven. These families are, as
one would expect, disproportionately low income or minority.
I think that these statistics should be of great concern to
anyone who has any commitment to ensuring that all Americans
have access to basic financial services. There is a growing
recognition that the cost incurred by the unbanked greatly
exceed the high fees paid to cash paychecks, send remittances,
and pay bills. In fact, the lack of a relationship with a
traditional bank or credit union has profound implications for
the ability of an individual to acquire financial assets and to
accumulate wealth.
A recent survey by the Office of the Comptroller showed
that only 30 percent of unbanked households held savings,
compared to 80 percent of those with bank accounts.
Furthermore, the Federal Reserve's data reveals that only 8
percent of unbanked families have a retirement account.
Without access to mainstream banks and credit unions, the
unbanked end up using fringe financial service entities to
conduct routine transactions. The fringe service providers
offer no opportunity to build a credit history, which then
becomes essential to accessing other affordable financial
products, such as mortgages or low-interest lines of credit.
Without traditional credit, individuals are vulnerable to
exploitation by abusive lenders offering high-cost mortgages,
high-interest short-term loans, and very expensive rent-to-own
products.
Also of considerable importance, but often overlooked are
the public safety implications for the unbanked. These
individuals are often the victims of crime because many operate
on a cash-only basis, and end up carrying significant amounts
of cash on their person or store cash in their homes.
Surveys of the unbanked suggest that there are a variety of
reasons why millions of families in the United States do not
have accounts with insured depository institutions. These
reasons range from the common complaints that barriers to entry
exist for low-income individuals in the form of high costs and
lack of convenient bank branches, to more complex issues
involving distrust and negative attitudes about insured
depository institutions borne of past experience. The lack of
sufficient financial literacy or information about the
availability of low-cost banking accounts are also seen as a
significant obstacle.
So it all poses, I think, a significant challenge to those
of us who are trying to find a solution. Clearly, increasing
the number of banked will not be an easy task and it will
really require sustained commitment to eliminate this, in a
sense, bifurcated financial services system that currently
exists in the country.
This morning, we will hear about the multifaceted
approaches currently being undertaken by the Federal
Government, by insured depository institutions, by community
groups, and by others to address this issue.
I am hopeful that today's hearing will lead to a broader
understanding of the needs of the unbanked, as well as provide
a forum for an exchange of ideas on improving access to basic
financial services. A central focus of this hearing will be a
review of the Treasury Department's efforts to improve access
to affordable and convenient accounts through the
implementation of the First Accounts Program, which was
announced in January of 2000. The Treasury Department has
played an important role in highlighting the problems of the
unbanked and addressing their needs.
I especially want to express my appreciation to Assistant
Secretary Sheila Bair for her strong leadership and continuing
commitment to the First Accounts Program, and we look forward
this morning to hearing an update of Treasury's efforts.
Before turning to the Assistant Secretary, I also want to
commend those banks, credit unions, thrifts, community
development financial institutions, and others that have worked
together to create innovative programs that remove many of the
obstacles that low-income, unbanked consumers face when they
seek to establish checking or savings accounts.
I strongly urge other insured depository institutions that
have not yet taken up the challenge to work with the
Government, the nonprofit organizations, community development
financial institutions, and employers to design products that
address the needs of the unbanked and increase their financial
stability.
I obviously feel very keenly that if we can bring the
unbanked into the mainstream of the financial system, it will
clearly be to their advantage. But beyond that, it will really
be to the advantage of the workings of our economic system. It
will give it greater legitimacy and credibility. It will
strengthen it. I think mainline institutions will discover
that, in fact, there is a market there to be developed and
grown that will prove to be advantageous to them.
And we will rid ourselves of this distressing problem of
having part of our population not accessing the services that
most of us consider as standard or routine, and therefore, in a
sense, being alienated from the workings of the economic and
financial system. I regard that as a highly undesirable thing
and we have been working very hard, and we are very pleased
with the work that Treasury has been doing.
Before I turn to Ms. Bair, I will yield to my colleague,
Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman.
I strongly appreciate your holding this hearing. And in
fact, I will keep my remarks brief because you have essentially
said it very well. With your permission, I would associate
myself with your remarks and comments. I strongly agree with
everything you have said.
I too want to commend and thank Assistant Secretary Sheila
Bair for all of the work that she has done on this important
issue and the other important work that she has done over the
years. I know that she comes with a lot of experience in the
financial sector of our economy. I appreciate your willingness
to be involved in public service.
Ms. Bair. Thank you.
Senator Crapo. In Idaho, when you look at the statistics
that you have talked about, Mr. Chairman, that means that we
have something like, if those statistics hold in Idaho,
something like 47,000 households that are unbanked. Surveys
have found, as you have indicated, Mr. Chairman, that the
groups that are most likely to be unbanked are lower-income
households, households headed by African-Americans and
Hispanics, households headed by young adults, and households in
which the home is rented.
I see that as a significant and increasingly difficult
problem in Idaho. And that is why I believe that this hearing
and the efforts that are being undertaken by so many who are
here today are so critical. We have looked particularly in
Idaho at one of our growing and significant groups, the
Hispanic population, and have found that not only are they
squarely hit by these kinds of problems, but also with the
types of problems that relate to access to affordable housing,
either ownership or rental. These issues are connected.
We have, because of that, started what we are calling an
Hispanic Initiative in my office to try to identify the
universe of issues that are faced by the Hispanic population in
Idaho, not just the housing and the financial services issues,
but the remainder of those issues, and to try to see what we
can do from our position here to help increase the
opportunities for the people who fall into these categories and
face these difficult burdens. This hearing today is hitting
squarely at one of those important issues.
I do want to give my thanks not only to Assistant Secretary
Bair and the Treasury Department for their effective work in
this area, but also to the National Credit Union Foundation, in
which one of these First Accounts awards made it to Idaho and
is helping us to get ourselves very involved in financial
literacy efforts in rural Idaho and developing that basic
consumer financial education that is so critical, and helping
our people to gain access to affordable international money
transfer services at greatly reduced costs. So, there is a lot
being done here and there is a lot of great thinking and a lot
of innovative ideas and a lot of resources that can be brought
to bear on this issue.
One of the hopes that I have is that we can strengthen
those opportunities through the things that we learn in these
hearings, and also that we can identify what is there and bring
them effectively into play across the Nation, but in
particular, in Idaho.
So thank you very much, Mr. Chairman, Assistant Secretary
Bair, and for all of the witnesses who are here to help us work
on this critical issue.
Chairman Sarbanes. Senator Crapo, thank you very much for
your strong support for what we are trying to do. And I look
forward to continuing to work closely with you as we try to
advance the goals that we have set out here.
Senator Crapo. Thank you.
Chairman Sarbanes. Sheila, we would be delighted to hear
from you. We are pleased to welcome you back before the
Committee.
STATEMENT OF SHEILA C. BAIR
ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS
U.S. DEPARTMENT OF THE TREASURY
Ms. Bair. Thank you, Chairman Sarbanes and Senator Crapo, I
appreciate the opportunity to appear before you this morning to
talk about First Accounts, a grant program administered by the
Treasury Department, that is designed to help unbanked low- and
moderate-income individuals establish banking relationships
with insured depository institutions.
Mr. Chairman, I commend you for focusing the national
spotlight on this critical issue of expanding consumer access
to mainstream financial services by convening today's hearing,
as well as the hearings you held previously on the remittance
industry and financial education. The policy objective of First
Accounts is embraced by Members of both parties. Moreover, it
is of great importance to me personally, to the Treasury
Department, and to the Bush Administration.
Secretary O'Neill recently noted that: ``We must work to
ensure that all Americans have the knowledge and tools to build
their own financial security. Ownership, independence, and
access to wealth should not be the privilege of a few. They
should be the hope of every American.'' Establishing a bank
account at an insured depository institution is one of the
basic tools necessary for individuals to build their own
financial security. Expanding low- and moderate-income
Americans' access to mainstream banking services is very much
in line with the compassionate conservatism of President Bush
to give all Americans the chance to fully participate in the
benefits of our free economy. In a recent speech, President
Bush defined this compassionate conservatism by saying: ``It is
compassionate to actively help our fellow citizens in need. It
is conservative to insist on responsibility and results.''
Consistent with this philosophy, we have strived to direct
First Accounts funding to those initiatives which are
replicable, self-sustaining, and, most importantly, promise to
bring the greatest number of unbanked individuals into stable
banking relationships.
Who are the unbanked? Simply put, the unbanked are people
who do not have a banking relationship with a traditional
financial institution, such as a commercial bank, a savings
association, or a credit union.
Although there are few statistics available regarding the
true size of the unbanked population in the United States, some
estimates indicate that as many as one in ten families, or even
one in seven, as Chairman Sarbanes noted, may not have bank
accounts.
In light of this, an obvious question is: Why do so many
people remain outside of the mainstream banking system? Are
they shut out of the system or do they make a conscious choice not
to do business at traditional financial institutions? Surveys
on this issue reveal varied responses to these questions,
including: Bank fees or minimum balance requirements are too
high; the types of accounts offered by traditional financial
institutions do not meet the needs of the unbanked; a person
may not write enough checks or have enough month-to-month
savings to make it worthwhile to maintain an account; or the
unbanked are simply not comfortable dealing with banks or
letting them know their private financial
information.
We believe that an individual should have the right to
choose where he or she will seek financial services. This right
to choose, however, is an illusory right if people do not have
accurate and complete information that will enable them to make
educated decisions and access to a range of financial service
providers.
There are several advantages to being banked. The unbanked
typically pay higher costs in the form of transaction fees for
financial services than individuals with banking relationships.
Individuals also face heightened safety and security risks
as a result of having to conduct all financial transactions in
cash. Carrying large amounts of cash is dangerous and keeping
cash at home is obviously risky.
Finally, establishing a banking relationship is taking a
first step toward building a promising economic future. A
traditional banking relationship offers the account holder an
opportunity to become familiar with fundamental financial
concepts that are critical in asset building and bank accounts
provide a tool to help families fulfill their savings goals and
manage their household money.
Through the First Accounts Program, Treasury is funding
initiatives to connect unbanked low- and moderate-income
individuals to mainstream financial services. But the paramount
goal of First Accounts is to move a maximum number of unbanked
low- and moderate-income individuals to a stable banked status
with an insured depository institution. We hope to accomplish
this goal through the development of financial products and
services, including education and counseling, that can serve as
replicable models in meeting the financial services needs of
unbanked individuals without the need for ongoing public
subsidies.
Under First Accounts, financial institutions are encouraged
to create low-cost accounts for unbanked families and to help
bring more ATM's to safe places in low-income communities.
Treasury's First Accounts initiative was launched this past
December 27 with a published notice of funds availability, a
NOFA, in the Federal Register inviting applications for First
Accounts grants.
First Accounts applicants were required to propose, at a
minimum, low-cost electronic, checking, or other types of
accounts, either directly, if the applicant is an insured
depository institution, or indirectly through a partnership
with one or more insured depository institutions. Applications
were due March 20 and a wide variety of eligible entities did,
in fact, apply for grants. In total, Treasury received 231
applications from 38 different States.
During the last several weeks, a team of reviewers have
been busy completing our review of the applications. This
competitive review process involved evaluating the applications
based on a number of different criteria including: the likelihood
of success, the extent to which a project is replicable and can
become self-sustaining, as well as the applicants' experience
and track record, and management capability.
After careful consideration, yesterday, we announced our
selections for First Accounts. The 15 awards totaling $8.3
million promise to directly assist over 35,000 unbanked low-
and moderate-income individuals in opening bank accounts, and
hopefully, hundreds of thousands more by becoming successful
models which can be replicated in other communities. A complete
list of grant awardees is attached to my testimony for inclusion
in the record.
Chairman Sarbanes. It will be included in the record.
Ms. Bair. Thank you, Mr. Chairman.
The First Accounts grant awards are going to nonprofits,
insured depository institutions, insured credit unions, a
community development financial institution, a faith-based
organization, and a foundation. The projects are very
innovative and focused on a wide variety of unbanked people,
including youth, new entrants to the workforce, recent
immigrants, Native Americans living on reservations, people
living in public housing, and families using child care
facilities.
All involve a significant degree of financial education.
For instance, providing unbanked individuals with free checking
or savings accounts upon completion of a financial education
course and/or providing ongoing counseling and education
support services once the unbanked individual has established
an account.
Nine of the pilots involve partnerships with employers in
the low-income areas as a means of reaching out to unbanked
employees, as well as being able to provide lower-cost account
services by building upon the employer's relationship with a
financial institution. Eight would expand access by installing
ATM's in low-income areas, and one promises to establish two new
branches in underserved areas. Most feature electronic access
to account services through ATM cards.
Treasury's role in the First Accounts Program will not end
with its selection of grant recipients. Treasury's ongoing
involvement with First Accounts will include evaluating the
programs for progress and success, deliverables, and
effectiveness on a regular basis. In addition, Treasury will
receive periodic reports from the grant recipients. Once we
have data on the success of programs, the Administration will
consider the cost-effectiveness of continuing First Accounts or
other similar types of programs.
Before concluding, let me also highlight a number of other
initiatives that Treasury is working on related to the
unbanked. We have a number of efforts underway aimed at
improving financial education, including the establishment of a
new Office of Financial Education that will develop and
implement financial education policy initiatives and will
coordinate Government programs.
This Office will also be responsible for Bank on Your
Schools, a partnership between schools and financial
institutions that will involve providing students with their
own free savings accounts and giving them hands-on experience
working at a financial institution.
Another topic that is often overlooked in the discussion of
the unbanked is the remittance industry. The Inter-American
Development Bank estimates that Latin American immigrants
living in the United States send an average of $200 to their
native countries about seven to eight times a year. These
remittances have reached a level that surpassed $23 billion
last year, about one-fifth of total worldwide remittances. Most
immigrants send remittances through a small number of
alternative financial services providers and lack of
competition in the remittance industry has contributed to
higher remittance costs.
With our encouragement and support, however, more and more
traditional financial institutions and credit unions are
recognizing that there is a concrete opportunity to attract a
diverse consumer base by offering low-cost remittance products.
Major financial institutions that have recently approved new,
lower-cost remittance products include Wells Fargo, Bank of
America, and Citigroup.
In closing, I would like to commend the efforts of the many
banks, credit unions, and community- and consumer-based
entities and groups, many of which are represented on the panel
that will follow me this morning, who have been working for
many, many years to address the problems faced by the unbanked
segment of the population.
Expanding access to financial services is a bipartisan
issue that contributes to improved financial well-being among
many low- and moderate-income individuals. Opening an account
at an insured depository institution provides the account holder
with a number of benefits: The opportunity for wealth building;
lowering costs for financial services; security; knowledge of
and familiarity with the fundamentals of personal finance; and
the chance to build a credit history and qualify for credit on
reasonable terms. Because of these benefits, Treasury is
committed to promoting policies that will give unbanked
individuals both access and choice in establishing traditional
account relationships with insured banks and credit unions.
That concludes my statement and again, I thank you very
much for the opportunity to testify this morning and to let you
know what we have been doing to implement this important
program.
Chairman Sarbanes. Well, thank you very much. We are
pleased to have this update.
I understand that, in the course of making the grants you
just announced, that you received 231 applications from 38
States requesting about $130 million in response to the
December notice of funds. Is that right?
Ms. Bair. That is correct.
Chairman Sarbanes. Of course, you had limited money
available. You were able to make 15 grants, totalling slightly
more than $8 million. So there is obviously a tremendous
potential out there, a lot of people seeking to participate in
the program. I am very concerned about the amount of money that
is being made available. I know the budget request this year
was only for $2 million for the First Accounts initiative. What
do you have left down there at the moment? About $2 million?
Ms. Bair. We have about $1.5 million. There was also
$300,000 earmarked for Alaska ATM's, and $100,000 earmarked for
Metropolitan Family Services in Chicago. So subtracting that, I
think, we have--plus the $8.3 million just awarded yesterday--
about a million and a half left.
We need to hold some of that back for administrative costs.
Obviously, there needs to be grant administration oversight of
the grant-making process. We want to do research and evaluation
of the pilots that we are funding because we think one of the
great value-added benefits to this program is being able to
highlight the success stories and publish them and bring
attention to them, so that we can encourage other financial
institutions and groups and others involved in this to
replicate them.
We are also considering with the money we have left over as
to whether it would help to do a national survey specifically
targeted on the unbanked population to further explore what
types of products and services best meet their needs.
The Fed's Survey of Consumer Finances, which you
referenced, is the best existing survey on that subject. We
have been talking with some in the community field and with
academics to see whether there would be value-added for that
survey.
We could take some of that remaining money and use it for
perhaps one more grant application. There was $2 million in the
2002 appropriation, and as you say, another $2 million has now
been requested in the 2003 appropriation. And certainly, we have a
number of meritorious applications in the pipeline that remain
unfunded right now because we gave out what we felt we had to
give out right now.
Chairman Sarbanes. Well, I know that the Administration
marches in lockstep once the OMB makes its decisions. But I
take it that if we worked hard here in the Congress to boost
the money in the coming budget for this purpose, that would not
distress or upset you.
Ms. Bair. My sense is that I really cannot speak to that
because I think resources are scarce. I think this is a policy
objective that the Administration strongly shares. But there
are a lot of competing policy resources right now,
unfortunately. So, I would have to stand by the $2 million that
has been requested in the Administration's budget.
Chairman Sarbanes. I do not want to make things difficult
for you this morning, but let me ask you this question. You had
231 applications. You picked 15 of them.
Ms. Bair. That is right.
Chairman Sarbanes. If we were doing a curve of the quality
of the applications, presumably, the 15 would be in the very
top category.
Ms. Bair. That is right.
Chairman Sarbanes. How many more would have been in the top
category if you had the money, of the 231? Or is this clearly
the top category and then we go to the next category?
Ms. Bair. No.
Chairman Sarbanes. If so, how many are in the next
category?
Ms. Bair. Right. My sense is that there is a progression
and that there are a number of--off the top of my head, I could
not give you precise numbers. We used a rating system, a
scoring process that was published in the NOFA last December.
But there was a fairly steady gradation. There were a number of
other grant applications that were very close to the point
rating cut-off that we had based on the amount of money.
Chairman Sarbanes. Would you say half of them? Maybe, a
quarter of them?
Ms. Bair. Jean Whaley is here, who was our principal staff
person in charge of this. Jean, do you know off the top of your
head?
[Pause.]
About a third, she said.
Chairman Sarbanes. About a third of the total were in the
quality category, so to speak.
Ms. Bair. Yes.
Chairman Sarbanes. So that would be about 75 or so of the
231. Is that right?
Yes. Okay. Now let me ask you this question. The CDFI fund,
which is under your jurisdiction, has made a big difference, I
think, in the ability of their members to reach out to the
unbanked. It has enabled community development credit unions to
open branches in, for instance, the farm worker community in
California.
Ms. Bair. Yes.
Chairman Sarbanes. The South Bronx, the lower East Side of
New York. It has enabled the credit union that serves the
Navajo and other reservations to add electronic services.
Actually, my colleague, Senator Johnson, in his Subcommittee,
is planning a hearing on the needs of Native Americans next
month to examine that particular question.
So there are other ways you can encourage this objective.
Here, I am suggesting working through the CDFI fund. Now,
again, we have a problem there in terms of its budgetary
allocations. But do you perceive that the CDFI's are an
effective instrument for trying to achieve this objective of
low-cost banking services?
Ms. Bair. There was a CDFI among the award grantees. Yes.
Chairman Sarbanes. I was thinking not so much there, but--
because you have a separate pot of money for the CDFI's.
Ms. Bair. Just focused on expanding----
Chairman Sarbanes. Whether there is a way you can use that
to encourage the CDFI's to move into this area.
Ms. Bair. It is an interesting idea. I think, certainly,
there is a lot of high value-added in targeting some measure of
CDFI award-making toward expanding access and creating
sustainable ongoing community-based financial institutions in
economically distressed regions. So, I think, yes, it is very
consistent with the CDFI fund's overall mission and one we
would certainly be open to exploring with you about whether we
should have a more clarified focus of their award-making.
Chairman Sarbanes. My time is up. I am going to yield to
Senator Crapo. Let me ask this final question. How much time do
you think you need before you can take a reading on whether
this is cost-effective, whether the 15 grants you have put out
are showing positive results?
Ms. Bair. I would say at least 12 months. This is a hard
population to reach. And the beginning effort will be marketing
outreach and identifying unbanked individuals. And also, a lot
of the awards require financial education in advance of
actually opening the account, which I think is a good approach
because a lot of the unbanked communities are previously
banked. But because they did not have the adequate financial
education and skills to know how to manage a bank account, they
got in trouble with overdraft fees or what have you, and
terminated their banking relationship.
So, we want to give them adequate lead time to do the
outreach, the marketing, the financial education, establish the
accounts, before we evaluate whether they are successful or
not. I would say that you want to give them at least 12 months.
Chairman Sarbanes. Sheila, I wish we had enough money or
could get enough money to have more than 15 trying this thing.
Ms. Bair. I understand.
Chairman Sarbanes. Particularly in light of what I
understand, that you would put about a third of the 231
applicants into the top category, quality category, because I
am worried that when we do
15, then everyone says, well, let's wait to get the results
from the 15.
I am not sure that is a broad enough effort or sample or
pilot to give us a chance to really take a reading. Out of 15,
if you have three or four that flop, so to speak, that is a
fairly large number out of 15 and you would be judging the
program in too narrow a focus.
So, I think we need to give some thought to how we can
engineer perhaps a second round so we broaden the number of
pilot projects that are out there, both in terms of the kind of
groups and also geographically, so you get a better spread.
Let's try to think together about how we might do that.
Ms. Bair. All right.
Chairman Sarbanes. Senator Crapo.
Senator Crapo. Thank you very much.
I probably should know the answer to this question, but Ms.
Bair, can you tell me what criteria are utilized to determine
which grants are successful or are awarded, as opposed to those
that do not qualify?
Ms. Bair. We put a high focus on results and we really
pushed the applicants to give us a number of how many unbanked
individuals they thought they could get into stable banking
relationships with their programs, and then also demonstrate
with reasonable specificity how their program would lead to
those results.
I think probably the numbers that we have, the 34,000 or
so, is probably a low estimate because we told them in advance,
we want to know exactly how many unbanked individuals you are
going to be able to put into sustainable banking relationships,
and as part of the evaluation process, we will be holding you
to that. So, I think they were probably conservative in their
estimates. We are hoping that many more than the 34,445 that we
have tallied up as part of the original round of grants will
take place.
We also put a high premium on whether the pilots that we
were funding could be replicable in other cities, assuming its
success. And also, whether they would be self-sustaining
because I think there is general agreement that this is a good
expenditure of Government resources to fund pilots, but some
concern about having an ongoing, certainly a permanent subsidy
program. So the more that we could encourage self-sustaining
pilots, we think is in everybody's interest. We also scored
high for those that demonstrated that type of promise.
Chairman Sarbanes. How many extra points were given if your
proposal encompassed the State of Idaho?
[Laughter.]
Senator Crapo. At this point, many, I am sure.
[Laughter.]
Ms. Bair. I would hasten to add that my review of the grant
applications, the names of the entities, as well as the States,
were redacted. So, I was operating blind with regard to both.
Senator Crapo. Well, we will have to get you the code.
Ms. Bair. I guess, yes.
[Laughter.]
Senator Crapo. The question I have in my mind actually
relates to this, though, because I am guessing that there is
probably a difference on the grant applications and on the
issues between urban and rural areas.
Ms. Bair. Yes.
Senator Crapo. And I would also guess that if you were
focusing on the ability to reach certain large numbers of
people, that urban areas would have a distinct advantage in
success in the grant application process. I do not know that.
As I indicated, Idaho was successful in being part of at least
a regional grant.
But the question I have is, is there any focus on the
urban/rural distinction? Is there any effort to try to make
sure that rural areas do get adequate representation in the
program?
Ms. Bair. I think that was adequately factored in because
six of the 15 are in urban areas, six are in rural areas. So,
yes, you are right. The urban areas have a greater
concentration of the community that we are trying to reach, it
might be easier in terms of just from a numbers perspective.
But there are other qualifying criteria that the proof is in
the pudding, so to speak, because six of the pilots are in
rural areas.
Senator Crapo. I appreciate that and I would just encourage
you to look further at it. It may be that we would want to
expand and provide other alternatives or opportunities to try
to reach rural areas because, frankly, a number of the rural
areas might just be disqualified because they do not have an
institution that would be able to participate in the grant
application.
Ms. Bair. Right.
Senator Crapo. So there may be some further thinking that
we need to apply to the question of how to get these services
further out into the rural areas. I appreciate your attention
to that.
Ms. Bair. Absolutely.
Senator Crapo. And again, that is all I have. But I just
want to also thank you very much for the effective attention
and work that you have been giving to this.
Ms. Bair. Thank you.
Chairman Sarbanes. Thank you very much.
We have been joined by Senator Stabenow. Debbie, we are
happy to yield to you.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. I was speaking
on the floor and unable to get here sooner. But I did want to
come and thank you for having this hearing.
Ms. Bair, we are very happy----
Chairman Sarbanes. I did not realize you were speaking on
the floor. Therefore, I wasn't put in the dilemma of whether we
should recess the Committee hearing.
[Laughter.]
Senator Stabenow. It would have been very nice if the Chair
had recessed so that people could watch with baited breath.
[Laughter.]
But understanding the conscientious nature of the Chair of
this Committee and the numerous meetings he holds every day----
[Laughter.]
In all seriousness, it is wonderful to have you here. I
also want to welcome on our second panel, Mr. Michael Barr, who
is from the University of Michigan, Assistant Professor of Law.
We are pleased and proud that the Chairman would have the
wisdom of having the expertise of someone from Michigan. And
since my son graduated from the University of Michigan--
although I have to say that I graduated from Michigan State----
[Laughter.]
So, we are a divided family. But it is wonderful to have
you here as well.
We have been, of course, looking at a variety of issues
that deal with financial literacy, predatory lending, now with
those who are unbanked, do not feel comfortable, whether it is
racial, cultural, other kinds of issues that come into play for
us in terms of barriers.
But I am wondering if you have identified regulatory or
legal barriers to reach out to those that we are talking about
today that are considered unbanked. And if you have suggestions
for legislative changes for the Committee in which we could
address this question and, hopefully, help make our financial
institutions, banking institutions, more accessible to those
who need them.
Ms. Bair. That is an interesting question, Senator, and I
would like to give it some further thought. No specific legal
or regulatory barriers come to mind, but I would like to give
that some thought. I think our focus has been more to try to
provide incentives and raise public awareness and awareness
among financial institutions of the importance of reaching out
to this community and thinking outside of the box, if you will,
thinking innovatively about how to reach out to this community
and how to redesign basic products and services so they are
more conducive to the unbanked population of people coming into
the banking system for the first time with little experience
about how banks work, how a bank account works.
So that has been the main thrust of our efforts. And I will
say that I think, as evidenced by the applications that we
received, as well as some of the innovations that some of the
major banks in the remittance field have taken, which I mention
in my testimony.
I think banks and credit unions have been extremely
responsive. They have been doing a lot of good work already and
we want to partner with them and community groups to continue
that.
Senator Stabenow. I would agree that oftentimes, we are not
talking about a legislative fix and we appreciate your
leadership and much of what we talked about with the question
of financial literacy is really the private sector that has
been coming together through a variety of means, Jump$tart and
a number of different coalitions that are really reaching out
and working in our schools and so on.
Ms. Bair. That is right.
Senator Stabenow. Even predatory lending, this whole
question of financial literacy and giving information to
people, really involves a partnership.
Ms. Bair. That is right. That is really true.
Senator Stabenow. So, I know that we need to be doing that.
I also know, though, that in both of those areas, there is a
role in terms of setting some kind of standards or expectations
or encouraging, and so on.
Ms. Bair. Right. I agree.
Senator Stabenow. You may have already addressed this, and
I apologize if you did in your testimony. But I am wondering
how the Department of the Treasury plans to track the success
of the First Accounts, and if there are certain measurements in
place to track the progress of the programs and if you are
going to be reporting back in terms of what has worked and not
worked, certainly that is very helpful to us.
Ms. Bair. Yes. There are ongoing reporting requirements. We
will be very hands-on in our monitoring of these grants.
I think, again, we are very excited. We had a number of
high-quality applications. I am very optimistic that the grant
applications that we have currently funded, we may be able to
fund a few more, are going to produce some significant
progress, in terms of bringing unbanked individuals into the
mainstream banking sector.
So, we will be working with them, closely monitoring, as
well as providing analysis of what has worked, what does not
work, and publicizing that, so that other institutions and
other communities can replicate the models that are successful.
In more detail, in terms of the detailed requirements, it
is addressed in my written testimony, the auditing requirements
and the reports that they are required to file.
Senator Stabenow. Thank you.
I finally would just say, Mr. Chairman, that Michigan is a
very large, very diverse State, large urban areas, many, many
small communities, from the southern border up to the Upper
Peninsula.
I hear concerns everywhere in Michigan--I do not hear it
only, although it is a very critical issue in our urban areas.
But I have heard the same kinds of needs and concerns in small
towns in Upper Peninsula, Michigan, or down in Benton Harbor
St. Joe and southwestern Michigan.
So, I appreciate and encourage you to look broadly at ways
to deal with those who are unbanked, whether they live in a
small rural community or they are in the city.
Ms. Bair. Having grown up in a town in southeast Kansas of
12,000 people, I am very sensitive to that. And thank you. That
is good input to have. We will.
Senator Stabenow. Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much. I had one other
point I wanted to touch on. And that is, I was very pleased to
see the reference in your statement about the question of
remittances.
Ms. Bair. Yes.
Chairman Sarbanes. We certainly welcome the focus by the
Treasury on this issue.
We held a hearing on that issue in this Committee and had
some very, very good testimony, which I am sure you reviewed.
And I noticed that President Bush, when he met with President
Vincente Fox in Monterey back in March, only 6 weeks ago, in the
joint statement, United States-Mexico statement, which they
issued, they talked about the Partnership for Prosperity. And
they said: ``We welcome the partnership's action plan of concrete
and innovative initiatives on housing, agriculture, infrastructure,
remittances, communications, development, financing, and
information technology.''
Then they state: ``Lowering the cost to Mexicans and
Mexican-Americans in the United States of sending money home so
that their families get to keep more of their hard-earned
wages.''
We have a terrific opportunity here. I think there is a
problem. We have a chance now, if we really work at it, and I
commend you for the effort that you have taken, to really get
these elements of the population that are kind of on the
outside in, where they can participate like everybody else.
Then they get the benefits of the competition that the rest of
us enjoy, and also the various consumer protections that are
written into that aspect of the financial industry.
Ms. Bair. That is right.
Chairman Sarbanes. I agree with you. I noticed in your
statement: ``Offering remittance features as a part of basic
bank accounts can be an important marketing tool in reaching
out to unbanked migrant workers.''
I think if we can get the industry over the transition
period and, in a sense, the start-up costs, they may well find
that this is a good market to develop. We certainly hope so,
because that would sit on its own base in the economic terms.
Ms. Bair. That is right. Three major banks have already
stepped up to the plate on this and we are very pleased. Their
remittance products are about half of what people typically pay
at a money transmitter. We think the answer to this question is
more competition, encouraging financial institutions to get in
and provide products and try to service this market as well.
As you noted, as I said in my testimony, we think another
advantage--again, we want people to have choices. We do not
want to tell them what to do. We just want to enhance their
choices.
But an advantage of choosing to use a mainstream financial
institution is that you can also establish a bank account and
start building up a credit history and establish a relationship
that could go into later getting reasonably-rated car loans or
home loans.
Instead of using the fly-by-night operations for your
lending needs, you have experience in stable relationships with
a lending institution where you can go for your credit needs.
So, in the long term, we think that is definitely an area of
promise.
Chairman Sarbanes. Of the grant awards--I did not count how
many, but more than a few, at least--are working through the
National Credit Union Foundation.
Ms. Bair. That is right.
Chairman Sarbanes. Which, in turn, is collaborating with--
well, in the instance that Senator Crapo was particularly
interested in, the Washington Credit Union League. I also feel
that this is an opportunity for the credit union movement--and
we are going to have a credit union representative on the next
panel--to deliver, in a sense, on what has been part of, at
least historically, the credit union movement.
Ms. Bair. Right.
Chairman Sarbanes. So, we are greatly encouraged by that.
Ms. Bair. I think credit unions have, and will continue to
play a very important role in this.
Chairman Sarbanes. Debbie, did you have anything else?
Senator Stabenow. No, thank you, Mr. Chairman.
Chairman Sarbanes. Ms. Bair is there a question we did not
ask that you wish we would asked, because you had an answer you
wanted to give?
[Laughter.]
Ms. Bair. Mr. Chairman, your questions have been very
thorough. And again, I just appreciate the opportunity of
coming and talking with you about what we have been doing at
Treasury. We support the program. We are happy to get it up and
running, and we are enthusiastic about the kinds of results
that it will produce.
Chairman Sarbanes. Terrific. We appreciate what you are
doing.
Ms. Bair. Thank you.
Chairman Sarbanes. Thank you very much.
If the next panel could come and take their places at the
table.
[Pause.]
I think it is fair to say that our second panel here today
brings a wealth of knowledge and experience to the issue of
providing greater access for unbanked Americans and bringing
them into the financial mainstream. We are very appreciative to
the members of this panel for their willingness to participate
in this hearing and to join with us in the effort.
I am going to go straight across the panel and we will
reserve the questions until we have heard from all five
panelists. I think that is the most efficient and expeditious
way to proceed. Instead of introducing everyone now, I will
simply introduce each person as we come to their turn.
So, Michael, we will start with you. Michael Barr is an
Assistant Professor of Law at the University of Michigan Law
School. Where he teaches banking and financial institutions
law. From 1997 to 2001, he served as the Deputy Assistant
Treasury Secretary for Community Development Policy, where he
was active in a wide range of issues regarding access to
capital and financial services, including the creation and
implementation of Treasury's ETA accounts and the First
Accounts concept, which we have been discussing earlier this
morning with Sheila Bair.
We have worked closely with Michael over the years and very
much appreciate his abilities and his dedication. We are very
pleased, Michael, you are here today. We would be happy to hear
from you.
STATEMENT OF MICHAEL S. BARR
ASSISTANT PROFESSOR OF LAW
UNIVERSITY OF MICHIGAN LAW SCHOOL
Mr. Barr. Thank you very much, Chairman Sarbanes and
Senator Stabenow. I appreciate the opportunity to be here today
to discuss how to bring more Americans into the financial
services mainstream.
Access to basic financial services is critical to success
in the modern American economy. Yet today, nearly 10 million
households lack the most basic financial tool--a bank account.
Twenty-two percent of low-income families, over 8.4 million
families earning under $25,000 a year, do not have an account.
The consequences of not having access to mainstream
financial services can be severe.
First, the unbanked face high costs for basic financial
services. For example, a worker earning $12,000 a year,
slightly more than the Federal minimum wage, would pay $250
annually just to cash payroll checks at a check cashing outlet,
in addition to fees for money orders and other common
transactions. Nearly 80 percent of checks cashed at check
cashing outlets are payroll checks, and another 16 percent are
Government benefit checks. These checks could be directly
deposited into bank accounts with significantly lower payment
systems costs.
The cost of these basic financial transactions can also
undermine public initiatives to move families from welfare to
work, and to make work pay through the Earned Income Tax
Credit. For example, one survey found that 44 percent of EITC
recipients in inner-city Chicago used check cashing services to
cash their Government refund check.
Second, low-income families need to save for injuries or
for job losses, as well as for key life events, such as buying
a home, saving for their children to go to college, or entering
old age. Yet low-income families, particularly those without
bank accounts, often lack any regular means to save. Bank
accounts can be important entry points for the provision of
regular savings plans for low-income workers, for example,
through payroll deduction.
Third, the unbanked are also largely cut off from
mainstream sources of credit. Without a bank account, it is
more difficult and more costly to establish credit to qualify
for a loan.
While the financial system works extraordinarily well for
most Americans, many low- and moderate-income individuals face
a number of barriers to account ownership.
First, regular checking accounts may not make economic
sense for many low-income families. Consumers who cannot meet
account balance minimums pay high monthly fees, and most banks
levy high charges for bounced checks. Banking institutions may
also charge high fees for money orders or other instruments
that typical consumers do not often use. Studies confirm,
though, that many of the unbanked would become banked if they
found a product that worked for them.
Second, many unbanked persons may not qualify for
conventional bank accounts. Nearly seven million people have
had accounts closed for past problems, such as writing checks
with insufficient funds or failing to pay overdraft charges. A
private clearinghouse keeps records of these problems for 5
years, during which time these individuals will be unable to
open a conventional checking account at most institutions.
While some persons undoubtedly do pose an undue risk for account
ownership, many of these individuals could responsibly use bank
accounts.
Moving forward, banks could offer accounts contingent on
completion of financial counseling and offer electronically-
based accounts with automatic money orders, and without check-
writing privileges, the kinds of accounts that pose little risk
of overdraft.
Third, while many communities contain adequate numbers of
banking institutions, in some low-income communities, banks,
thrifts, and credit unions are not as readily accessible to
potential customers. Low-income central city neighborhoods have
fewer bank offices per capita than higher-income ones and
similar patterns persist for ATM's. For example, in New York
and Los Angeles, there are nearly twice as many ATM's per
capita in middle-income zip codes as there are in low-income
zip codes.
Fourth, the financial institutions may be reluctant to
expend the resources for research, product development, bank
personnel training, marketing and financial education,
necessary to expand financial services to low-income
individuals.
Some progress has been made in recent years in expanding
access to financial services. The period 1995 to 1998 marked a
decline in the percentage of low-income families who are
unbanked from 25 to 22 percent. This decline in the percentage
of unbanked may reflect in part strong economic growth in the
late 1990's.
In addition, Treasury's EFT '99 Program has meant that
direct deposit of Federal benefits into bank accounts has
increased as a percentage of all Federal benefit payments from
58 percent in 1996, before EFT '99, to 76 percent in 2001. This
increase reflects an increase in direct deposit to existing
accounts, as well as an increase in the number of Federal
benefit recipients who have been able to obtain bank accounts.
Moreover, Treasury has launched the Electronic Transfer
Account, ETA, a low-cost electronic account for Federal benefit
recipients. Nearly 600 banks, thrifts, and credit unions are
offering ETA's at over 18,000 locations nationwide. Over 28,000
benefit recipients have opened these ETA's thus far, and new
ETA account holders are being signed up at a rate of over 1,000
per month.
More recently, a number of banks, thrifts, and credit
unions have begun to experiment with a variety of products
designed to serve the needs of low-income individuals, and you
will be hearing more about those from other panelists this
morning.
Treasury's First Accounts initiative could play an
important role in fostering innovation to reduce costs, lower
risk, and democratize access to financial services for low-
income families.
As Assistant Secretary Bair has testified, the results from
the first round of funding are very impressive. But only a
sustained commitment to the program will provide financial
institutions with sufficient incentive to make the necessary
investments to serve low-income households.
Banks, thrifts, and credit unions could experiment under
First Accounts with a wide variety of techniques. Transaction
accounts with debit cards but no checks reduce risks by
preventing accounts from being overdrawn, lower the cost of
processing each transaction, expand availability more cheaply
than branches, and decrease the risk to public safety, as the
Chairman has noted.
Banks could offer savings features including payment of
interest or separate savings buckets within accounts. Banks can
provide convenient and low-cost means to pay bills, for
example, through automated money orders. And as the Chairman
pointed out, recent efforts to reduce the cost of sending
remittances abroad holds special promise for bringing immigrant
communities into the banking system.
The First Accounts initiative has the potential to spur
``leap-frogging'' in technology for low-income families. To
offer a few examples that could be subjected to the test of
market feasibility: Providers of the network infrastructure for
debit and credit cards might explore how low-income customers
could be served on shared technological platforms. E-finance
can increasingly be made available to the poor at Internet
kiosks. And companies expanding the use of cellular telephones
to transact financial services for high-income clientele could
also focus attention on expanding banking products for the low-
income market currently utilizing prepaid cellular telephones.
Finally, First Accounts can also help to spur employer-
driven strategies to move toward banking services. Employers
can reap significant benefits from moving their workers to
direct deposit, driving down payroll processing costs,
increasing take home pay for workers, and reducing theft or
fraud associated with checks.
Employers can reach their employees with financial education
relatively cheaply. And financial institutions can deploy
debit-card-based payroll systems for their clients' employees,
providing direct deposit into low-cost electronic banking
accounts and systemic savings programs for low-income workers.
In conclusion, First Accounts and related initiatives can
help to transform financial services for low-income families.
Such a transformation is a key to promoting greater economic
opportunities for low-income communities.
Thank you.
Chairman Sarbanes. Thank you very much, Michael.
Our next panelist, Fran Grossman, is Executive Vice
President of Shorebank, the Nation's oldest and largest
community development bank, a legend in its own time, if I may
say so.
Ms. Grossman. The older I get, we should be first, not
oldest.
[Laughter.]
Chairman Sarbanes. Yes. Shorebank has been at the forefront
of efforts to connect the unbanked to mainstream financial
institutions and to facilitate ongoing savings and asset
accumulation in low-income households.
We are very pleased that you are here today, Ms. Grossman.
We would be happy to hear from you.
STATEMENT OF FRAN GROSSMAN
EXECUTIVE VICE PRESIDENT
SHOREBANK ADVISORY SERVICES
Ms. Grossman. I am very, pleased to be here. I thank you
very much for this opportunity.
Shorebank is a bit of a legend in its own time and
sometimes people think we are much bigger than we are and we
can accomplish much more than we actually can. In terms of this
hearing, the critical issue is that Shorebank is the first and
largest community development financial institution in America,
which means it has $1.3 billion in assets. It is not that big.
But the real issue for here, which I will get to when I
talk about First Accounts, is that we have been using a
financial institution as a catalyst for the community for 30
years. We are still at it using slightly different ways,
slightly different models, but the bottom line is 30 years
later, we are still at it. To me, that is the secret of what we
have to be doing as a Nation.
Our belief is that we can help make changes in communities
better by using a financial engine, a bank, as a means to make
things happen. We use our financial resources, our smarts, our
contacts. It is wonderful to be on this panel with two other
people from Chicago, both of whom are from different parts of
the spectrum, one from the Woodstock Institute and Bank One. We
work closely with both. We do not always agree, but we agree on
the goal, and we are going to get there, I hope, in my
lifetime.
Today, actually, I am speaking not only as a banker, but
also as an inner-city school teacher, a preschool teacher, a
social worker, a community worker in public housing, a
neighbor, a friend, a member of a religious institution, a
mother, a mother-in-law, and especially as a grandmother. All
of this has made me a pragmatic optimist.
I am actually very proud to be here with people like you
who want to figure out how to make sure that more people have
access to this country's financial industry.
I want to thank you for having these hearings and I want to
thank Sheila Bair and the Treasury Department for the creation,
and Michael Barr's work on the development of the First
Accounts initiative. I also want to thank Judy Kennedy and
NAHHL for working with us on this. And mostly, I want to thank
you, Senator Sarbanes, for holding this hearing and shining the
spotlight on this issue.
To me, it is very exciting that the Department of the
Treasury is doing this. Clearly, we are all here because we
want to figure it out. I am especially concerned with
encouraging people in saving and I always want to be sure that
there is an understanding between savings and transactions,
because they are different issues, and sometimes we get them
mixed up.
It doesn't mean one doesn't lead to another, but I think
the goal is to have savers, which is to say that the more
people save, the richer our country becomes in many ways. The
richer people are and the more they can do, the better their
future is and, therefore, our future as a Nation will be.
Michael pointed out that about the 10 million people who do
not have bank accounts. He also noted seven million who were at
one point banked and are no longer banked, 22 percent earn
under $25,000. So, I will not go into that.
But what we sometimes forget is all of those poor people
who do save. My grandmother was a widow, a very young widow
with three little kids. She had a job as a secretary many, many
years ago, and she saved like mad. She was frugal. She kept the
string, the wrapping paper, the like. She had money all over
the house, whether it was in the flour bin or the
refrigerator--actually, in those days, she did not have a
refrigerator. The best one we liked was in the encyclopedia
under M for money.
[Laughter.]
She did not go to a bank. Why didn't she go to a bank?
First of all, she did not trust them. There were men there. She
did not want anyone knowing what she had. And I often think
that if she had put some of that money in the bank, what would
have happened? We would have been rich with the compounding
interest. And that is the message in a sense that we have to
give people.
So, I think that there are many, many reasons why people do
not bank. Some of them are language. Some of them are
ethnicity. Some of them are cultural. Some of them are race.
Some of them are age.
I was thinking when I flew in this morning. I arrived and
asked where was the hearing and the woman said, go across the
hall. I am sitting in this room behind you and all these nice
little young men and women are walking through and I am just
sitting there waiting. Like what is going on here?
Here I am a well-educated woman, experienced with, high SAT
scores. I did not go to the University of Michigan, but I did
get in.
[Laughter.]
It never occurred to me to ask. I finally got up to go to
the bathroom and I saw somebody and she said, you are supposed
to be over here. And I thought what it must be like--I am so
intimidated by being here. I am a grown-up and I am smart and I
am educated, what is it like for those who have not had my
opportunities?
So, you begin to see what happens to people who, when they
go into a new place, they are scared, maybe a little defensive
and guarded. They think they are going to be disrespected and
if somebody looks at them the wrong way or asks them the wrong
question, they feel especially inadequate. We have a lot of
work to do.
My concerns actually with First Accounts are the ones that
you raised. I think it is a fabulous program. I think the
potential is marvelous. I am concerned that we are so result-
oriented on issues that are so, so hard, what we want--are fast
solutions. We want to do it today. We want to have the problems
solved. We want the most results.
We have to be disciplined, and that is me as a mother and a
teacher speaking. This takes time. We have to have standards.
But we have to manage our expectations to the size of the
problem. Some of the best applications on paper may not be the
best. They may need to be reworded or need rethinking.
We know how easy it is to hire somebody to write a good
grant, to write things. We really have to think seriously about
how are we going to dig deep and find the innovative and the
creative programs and work on making them work. It is going to
take time and we have to know that not all of our ideas are
workable. And of course, I have gone way off.
Let me just tell you a little bit about what Shorebank has
done over the past 6 years.
All of our branches in Chicago but one, which is in a small
building downtown, are in poor neighborhoods, as are our
branches in Detroit, as well as throughout Michigan.
We focus significant energy on serving the unbanked. We
have experimented with new products, delivery systems, and
outreach strategies. One of our recent new products was
introduced in 1998, that was something called the Individual
Development Accounts. Those are known as IDA's. It is a savings
account that is like a 401(k) in a shortened form. It is
matched dollar-for-dollar for low-income families saving to buy
a home, start a small business, or an education.
To date, we have opened more than 600 of these accounts. We
have trained hundreds in money management techniques and
witnessed the marvelous effects of this program. But in a sad
way, one of our best successes was our own employee who got
into the program, saved enough for a downpayment for a house,
and all of a sudden realized that she should have a 401(k).
In some sense, we did not even look into our own house to
see what we as employers, what each individual here can do to
help other people to understand. We have to model, all of us,
every day.
Another one that we are very proud of is the Extra Credit
Savings Program. This leverages the power of the Earned Income
Tax Credit, which we think is possibly the largest antipoverty
program in the country.
Beginning 3 years ago, we opened our bank lobbies in the
evening to volunteer tax preparers. Working families wanted to
have their taxes done for free and personal bankers were on
hand to open accounts. All they had to do was to have their
money transferred electronically to the account. They did not
have to keep it in there, but they had to have it transferred
electronically.
That year, more than 60 percent of the people who showed up
had no bank accounts. After receiving their refund, more than
half continued the account. But half did not and that is
important. We have to acknowledge what works and what we have
to work harder at. Some of them arranged to have their
paychecks automatically deposited. Others kept savings and
signed up. It was a small but significant growth and each year
that we do it, it gets better. Over the past years, we have
opened 350 accounts with tax refunds
totalling more than $250,000. We have also helped others
throughout the country replicate this program.
We think we should fully leverage the power of the Earned
Income Tax Credit to institutionalize the link between tax
systems and financial services. Just like Motor Voter. You go
in, you get your driver's license, you register to vote. If you
go in and have somebody help you prepare your taxes, you should
be able to open a bank account at the same time. So, I ask your
support for these kinds of acts. IDA has been successful. It is
not the answer. It is one answer to a hard question.
Also, having been a CRA officer for a large bank, I can
tell you CRA works, in some ways the same way. It is the
strength and the importance that people like you give to CRA
that make the banks say, ``Oh, this is important. They like
that. We are going to do it.''
As you know, things happen when the spotlight is shined on
them.
So, in conclusion, I guess my main message is it is
important that we have reasonable expectations and that we do
not get caught up in a numbers game of results. We have to give
this time. We have to make commitments. It is like raising
children. I do not think it is ever over.
[Laughter.]
But with all of our hard work and working together from
different angles, we can succeed in broadening financial
opportunities and making our country the kind of country we
want to live in.
Thank you.
Chairman Sarbanes. Well, thank you very much. We can see
from your testimony why Shorebank is such a dynamic
institution.
Since you mentioned the CRA, I would be remiss if I did not
acknowledge the tremendous contribution that Michael Barr made
when he was at the Treasury when we were working on that issue
here in the Congress. I want to again express my appreciation
to him for that.
Our next panelist is Jaye Morgan Williams, who is the
Senior Vice President and Managing Director of Community
Investment for the Nation's sixth largest bank holding company,
Bank One Corporation. Bank One Corporation, very much to its
credit, is partnering with numerous nonprofit organizations,
employers and others, to reach out to the unbanked with a
number of innovative initiatives.
Ms. Williams, we are very pleased to have you here today.
We would be happy to hear from you.
STATEMENT OF JAYE MORGAN WILLIAMS
SENIOR VICE PRESIDENT AND
MANAGING DIRECTOR OF COMMUNITY INVESTMENT
BANK ONE CORPORATION
Ms. Morgan Williams. And I am equally pleased to be here.
Chairman Sarbanes, Senator Stabenow, I appreciate the
opportunity to be here today on behalf of Bank One to discuss
our commitment to helping American families gain access to the
financial services mainstream and to share some of our
experiences in doing so. We are particularly proud to share
this panel with some of our Chicago colleagues, Marva Williams
from the Woodstock Institute, and Fran Grossman from Shorebank.
We have worked with both of those institutions over the years.
They are very dedicated to this problem and they have actually
been a source of inspiration to Bank One, as well as many other
Chicago organizations and others in the banking system.
Our commitment to the so-called unbanked stems from our
core belief that helping families gain access to the banking
system is good for these families. It is good for individual
communities. It is good for the national economy. And it is
actually good business for Bank One. We believe it is good
business both in the near-term and the long-term.
Before describing some of our programs, I would like to
briefly summarize what we at Bank One have learned as we have
pursued our commitment to helping families enter into the
mainstream of financial services.
First and foremost, the programs that you will hear about
today are works in progress. As hard as we try, we are just
beginning to understand the multitude of reasons that 10
million American families are unbanked. Devising programs that
succeed is often a matter of trial and error. We are proud of
our efforts and we are actually humble about our errors, which
often teach us the most.
Second, financial literacy, as you have heard today, is
essential for a successful banking relationship and credit
relationship. We believe we can trace our biggest
disappointments in these programs to instances when ``the cart
was put before the horse,'' that is when low-income
participants entered into banking or credit relationships with
too little understanding of the fundamentals of consumer
finance. We at Bank One believe that financial literacy
training is absolutely critical to the success of programs
servicing the unbanked.
Third, partnerships are essential. Our partnerships with
community groups, advocacy organizations, and community banks
are essential to mounting programs that reach the unbanked
population in a meaningful way. This is not a battle that can
be won with a go-it-alone strategy.
I would like to now briefly discuss four of our current
programs for bringing more American families into the
mainstream. I would like to first turn to Bank One's
Alternative Banking Program, our ABP Program, which we are
proud to participate in through the Chicago CRA Coalition, an
organization represented by one of my co-panelists, the
Woodstock Institute.
The ABP offers checking accounts designed to appeal to the
lowincome, unbanked customers. These accounts differ from our
traditional accounts in that they are easier to qualify for and
less expensive to maintain. Applicants may be approved with no
credit history, or little credit history, or with borderline
credit history. An account can be opened with a balance of only
$10, as opposed to $250, which is generally what is expected for
minimum account openings, and may be held with actually no
balance at all.
But as is true of all of our programs for the unbanked,
customers must be educated in the basics of consumer finance in
order to
succeed. For this reason, we conduct workshops in the ``ABC's
of Banking'' in neighborhoods around Chicago that surround the
banking centers that offer the products.
We are encouraged by the results we are seeing. Since we
rolled out the program in March of 1999, every single ABP
account holder would have been an individual who would not have
been eligible for a traditional Bank One account, due to the
lack of credit. Yet, the average checking account balance is
$1,100 and the average savings account balance is $1,600. We
are actually very proud of the results and we absolutely
believe these accounts represent significant savings
opportunities for low-income individuals.
Many who are unbanked, as you have also heard today, have
even a more basic concern, and that is personal safety. This is
the concern underlying our Communities Banking for Safety
Program. It is a program we offer in partnership with the
Dallas City Police Department and the Mexican Consulate and
other local banks. Bank One participates in ongoing community
meetings to promote trust in the United States banking system
among immigrants.
In conjunction with this outreach effort, we have made it
easier for Mexican immigrants to qualify for banking accounts.
As with the Chicago ABP account, applicants with no or minimal
credit history may qualify for deposit accounts. And in
deference to the special needs of immigrants, Bank One expanded
the list of acceptable forms of ID to include the Mexican Consulate
ID, called the ``Matricula,'' instead of a driver's license or a
Social Security card. The Matricula is accepted everywhere that
Bank One does business.
It might surprise some Members of the Committee to learn
that many of the unbanked Americans actually work in regular
paying jobs. We see the workplace as a very promising arena for
financial education, as well as initiating banking
relationships. Last fall, in Dallas, we initiated a pilot as
part of an ongoing program to promote Bank on the Job. Through
employers, we are offering low-income employees free checking
accounts if they sign up for direct deposit of their paychecks.
At the same time, representatives of Bank One's Community Investment Department provide on-site financial literacy training in many
subjects including budgeting, managing accounts, savings, and
homebuying.
Our Paycard Program is another workplace initiative that we
undertake in partnership with employers. The program allows
companies to pay unbanked employees through a Bank One Visa
stored value card. Bank One is currently marketing this product
to the employees of some of our large corporate customers, and
we are enthusiastic about the promise for the product.
Before concluding, I would like to use this opportunity to
recognize the leadership of the Treasury Department and this
Committee in addressing the problem of the unbanked. Chairman
Sarbanes, you have done so much to raise the profile of this
issue and to support the efforts to resolve it. The Treasury
Department has also demonstrated an ongoing commitment to
bringing unbanked Americans into the mainstream.
In conclusion, we emphasize Bank One's commitment to
helping 10 million American households who are outside the
financial mainstream become full participants in the American
economy through banking relationships. We hope that the
experiences we share with you today in terms of our product
offerings will add to our collective understanding of what does
work and what does not work, and that other institutions will take
advantage of this knowledge.
I think it is most important to share what we consider the
most important lesson with this Committee, and that is
addressing the needs of the unbanked population will require a
sustained team
effort involving mainstream financial institutions, community
institutions, advocacy groups, as well as the Government. It
will require diverse programs, trials and error, and constant
monitoring, reevaluation, readjustment, and product redesign.
We believe it will be hard work, but we believe that we can
all be successful if we work together. We thank the Committee
for inviting us to share our experiences and appreciate having
the opportunity to listen to our panel members and some of
their experiences as well.
Thank you.
Chairman Sarbanes. Thank you very much. It was extremely
helpful to have had the benefit of the report of what Bank One
Corporation is doing. You have been doing some very innovative
programs and we appreciate that very much.
We will now hear from Ms. Marva Williams, who is the Vice
President of the Woodstock Institute, a renowned nonprofit
organization formed in Chicago 29 years ago to promote
community reinvestment and economic development in low-income
and minority communities through both research, public
education and technical assistance.
Actually, Ms. Williams recently completed an analysis of
the development of bank accounts and financial literacy
training for lower-income, unbanked consumers. And so, we are
very pleased you are here with us. We would be happy to hear
from you.
STATEMENT OF MARVA E. WILLIAMS
SENIOR VICE PRESIDENT
WOODSTOCK INSTITUTE
Ms. Williams. Thank you very much, Mr. Chairman. I want to
thank you and the other Members of the Senate Banking Committee
for inviting me here to talk about a topic that is very dear to
me--providing opportunities for lower-income people to join the
financial mainstream. And I am also very pleased to join my
fellow Chicagoans, Fran Grossman and Jaye Morgan Williams, as
well as Michael Barr and Rufino Carbajal on this panel today.
The Woodstock Institute, in partnership with several
Chicago area banks, is promoting the establishment of lifeline
banking for lower-income people to establish deposit products,
to improve their financial literacy, and to develop assets. The
Woodstock Institute has a 29 year history of policy research,
public education, and technical assistance to promote access to
safe and sound credit. We also have a specialized knowledge of
lower-income families' use of basic financial services.
We believe that lifeline banking is crucial for consumers.
It is the foundation for building and developing assets. And
also, as Senator Sarbanes mentioned earlier, people who do not
have a relationship with a mainstream financial institution
also pay higher transaction costs to cash their checks, as
well, as to pay their bills.
However, as Michael Barr has said, there are many
challenges that lower-income people face when developing a
relationship with a mainstream financial institution. There is
the problem of limited access. There has been a decline in the
number of bank branches in lower-income communities per capita.
Costs can also be prohibitively expensive for lower-income
people. Credit status can also be a problem. Some banks conduct
credit checks, as well as scoring for applicants, so that
consumers with little or no credit or a slightly borderline
credit rating can be disqualified from establishing a bank
account.
Trust is also a major issue. Some unbanked consumers may
have attempted to access bank services in the past and been
repelled for a variety of reasons. In addition, poor
communication regarding
account guidelines can lead to misunderstanding. Further, many
recent immigrants distrust financial institutions or may have
concerns about immigration issues.
As Jaye Morgan Williams listed, financial literacy is also
a major issue. Lifeline banking requires significant education.
Without the skills to manage accounts, consumers may be faced
with high fees for nonsufficient funds and other transactions.
In addition, some consumers may need assistance when accessing
electronic banking.
The last challenge I would like to mention this morning is
related to lack of information and poor marketing. Many banks
have affordable accounts that are appropriate for lower-income
consumers. However, those accounts are not well marketed.
Based on these challenges, the Woodstock Institute has
identified what we think are some of the key characteristics of
a lifeline checking account product. They include flexible ID,
such as utility bills or the Matricula card, which is an
identification card that is issued by the Mexican Consulate.
And I am very happy to hear that Bank One is accepting that.
Also, flexible or no credit checks. We are also concerned about
the cost of the accounts, so we would like to see no minimum
balances, no monthly service fees, as well as no additional
charges to see a teller.
And the last characteristic is the promotion of direct
deposit of paychecks and Government benefits. We think that
this is a major entree for many lower-income people into the
banking system.
I would just like to say a word for a minute about what we
call intermediate products. Checking account products may not
be suitable for all consumers. They may instead prefer a
savings account and an affordable way to pay their bills.
However, very few financial institutions provide or market
affordable ways to pay utility bills and other bills.
There are two Chicago-based institutions--the North Side
Community Federal Credit Union and First Bank of the Americas,
which offer electronic bill payment services. Customers can pay
their utility bills and other bills for as little as 30 cents.
I would also like to mention that these financial
institutions have affordable options to payday loans, which has
become a major problem in many lower-income communities. And
they also provide inexpensive ways for people to transfer money
to their relatives in Mexico.
Now, I would like to provide three examples of projects
that the Woodstock Institute has worked on.
First of all, I would like to talk about the alternative
banking program which is offered by Bank One. We have been very
pleased with that partnership and believe that the alternative
banking program has made a major difference for many lower-
income people.
However, the Alternative Banking Program is only available
at eight branches in the city of Chicago, and we recommend that
Bank One extend that program to reach more unbanked consumers
in Chicago and other markets that Bank One operates in.
Our second area is financial literacy partnerships. We have
developed relationships with several Chicago-area banks. These
efforts have resulted in the integration of financial literacy
programs within each bank's retail banking division.
Several bank-community partnerships have been established
or strengthened through this work as well. And most
importantly, the banks that we have been working with provide
an opportunity for workshop participants to open accounts and
to develop a relationship with customer service
representatives.
Third, the CDFI Fund has played an integral role in
expanding lifeline banking opportunities by providing grants
and investments to CDFI's. CDFI's have a track record of
providing financial services in distressed urban and rural
communities.
One example is the Northeast Community Federal Credit Union
which is located in San Francisco. Organized in 1981, this
credit union is committed to meeting the unmet financial needs
of lower-income community residents, many of whom are recent
immigrants or refugees from societies where financial
institutions are not trustworthy or accessible. Further, some
people are concerned that maintaining a deposit account might
violate citizenship or immigration regulations. Northeast
Community works with local community organizations to provide
information about U.S. financial institutions and it also
allows consumers to establish accounts with flexible and
alternative forms of identification.
There are five lessons that I would like to share this
morning that we have developed as a result of our relationships
with banks and other organizations.
The first lesson is the importance of program marketing.
Marketing strategies should be developed by banks in
relationships with community-based organizations and with other
organizations that are involved in consumer issues.
The second lesson is financial literacy. Banks should work
in partnership with the community and other organizations to
provide information on basic banking.
The third lesson is the importance of bank staff. I think a
major component of the success of these programs is the
enthusiasm and expertise of bank staff and the value of
courteous, front-line staff cannot be overstated.
The fourth lesson is in account disclosures. Account
disclosures should be translated from legalese into standard
language so that they are understandable for consumers at all
reading levels. In addition, many of these materials should be
translated into Spanish and other languages as appropriate.
Our fifth lesson is related to reducing costs for banks. It
is important to consider how banks can cut costs and provide
basic financial services. Most retail account products are not
profitable. One banker told me that financial institutions make
80 percent of their profit on retail products from 20 percent
of their customers.
Some ways we would like to suggest to reduce overhead and
other service costs include promoting phone banking, which can
cut costs for financial institutions, as well as consumers, and
also to increase electronic access to banking. This option may
require extensive financial literacy training, but we believe
that in the long-term, that it is beneficial for the financial
institution, as well as for the consumer.
In closing, I would like to thank the Committee for
inviting me here today to share my experiences on lifeline
banking. This is a topic that is very near and dear to me.
Expanding lifeline banking is essential to improving the
financial personal health of millions of Americans. I am
confident that with the sustained efforts of the Treasury
Department, financial institutions, and community organizations
we can shrink the number of unbanked consumers in this country.
Thank you very much for this opportunity and I would be
pleased to answer any questions you may have later.
Chairman Sarbanes. Well, thank you very much. It is
extremely helpful testimony.
I want to say to all the panelists that the written
statements that you have submitted will be included in full in
the record. I had a chance to go through them, not in the
detail that I hope to do subsequently to this hearing, but I do
recognize the significant effort that was put into preparing
these statements and they are going to be enormously helpful to
us in terms of the ideas you have put forth and also the way
you have outlined the existing situation. We do appreciate the
effort that obviously went into them.
Our concluding panelist is Mr. Rufino Carbajal, who is the
Manager of the West Texas Credit Union--we are breaking out of
the Chicago monopoly here.
Ms. Grossman. We will count West Texas as the Midwest.
[Laughter.]
Chairman Sarbanes. The West Texas Credit Union, is a State-
chartered credit union with 11,000 members located in El Paso,
Texas. They have made a special effort to reach out to minority
populations by offering a range of products that meet their
particular needs, including, as I understand it, lower-cost
remittances.
Mr. Carbajal. Correct.
Chairman Sarbanes. Mr. Carbajal, we would be happy to hear
from you.
STATEMENT OF RUFINO CARBAJAL, JR.
MANAGER, WEST TEXAS CREDIT UNION
ON BEHALF OF
CREDIT UNION NATIONAL ASSOCIATION (CUNA)
Mr. Carbajal. Thank you very much, Chairman Sarbanes. My
regards to our Senator, Senator Gramm, who is not with us
today.
I am honored to be here this morning----
Chairman Sarbanes. He was not able to make this hearing,
but he particularly wanted to express his appreciation for the
work that you are doing there in El Paso.
Mr. Carbajal. Thank you.
I am honored to be here this morning to present testimony
on the plight of the unbanked and the underserved. I am Manager
of the West Texas Credit Union, a $34 million credit union that
serves about 11,000 members in El Paso, Texas. I am here on
behalf of the Credit Union National Association.
I am extremely pleased that the major focus of this
morning's hearing is the implementation of the First Accounts
Program, particularly in light of yesterday's announcements of
the awards by the Treasury Department. We are gratified that
Treasury has reached out to credit unions to apply for the
First Accounts that many may be included as recipients of the
grant awards.
I am especially excited that West Texas Credit Union is a
participant with CUNA National Credit Union Foundation and the
El Paso Credit Union Affordable Housing Credit Union service
organization is a grant recipient.
Our grant of $92,504 will connect 4,000 unbanked low- and
moderate-income individuals in El Paso and El Paso County to
insured credit union accounts over a period of 2 years. Other
grants to credit unions will provide over $2.85 million to
credit unions in
12 other States, reaching a potential of thousands of unbanked
individuals. We are extremely grateful to have been chosen to
receive these grants and look forward to making this program a
huge success.
Shifting to another important issue, I am proud to say that
West Texas Credit Union has been offering its members the
opportunity to wire money back to Mexico. We use the World
Council of Credit Unions service called International
Remittance Network, IRNet'. This service saves our
users at least one-third the cost of using the high-cost money
transfer agent.
While many credit unions are leading the way in ensuring
that immigrants have access to affordable remittance and
financial services, these efforts would be significantly
enhanced if Congress allows credit unions to provide their
service to nonmembers within the field of membership. I am very
excited that the House of Representatives has initiated
legislation to do just that.
I am equally proud that West Texas Credit Union is one of
many credit unions that are among the leading providers of
Individual Development Accounts. Chairman Sarbanes'
announcement of this hearing referred to the inability of the
unbanked to acquire financial assets and save for the future.
If ever there was a product developed to serve exactly that
purpose, it is the IDA. And if ever there was an institution
developed to provide those accounts, it is the credit union,
whose mission of ``People Helping People'' fits perfectly with
the goals of the IDA. We look forward to the passage of the
bill that will expand incentives for the IDA's.
West Texas Credit Union, in partnership with the El Puente
Community Development, began offering IDA's in October 2001.
Once a participant reaches his or her goal, El Puente CDC will
authorize the withdrawal of the funds. But before the funds are
withdrawn the account holder must complete a course in
financial literacy.
Legislation currently before Congress would greatly enhance
the number of IDA accounts in existence. The Savings For
Working Families Act has been introduced both as a free-
standing bill and incorporated within other legislation. I urge
the Senate to support this very important initiative.
Credit unions recognize that it is necessary to offer some
form of financial literacy training to successfully integrate
the unbanked into the financial mainstream. That is why they
have traditionally made financial education a part of their
mission. Credit unions provide financial information and
training to members on a one-to-one basis, and actively work in
the schools to teach personal finance skills to children and
teenagers. CUNA has formed a partnership with the National
Endowment for Financial Education to teach the High School
Financial Planning Program' to high school seniors
across the Nation.
Another exciting program offered by the West Texas Credit
Union is our Affordable Housing Program. With the grant money
from CUNA's National Credit Union Foundation and the Texas
Credit Union League, the State Credit Union Foundation, eight
credit unions located in El Paso, Texas, chartered and wholly-
own the El Paso Affordable Housing Credit Union Service
Organization. The AHCUSO is an affordable mortgage and
homeownership counseling agency whose mission is to provide
financial literacy and homeownership counseling to thousands of
low-income El Paso residents.
The AHCUSO has partnered with the El Paso Housing Authority
and has committed $1.8 million to the financing of affordable
homes, of which approximately $500,000 has been closed. HUD
provides downpayment assistance, and the financing and
servicing is being done by the AHCUSO.
Credit unions also recognize that consumers and their
members must give viable options to avoid the traps of
predatory lenders. Credit unions have stepped up their efforts
to combat predatory lenders in neighborhoods by offering
affordable alternatives for both payday loans and mortgage
loans. Regrettably, however, the demand for these payday loans
continues to increase and there are now more payday loans
across the country than there are credit unions.
Finally, CUNA applauds Chairman Sarbanes and other Members
of the Committee for your commitment to eliminate predatory
lending practices through the introduction of ``The Predatory
Lending Consumer Protection Act of 2002.'' We look forward to
reviewing the details of the bill and working with the
Committee staff to support the passage of an effective
antipredatory lending law.
In conclusion, I have witnessed firsthand that poor people
want to work and know that even with a little bit of savings,
they can grow and thrive. Whether it is through the First
Accounts Program, affordable housing programs, enhanced IDA's,
expanded opportunities to serve their communities, or financial
literacy, credit unions stand ready to meet this very important
challenge.
I thank you again for the opportunity to offer the views of
credit unions on this very important topic.
Chairman Sarbanes. Thank you very much, sir. We very much
appreciate your being here with us today and the role that the
credit union movement is playing in this field.
I have just a few questions to put to the panel and then we
will draw to a close.
The Federal Reserve, in its 1998 survey of consumer
finances, said that 48 percent of families--in other words,
almost half, without a checking account, had previously owned a
checking account at some time in the past. I was really brought
up short by that figure. Here we are, talking about the
unbanked. They do not have a checking account. And then we
discover that half, at least according to this survey,
previously had checking accounts. They were in the banking
system. Now, what is behind this? Why did they drop out of the
banking system and how much of a problem are they in terms of
bringing them back in?
It is one thing to say, well, these people have never been
in the banking system for a lot of reasons, and you address
that. It seems to me a somewhat different problem to say, well,
these people were in the banking system and they got out of it.
Does anyone want to address that? Michael?
Mr. Barr. I am happy to start. That is quite a critical
issue in terms of bringing low-income families into the banking
system.
The individuals who have been in the banking system and
have come out might fall into, roughly speaking, two groups,
those who have had problems with the system and voluntarily
exited, and those who have exited because their accounts have
been closed because of problems with not being able to manage
their finances in a way that permits them to avoid writing
checks with insufficient funds, primarily, but also because of
not paying overdraft charges, or in some cases, fraud.
I think it is important in looking at the unbanked not to
think of them as an homogenous group, but as different segments
of the market.
Individuals who effectively have had credit problems with
the system can still be brought back into the banking system.
The question is, under what circumstances? And I think the
tentative answer is that there are products and services that
can be offered in a reasonably safe way, even to people who
have had problems in managing finances in the past. Those are
primarily accounts that do not have check-writing privileges,
in which withdrawals can be done on an on-line debit basis.
Automated money orders can be provided. And the risk of
overdraft is negligible, with some technical exceptions for
small institutions, those that use a different batching
process. But for most institutions, accounts can be provided
with very little risk of overdraft.
So, I think those kinds of products could be quite
attractive--both to people who have had problems and have
involuntarily exited, and to people who have had problems and
been effectively kicked out--and at lower cost and less risk to
financial institutions.
The second major component of the answer is financial
education. And I think our panelists have all been uniform in
believing that financial education is an important part of the
answer.
Chairman Sarbanes. Does anyone else want to answer that?
Ms. Grossman. We have about 40,000 to 50,000 accounts. The
vast majority of the accounts are people in low- and moderate-
income.
And I realize I have to go back--I was writing down to do
homework. One of our larger costs is the closing of accounts
and the waiving of fees.
For us, it is a big problem and I think Michael has hit it.
It is not simple. The economy goes down. People need money. It
is very easy to be mad at your bank and therefore, you are
going to write a bad check because you have to be mad at
somebody--why not a bank?
But there are a variety of reasons and I think it is a real
challenge to recognize that we have to have products and ways
to deal with them that are not punitive, that do not demean
people, and yet, still keep them so we do not lose money, so
that it becomes a very unprofitable business.
And I am going to talk to Michael later. I think we really
need to look at just some of the data and see what happens to
those 40,000, 50,000, what the costs are, what the fee waivers
are, and begin to look at other institutions in the same way,
because I think you have hit on a real hidden issue.
Chairman Sarbanes. Let me ask this question, and I would
like to get all the panelists to respond to this. Can the
unbanked market be profitably served by financial institutions?
In other words, can this all be done in a way that makes it
economically self-sufficient? If we are really serious about
getting the unbanked in, are we going to have to produce an
underwriter from somewhere? What is the answer?
Ms. Williams. Well, I am not a banker, but I do have an
opinion about that question, of course, as you might expect I
would.
[Laughter.]
According to experts that I have talked to, most retail
products are not profitable. Retail products are offered to
consumers to make them loyal customers of a bank and to enable
the bank to cross-sell other products.
Chairman Sarbanes. You mean as a general proposition.
Ms. Williams. Right.
Chairman Sarbanes. Yes, not just for the unbanked.
Ms. Williams. That is right, in general. And one of the
advantages that we found through the Alternative Banking
Program at Bank One is that the bank has been able to cross-
sell products. They have sold Alternative Banking Program
customers car loans, installment loans, home mortgages,
certificates of deposits, and other products. And so, that is
the first thing to consider in terms of profitability.
I think it is also important to consider electronic banking
alternatives. There are a number of new technologies that are
being evolved. There are smart ATM's that can do all kinds of
financial functions. There are ways to pay bills
electronically. There are automatic money order machines that
can also cut costs.
Mr. Carbajal. Excuse me. Speaking from the credit union
side of it. Our credit union has been a low-income designated
credit union for many, many years. We deal with the low income,
which, El Paso is, unfortunately, one of the poorest
metropolitan areas in the Nation.
I feel that our credit union has been successful. I believe
that there is a niche out there. We just need to understand
these types of people. You have to understand that it is a
high-volume, labor-intensive type of operation. But the
benefits are there. If you know how to deal with the under-
served, I think there is some financial benefits for the
institution in the long run. So, I feel that there is. There is
a lot that we can do out there for those people, and I think it
can be profitable.
Chairman Sarbanes. Ms. Morgan Williams.
Ms. Morgan Williams. I guess I would like to start off by
suggesting that I think that they have to be profitable. I
think it is a very important question and it is an important
aspect of this issue that we have to stay focused on.
The reason we have to stay focused on it is that, in order
for this to work, it needs to be sustainable. We have to make
sure that both the product design and the product offerings are
offered in a way that allows us to do well while we are doing
good. It is important that they are profitable because you will
increase the level of interest and the level of participation
in the financial services industry, if we can keep an eye
toward profitability.
What is important, though, is that the R&D efforts are
fairly significant. So when we look at supplemental support or
subsidy support, it should really be in the early stages of
product development and product design.
Our objective with the ABP is to transition those accounts
to mainstream accounts. We do a once-a-year look at the end of
12 months, how many of these accounts would be appropriate to
transition to mainstream accounts? We would expect those to
move into our traditional banking products.
Chairman Sarbanes. Does anyone else want to add anything?
Ms. Grossman. Yes. I think there are segments of the market
that are profitable. But I also, having been experienced in
private banking, some of it is accommodation. We accommodate
private bank customers. We make loans to them. We do weird
things for them. We do not lose money, but we do not make money
in the large private banks, in the major banks.
So when you make a loan to a son-in-law or a cousin or you
open an account for somebody's housekeeper, those are
accommodations, and you look at the whole relationship and you
say, well, we are really making money.
The question becomes, I think it is the R&D. It is also
beginning to think about them differently. Who are we
accommodating? Will the State government put more money into an
institution where they can make money on fees and services if
they offer certain kinds of things? Are there ways of being
creative and saying, we want it done, but we know that it is
not going to serve the same kind of profit?
It is not going to lose money, but it may not have the same
return on equity as the other parts of the bank, and that means
that the people who are doing that do not necessarily get the
same kind of importance within the bank. So, I think we have to
think about it very clearly and be honest that it is not as
profitable as other businesses, but it does not lose money.
Mr. Barr. Treasury research suggests that banks can serve
the unbanked profitably on an ongoing basis. Electronic bank
accounts offering debit card transactions can be profitably
offered for fees of under $3.00 per month. Savings features,
automated money orders or bill payment, and other
electronically-based products can also be offered profitably at
low fees that would be affordable and desirable for the
unbanked. At least initially, Governmental support will be
needed for financial institutions to make the necessary
investments in research and development, expanded distribution,
and training and marketing. Account opening costs will likely
also need to be supported in the short-term as an incentive, in
order to reduce the time it will take banks to recoup initial
account opening costs.
Financial education is not a function that banks will fund over
the long-term, and will continue to need Governmental support
for some time.
Chairman Sarbanes. Can employers impact on this and are any
of them doing it?
Suppose you had an employer who said to a bank that was his
bank, I really want all my employees to have an account. And I
am setting out to try to accomplish that as their employer.
Now, first of all, I do not know whether under State law, I
guess, I would have to look into this. I should know the
answer, I guess, whether an employer can say to all his
employees, you are going to get your payment by an electronic
transfer into a bank account, which everyone tells me is the
cheapest--the Government now is doing that, in order to save
money. And presumably, employers could save money.
Now whether they can do that under existing law--how does a
very large employer have to pay his employees? Does he actually
have to give them a check or a payment under State law, or can
he put it directly into a bank? I presume he can do that if the
employee wants him to do that. But suppose the employee does
not want to do that. Does anyone know the answer to that? You
are the professor of law.
Mr. Barr. Yes. But, unfortunately, not of State employment
law. There is no Federal rule and I do not know any State
banking rule that would touch on that issue. A lot of employers
are in fact using direct deposit today. Employers, I think you
rightly point out, are a critical part of how we can move
forward to reach the unbanked.
Direct deposit of payroll is an important way in which low-
income workers can have access to the banking system. And as
you point out, it is less expensive for employers in terms of
their
payroll.
I know within the Federal Government, we saved 42 cents a
payment to move electronically from checks. It is certainly a
greater efficiency for the payment system. It increases take-
home pay for their workers if their workers are not having to
go to a check cashers. A lot of check cashers have mobile vans
that go to large work sites and charge quite large sums to cash
what could be easily converted into a payroll check. So, I
think that it is an extraordinary opportunity to reach quite a
large number of unbanked individuals at scale quickly.
Ms. Morgan Williams. Most large companies offer electronic
banking or direct deposit to their employees. And I would say,
by and large, 80 percent of their employees partake in that.
The challenge for employers is to the financial services
options that an employee might choose because, generally, the
direct deposit is with that corporation's bank. But most
corporations participate in it. Our Bank at Work Program is one
where we encourage employers, actually smaller employers, to
encourage their employees to pursue banking relationships and
direct deposits. Then the Paycard, the Value Card, is the other
option that employers can offer to a community of employees
that might not otherwise use banks.
Chairman Sarbanes. Right. Now one of the things we are
interested in which relates to this is financial literacy. And
the Committee has held hearings on financial literacy. I am
very pleased, of course, that the Treasury is now establishing
a new office the Office of Financial Education.
I did not get to ask Sheila Bair about that, but she has
been
active in that as well. It will be under the Assistant
Secretary for
Financial Institutions. It will be headed by a new Deputy
Assistant Secretary. They have this Financial Education
Initiative on Bank on Your Schools, a partnership with the
schools.
We think this is all extremely important. And it also
becomes relevant as we address predatory lending, although I do
not think that education can take the place of appropriate
legislation or regulation. I think it has to be part of a
package to try to do that.
Now, Ms. Morgan Williams, as I understand it, you all have
a very active educational program. Is that correct?
Ms. Morgan Williams. Yes, that is correct.
Chairman Sarbanes. Could you just again kind of outline
that very quickly for us?
Ms. Morgan Williams. Sure. In all the markets we operate
in, and we are in 15 States across the country, we have
approximately 50 individuals who are specifically focused on
understanding both the product needs and the program needs of
the communities we operate in. And those tend to be low- and
moderate-income community focus. In each of those markets, we
offer either paper-based or electronic-based financial literacy
programs. They teach basic financial management, credit repair,
homebuying counseling, a full stream of financial services
options.
In some markets, we offer financial literacy in high
schools, where we are teaching high school students the
appropriate thoughts around budgeting and planning as they
prepare to leave high school and think about adult
responsibilities around literacy.
I also am responsible for the bank's community development
activities in affordable housing. We offer financial literacy
programs with faith-based organizations and in senior projects,
where we have been a project participant. But we have a broad
array of products and programs and services and a number of
individuals who participate in delivering those.
Chairman Sarbanes. Good.
Mr. Carbajal, what do you all do?
Mr. Carbajal. Yes. As a matter of fact, we have the same
basic programs that they have in the city of El Paso. We work
with the El Paso high schools.
Very encouraging, though, is that this grant that we just
received is going to be used for this purpose, to go out there
to the unbanked, the under-served, and try to educate them.
What we have done is we have partnered up with nonprofit
institutions in El Paso, such as Project Bravo, YMCA, and those
agencies or those nonprofit organizations, to help us educate
our people in El Paso.
I guess we have become a community-chartered credit union
last year and I think that is going to give us the ability to
be able to go out and reach more into the community, whereas,
before, we were only limited to the members that we were
serving. So, we are looking forward to that and with the
program that we have put into place, we got it going at the
beginning of the year. We have already put some homes out there
for the low income and we are doing a lot of educating, or
adding education to our community.
Chairman Sarbanes. Good.
Well, this has been a very good panel and we are extremely
appreciative to you. We look forward to staying in touch. I
hope we can call on each of you in the future for further
counsel as we continue to try to address this issue.
As I indicated in my opening statement, I think that it is
an extremely important issue. It is very rewarding to see
people who have kind of been on the outside, not all of a
sudden, but slowly transition into becoming part of the system.
I know you encounter that in the course of your daily work
and I really commend all of you for what you are doing, and we
thank you very much for coming today.
Ms. Grossman. Thank you.
Mr. Barr. Thank you.
Chairman Sarbanes. The hearing stands adjourned.
[Whereupon, at 12:08 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF SHEILA C. BAIR
Assistant Secretary for Financial Institutions
U.S. Department of the Treasury
May 2, 2002
Introduction
Chairman Sarbanes, Senator Gramm, and distinguished Members of the
Committee, I appreciate the opportunity to appear before you this
morning to talk about the unbanked and to bring you up to date with
respect to First Accounts, a grant program administered by the Treasury
Department, which is designed to help ``unbanked'' low- and moderate-
income individuals establish banking relationships with Federally
regulated and insured financial institutions. Mr. Chairman, I commend
you for focusing a national spotlight on this critical issue of
expanding consumer access to mainstream financial services by convening
today's hearing, as well as the hearings you held earlier this year on
the remittance industry and financial education. The policy objective
of First Accounts is embraced by Members of both parties. It is of
great importance to me personally, to the Treasury Department, and to
the Bush Administration.
Secretary O'Neill recently noted that: ``We must work to ensure
that all Americans have the knowledge and tools to build their own
financial security. Ownership, independence, and access to wealth
should not be the privilege of a few. They should be the hope of every
American.'' Establishing a bank account at an insured depository
institution is one of the basic tools necessary for individuals to
build their own financial security. Expanding low- and moderate-income
Americans' access to mainstream banking services is very much in line
with the compassionate conservatism of President Bush to give all
Americans the chance to fully participate in the benefits of our free
economy. In a recent speech, President Bush defined this compassionate
conservatism, by saying ``It is compassionate to actively help our
fellow citizens in need. It is conservative to insist on responsibility
and results.'' Consistent with this philosophy, we have strived to
direct First Accounts funding to those initiatives which can be
replicable, self-sustaining, and most importantly, promise to bring the
greatest number of ``unbanked'' individuals into bank accounts.
Background
Who are the unbanked? While most Americans have the comfort of
keeping their money at insured depository institutions, other Americans
use financial services of a different sort. They cash checks at a
neighborhood storefront and pay bills in cash or with money orders.
Easy and convenient perhaps, but often expensive, dangerous, and not
economically productive. Simply put, the unbanked are people who do not
have a banking relationship with a traditional financial institution,
such as a commercial bank, a savings and loan association, or a credit
union.
Although there are few statistics available regarding the true size
of the unbanked population in the United States, some estimates
indicate that as many as 1 in 10 families, or approximately 10 million
households, may not have bank accounts.\1\ According to a January 2002
report, surveys have found that the groups most likely to be unbanked
are lower-income households, households headed by
African-Americans and Hispanics, households headed by young adults, and
households that rent their homes.\2\
---------------------------------------------------------------------------
\1\ Michael H. Moskow, Fostering Mainstream Financial Access:
www.chicagofed.org/unbanked, Chicago Fed Letter, Number 162 (Feb.
2001)(http://www.chicagofed.org/publications/fedletter/2001/
cflfed2001__162.pdf).
\2\ John P. Caskey, Bringing Unbanked Households Into the Banking
System, Capital Xchange (Jan. 2002) (http://www.brook.edu/dybdocroot/
es/urban/capitalxchange/article10.htm).
---------------------------------------------------------------------------
Given the estimated size of the unbanked population in the United
States, an obvious question is why do so many people remain outside of
the mainstream banking system? Are they shut out of the system or have
they made a conscious choice to not do business at traditional
financial institutions? Surveys on this issue reveal varied responses
to these questions.\3\ Some individuals who are unbanked cite financial
reasons; they say that bank fees or minimum balance requirements are
too high. Other unbanked individuals suggest that they choose to remain
unbanked because the types of accounts offered by traditional financial
institutions do not meet their needs. For example, a person may not
write enough checks or have enough month-to-month savings to make it
worthwhile to maintain an account. Attitudes toward banks also appear
to be a factor as a large number of people surveyed indicated that they
are not comfortable dealing with banks or letting them know their
private financial information.
---------------------------------------------------------------------------
\3\ Id.
---------------------------------------------------------------------------
Advantages to Being ``Banked''
An individual should have the right to choose where he or she will
seek financial services. The right to choose, however, is an illusory
right if people do not have accurate and complete information that will
enable them to make educated decisions and access to a range of
financial service providers.
The unbanked typically pay higher costs in the form of transaction
fees for financial services than individuals with banking
relationships. Recent Treasury research indicates that a minimum wage
worker can pay an average of $18 per month for cashing paychecks at a
check casher.\4\ A Social Security recipient would pay an
average of $9-$16 a month to cash his or her risk-free Government
check. Relying on alternative service providers as a source of credit
is equally or more expensive. Annualized interest rates for loans from
pawnshops, car-title lenders, payday lenders, and small loan companies
can be as high as 100 to 500 percent.\5\
---------------------------------------------------------------------------
\4\ Moser, supra note 1.
\5\ Caskey, supra note 2.
---------------------------------------------------------------------------
Individuals also face heightened safety and security risks as a
result of having to conduct all financial transactions in cash.
Carrying large amounts of cash is dangerous and keeping cash at home is
risky. There have been a number of recent news stories describing how
criminals have specifically targeted unbanked immigrants for robbery as
they leave check cashing outlets because of the likelihood that these
individuals are carrying a significant amount of cash.\6\ Other
articles cite cases of people losing their life savings in fires
because they kept it hidden in their homes in the form of cash.\7\
Unlike traditional depository institutions, alternative financial
services providers cannot offer their customers deposit account
products. Deposit accounts at insured financial institutions offer a
safe place to keep money until the depositor is ready to spend it.
---------------------------------------------------------------------------
\6\ CU's Testify Provisions of the Patriot Act Could Harm
Immigrants, Credit Union Journal (Feb. 25, 2002).
\7\ Angela Shah, Money in the Bank: Accounts Helping Wary
Immigrants Park Cash Safely, Send It Home, The Dallas Morning News
(Aug. 19, 2001).
---------------------------------------------------------------------------
Let me emphasize that we do not question the validity of products
offered by
alternative service providers. They can offer the advantages of
immediacy and con-
venience, for which the providers charge a premium. We do believe,
however, that low- and moderate-income Americans should have choices,
and those choices should include the ability to establish an account at
a mainstream financial institution such as a bank, thrift, or credit
union.
Finally, establishing a banking relationship is taking a first step
toward building a promising future. Individuals lacking basic financial
services may have a reduced ability to manage their finances, and may
be limited in planning and saving for
the future. Without a banking account, it is nearly impossible to
establish a sound
credit record, which in turn is necessary to qualify for a car loan,
home mortgage, or small business loan at reasonable rates. A
traditional banking relationship offers the account holder an
opportunity to become familiar with fundamental financial concepts that
are critical in asset building and bank accounts provide a tool to help
families fulfill their savings goals and manage their money.
Treasury Initiatives
Through the First Accounts Program, Treasury is funding initiatives
to connect unbanked low- and moderate-income individuals to mainstream
financial services. The paramount goal of First Accounts is to move a
maximum number of unbanked low- and moderate-income individuals to a
banked status with an insured depository institution. We hope to
accomplish this goal through the development of financial products and
services that can serve as replicable models in meeting the financial
services needs of unbanked individuals without the need for on-going
public subsidies. Under First Accounts, financial institutions are
encouraged to create low-cost accounts for unbanked families and to
help bring more ATM's to safe places in low-income communities.
Additional goals of the program include the provision of financial
education to unbanked low- and moderate-income individuals to enhance
the sustainability of the new financial relationships. We will also
undertake research to evaluate the success of the funded projects and
to understand what products, services, educational initiatives,
marketing techniques, or incentives are needed to achieve the goals of
the First Accounts Program. Treasury has great hope that the pilot
programs funded through First Accounts will serve as replicable, self-
sustaining models for achieving the goal of moving a significant number
of unbanked individuals into banking relationships with insured
depository institutions.
There are a number of reasons that individuals remain unbanked,
including a lack of low-cost account products; a lack of convenient
access; a perception of unprofitability; an individual's prior account
problems; and a lack of customer financial literacy. First Accounts
provides an opportunity and an incentive for entities to offer real
solutions regarding the supply of and demand for traditional banking
products and services in unbanked segments of the population. For
example, nonprofit organizations may provide consumer financial
education. Employers may provide convenient access. Financial
institutions may demonstrate the profitability of serving previously
unbanked customers through the development of new products designed to
meet the needs of low- and moderate-income Americans.
Treasury's First Accounts initiative was launched this past
December 27 with a published notice of funds availability, a NOFA, in
the Federal Register inviting applications for First Accounts
grants.\8\ The amount currently available is approximately $8 million
to fund projects that can serve as models to connect unbanked low- and
moderate-income individuals to mainstream financial services.
---------------------------------------------------------------------------
\8\ 66 Fed. Reg. 66,975 (Dec. 27, 2001).
---------------------------------------------------------------------------
First Accounts applicants were required to propose, at a minimum,
low-cost electronic checking, or other types of accounts either
directly (if the applicant is an insured depository) or indirectly
through one or more insured depository institutions. The NOFA put
particular emphasis on trying to reach unbanked employees through their
employers, as well as encouraging arrangements whereby employees can
obtain account services building from services already provided by
their employers' financial institutions. Applications were due March 20
and a wide variety of entities were eligible, and in fact did, apply
for the grants. The applicants included nonprofit organizations,
insured credit unions and banking institutions, community development
financial institutions, for-profit businesses, State agencies, Indian
tribal governments, local governments, financial services electronic
networks, and others. In total, Treasury received 231 applications from
38 States. Eighty-nine percent of the proposed projects proposed to
expand access of affordable financial services, 58 percent proposed to
develop new financial products and services, and 88 percent proposed to
educate unbanked individuals, employers, and institutions.
During the last few weeks, we have been busy completing our review
of the applications. The competitive review process involved evaluating
the applications based on a number of different criteria including:
likelihood of success, reasonableness of approach, extent to which a
project becomes self-sustaining, extent to which projects are
replicable, timeliness of rollout and estimated timeframe to achieve
objectives, performance goal setting, applicant's experience and track
record, and management capability. The application reviewers dedicated
many hours to assessing the applications and preparing their
recommendations, considering not only those factors listed above, but
also geographical and institution diversity.
After careful consideration, the Treasury Department is announcing
its selections for First Accounts grants. The 15 awards totaling
$8,357,234 promise to assist 35,445 ``unbanked'' low- and moderate-
income individuals in opening accounts at insured depository
institutions. A complete list of grant awardees is attached to my
testimony for inclusion in the record.
The First Accounts grant awards are going to nonprofit
organizations, insured depository institutions, insured credit unions, a community development financial institution, a faith-based organization,
and a foundation. The awardees will carry out projects that provide
financial literacy training, connect individuals to insured
accounts, develop low- or no-cost products and services, and increase
access to financial services through installation of automated teller
machines. The projects are focused on a wide variety of unbanked people,
including youth, new entrants to the workforce, recent immigrants,
residents of low-income communities, residents in rural areas, native Americans living on reservations, people living in public housing, and families using child care facilities. Awardees pledge that the funded
projects will cause 35,445 unbanked people to move to a banked status
with an insured depository institution.
Grant recipients will be targeting unbanked people in 25 States:
California, Colorado, District of Columbia, Georgia, Idaho, Iowa,
Illinois, Kentucky, Maryland, Michigan, Montana, New Jersey, New York,
Nevada, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania,
Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
Information on the 15 projects awarded grants and on First Accounts
can be found at www.treas.gov/firstaccounts.
Treasury's role in the First Accounts Program will not end with its
selection of grant recipients. Treasury's on-going involvement with
First Accounts will include evaluating the programs for progress,
deliverables, and effectiveness on a regular basis. In addition,
Treasury will receive periodic reports from the grant recipients. Once
we have data on the success of programs, the Administration will
consider the cost-effectiveness of continuing First Accounts or other
similar types of programs.
Another Federal program that is supported by the Administration and
shares First Account's goal of encouraging the unbanked to move into
the mainstream
financial services sector is the Electronic Transfer Account (ETA)
Program. The ETA Program, which is administered by Treasury's Financial
Management Service, provides low-cost electronic bank accounts to
Federal benefits recipients. To date, the ETA is offered in every
State, the District of Columbia, and Puerto Rico through appoximately
600 banks with more than 16,000 branch locations. Treasury plans to
continue to examine the benefits of the ETA Programs and, if necessary,
make recommendations to the Administration and Congress on how to
coordinate its ETA efforts with First Accounts to ensure that the unbanked receive valuable services in the most cost-effective manner.
Let me also highlight a number of other initiatives that Treasury
is working on related to the unbanked. First, we have a number of
efforts underway that are aimed at improving financial education. As
part of our long-term commitment to improve financial education for all
Americans, we are establishing a new office at Treasury. The Office of
Financial Education (OFE) will be under the leadership of the Assistant
Secretary for Financial Institutions and will be headed by a new Deputy
Assistant Secretary. OFE will develop and implement financial education
policy initiatives, and will oversee and coordinate our outreach
efforts.
One of Treasury's financial education initiatives is ``Bank on Your
Schools,'' a partnership between schools and financial institutions
that will promote financial education in low- and moderate-income
areas. This initiative will encourage financial institutions to open
student-run branches in high schools. Students will get hands-on
experience running a bank or credit union, and they will learn about
financial issues. We have been meeting with the major financial
institution trade groups and gathering information to develop ways to
expand these programs into low- and moderate-income communities.
Through ``Bank on Your Schools'' programs, young people gain actual
experience in opening and managing a bank account that can be carried
over into their adult lives.
Another topic that is often overlooked in the discussion of the
unbanked is the remittance industry. The Inter-American Development
Bank estimates that Latin American immigrants living in the United
States send an average of $200 to their native countries an average of
seven to eight times per year.\9\ These remittances have reached a
level that surpassed $23 billion last year--about one fifth of total
worldwide remittances.\10\ If current growth rates are maintained,
cumulative remittances could reach $300 billion by 2010. Most
immigrants send remittances through a small number of alternative
financial services providers. Lack of competition in the remittance
industry has contributed to high remittances costs. Although remittance
charges have declined in the past 2 years, they still range from $15 to
$26 for a typical $200 remittances. The cost varies depending on the
type of institution used to send the money and the country where the
money is being sent, but can often exceed 20 percent, when transmission
fees and losses on the exchange rate are both factored in.
---------------------------------------------------------------------------
\9\ Remittances to Latin America and the Caribbean, Multilateral
Investment Fund/Inter-American Investment Bank (Feb. 2002) (http://
www.iadb.org/mif/website/static/en/study3.doc).
\10\ Id.
---------------------------------------------------------------------------
But this is changing. With our encouragement and support, more and
more traditional financial institutions and credit unions are
recognizing that there is a concrete opportunity to attract a diverse
consumer base by offering low-cost remittance products. Offering
remittance features as part of basic bank accounts can be an
important marketing tool in reaching out to unbanked migrant workers.
One important product that banks and credit unions can offer that money
transmitters cannot is a Federally insured checking or savings account.
This can lay the foundation for new customers to save and build assets,
establish a banking relationship, and learn about important tools in
personal finance. At the same time, the increased competition should
result in lower remittance costs. We support any efforts made to make
the process of sending remittances more affordable for the people who
use it--most of whom are low-wage earners according to available data.
Conclusion
In closing, I would like to commend the efforts of the many banks,
credit unions, and community- and consumer-based entities and groups--
some of whom are represented on the panel that follows me this
morning--who have recognized the problems faced by the unbanked segment
of the population and undertaken initiatives to bring these individuals
into the financial mainstream.
Expanding access to financial services is a bipartisan issue that
contributes to improved financial well-being among many low- and moderate-income individuals. Opening an account at an insured depository
institutions provides the account holder with a number of benefits: the opportunity for wealth building; lower costs for financial services;
security; knowledge of and familiarity with the fundamentals of personal finance; and the chance to build a credit history and qualify for credit
on better terms. Because of these benefits, Treasury is committed to
promoting policies that will encourage unbanked individuals to
establish traditional account relationships with insured banks and
credit unions.
To accomplish this goal, Treasury has focused on both educating
individuals about the benefits of being banked and persuading
depository institutions to expand and tailor services for this
underserved segment of the population. First Accounts addresses both of
these goals. In addition, by developing replicable and sustainable
models, the achievements of the First Accounts grant recipients do not
have to be limited by the parameters of the original proposals. Other
entities hopefully will see the success stories, and establish similar
types of programs to serve the needs of a segment of the unbanked
population that they may be uniquely qualified to reach. As a result,
Treasury hopes that the effects of the First Accounts Program will
reach far beyond the initial group of pilot programs.
Thank you for the opportunity to appear here today. I look forward
to working with the Committee on these issues in the future.
* * * * *
FIRST ACCOUNTS
Last Updated January 27, 2003
Summary of May 2002 Grant Awards
The Treasury Department announced its selections for First Accounts
grants on May 1, 2002. The 15 awards totaling $8,357,234 will assist
35,445 ``unbanked'' low- and moderate-income individuals in opening
accounts at insured depository institutions. The awardees were selected
from among 231 applications from 38 States. Those applicants requested
$129,895,034.
The funds for First Accounts grants result from appropriations in
the Consolidated Appropriations Act, 2001 and the Department of
Transportation and Related Agencies Appropriations Act, 2001. The
purpose of the appropriations is to develop and implement programs to
expand access to financial services for low- and moderate-income
individuals. Treasury published a notice of funding availability on
December 27, 2001, inviting applications for projects that would move a
maximum number of ``unbanked'' low- and moderate-income individuals to
a ``banked'' status with an insured depository institution. The
deadline for application submissions was March 20, 2002. In just over 1
month, a team of reviewers scored the 231 applications on eight
criteria: reasonableness of approach; likelihood of success; self-
sustainability; model qualities; timeliness; performance goal setting;
experience of participating entities; and management capability.
The First Accounts grant awards are going to nonprofit
organizations, insured depository institutions, insured credit unions, a community development financial institution, a faith-based organization, a local government, and a credit union foundation. The awardees will carry out projects that provide financial literacy training, connect individuals to insured accounts, develop low- or no-cost products and services, and
increase access to financial services through installation of automated
teller machines. The projects are focused on a wide variety of unbanked people, that is, youth, new entrants to the workforce, recent immigrants, residents of low-income communities, residents in rural areas, native Americans living on reservations, people living in public housing,
families using child care facilities.
Grant recipients will be targeting unbanked people in 25 States:
California, Colorado, District of Columbia, Georgia, Idaho, Iowa,
Illinois, Kentucky, Maryland, Michigan, Montana, New Jersey, New York,
Nevada, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania,
Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
The paramount goal of First Accounts is to move a maximum number of
unbanked low- and moderate-income individuals to a banked status with
an insured depository institution through the development of financial
products and services that can serve as replicable models in other
communities without the need for on-
going public subsidies.
Information on the 15 projects awarded grants follows.
FIRST ACCOUNTS GRANT AWARDS--May 2002
California
Juma Ventures in San Francisco, California, has been selected to
receive a First Accounts grant in the amount of $250,000. The grant
funds will be used to connect 505 unbanked low- and moderate-income
youth in San Francisco to accounts at
insured depository institutions over 2 years. Juma Ventures is
collaborating with Citibank to expand an Independent Development
Account Program, offer banking and literacy training to youth employed
in its six for-profit social enterprises and connect them to accounts,
and begin a pilot in a high school. The pilot will use media-based
banking literacy training to give unbanked high school students a
practical knowledge of banking. The students will have the opportunity
to open a low-cost checking or savings accounts with electronic access.
The program will be expanded to additional schools in future years.
Additional funding and in-kind contributions are coming from the
Friedman Foundation, Hewlett Foundation, Merrill Lynch Foundation,
private donations, and Citibank.
Colorado
Mile High United Way in Denver, Colorado, has been selected to
receive a First Accounts grant in the amount of $1,267,500. The grant
funds will be used to connect 2,375 unbanked low- and moderate-income
individuals in the Denver metropolitan area to insured accounts at
insured depository institutions over 2 years. Mile High United Way is
collaborating with Wells Fargo-West to provide low- and no-cost bank
products including Individual Development Accounts and financial
management and economic literacy training. The project will reach out
to the unbanked population through employers and through community-
based organizations that include labor unions, faith-based and
immigrant-serving organizations, and workforce development public
agencies. Four area employers have committed to be involved in
promoting the low- or no-cost bank products to employees. The project
takes advantage of existing relationships between individuals and their
employers and community-based organizations. If successful, the
initiative will be expanded to five metropolitan areas in the State.
Additional funding and in-kind contributions are coming from Wells
Fargo-West, Mile High United Way, Rocky Mountain Mutual Housing
Association, and Del Norte Neighborhood Development Corporation.
Georgia
DeKalb County Extension Service in Decatur, Georgia, has been
selected to receive a First Accounts grant in the amount of $271,000.
The grant funds will be used to connect 330 unbanked low- and moderate-
income individuals in Decatur, Atlanta, and south central DeKalb County
to insured accounts at insured depository institutions over 2 years. To
implement the project, the Extension Service has formed The DeKalb
Collaborative consisting of DeKalb County Workforce Development
Department, Decatur High School, Decatur/DeKalb Housing Authority,
Columbia Village Residential Properties, New Leaf, Women's Bureau,
Stakeholder Partnerships Education and Communication, Decatur First
National Bank, Wachovia Bank, Bond Community Federal Credit Union, and
Branch Banking & Trust. The project will provide consumer education
workshops in English and Spanish and issue certificates to those
completing the curriculum. The certificates are taken to one of the
four banking partners to open a low-cost banking account. ``Lunch and
Learn'' sessions will be held with local employers; the DeKalb County
government is committed to participate. The project focuses on
education in small groups over an extended period of time, working
through the partnering agencies and it focuses on choice of banking
establishments. The DeKalb County Extension Service and the DeKalb
Workforce Department are making in-kind contributions.
Iowa
The Institute for Social and Economic Development in Coralville,
Iowa, has been selected to receive a First Accounts grant in the amount
of $301,000. The grant funds will be used to connect 265 unbanked low-
and moderate-income individuals in 16 census tracts in Des Moines to
insured accounts at insured depository institutions over 2 years.
Called ``Bank On It!'', the project will provide 8 hours of financial
literacy training, assistance to identify and resolve obstacles to
opening a bank or credit union account, and links to other asset-
building programs to help meet family economic goals. Graduates will
receive a certificate they can take to a partnering institution--
Bankers Trust, Wells Fargo, Iowa State, Financial Plus Credit Union--or
another institution. Graduates can receive assistance for 6 months to
assure keeping their account in good standing. The focus is on
partnerships forged between social organizations and banks to overcome
obstacles to accounts. Banking partners will present the last training
session of the financial literacy training. The emphasis is on
resolving problems, on building a firm financial knowledge, and
maintaining the accounts. Additional funding is coming from the Annie
E. Casey Foundation, Milbank Memorial Fund, and American Express
Foundation.
Illinois
The Center for Law & Human Services in Chicago, Illinois, has been
selected to receive a First Accounts grant in the amount of $686,566.
The grant funds will be used to connect 1,000 unbanked low- and
moderate-income individuals in Chicago and Detroit to insured accounts
at insured depository institutions over 2 years. The project is a
partnership of The Center for Law & Human Services, Accounting Aid
Society, Shorebank, National Consumer Law Center, and Consumer
Federation of America. The project will attract individuals who will
have their tax returns prepared free-of-charge and allow them to open
bank accounts into which their income tax refund can be deposited.
First, individuals open a savings account, followed by financial
education and an opportunity to open a checking account. Year-round
financial literacy classes are offered to provide the necessary skills
to maintain and manage the new accounts. The project focuses on using
the earned income tax credit and free tax preparation to encourage
opening accounts. Each of the partners is making in-kind contributions
to the project.
Kentucky
Members First Federal Credit Union in Louisville, Kentucky, has
been selected to receive a First Accounts grant in the amount of
$130,000. The grant funds will be used to connect 600 unbanked low- and
moderate-income individuals in 64 census tracts in Jefferson County,
Kentucky, and Belle, West Virginia, to insured accounts at insured
depository institutions over 1 year. The project will provide accounts
with no minimum balance and no monthly fee. An automated teller machine
will increase access in the West Virginia location. The project focuses
on educating consumers about regular savings, working with limited
resources, and understanding the true costs and benefits of financial
services. Additional funding is contributed by the credit union and by
foundations.
Michigan
The Mission of Peach Housing Counseling Agency in Flint, Michigan,
has been
selected to receive a First Accounts grant in the amount of $592,654.
The grant funds will be used to connect 660 unbanked low- and moderate-
income individuals in Genesee, Oakland, Saginaw, Lapeer, and Shiawasee
Counties to insured accounts at insured depository institutions over 2
years. The project will be implemented by a partnership of Mission,
Fifth Third Bank, Genesee County Family Independence Agency, and local
small businesses. Individuals will receive education, banking access,
and counseling support during their transition to using banking
services. The project will install three ATM's within the five counties
to increase access to financial services. The focus of the project is
on unmarried, under-employed, and unemployed persons. Additional
funding and in-kind contributions are coming from Fifth Third Bank,
Michigan State University Interns, and Michigan State University
Community and Economic Development Program.
Montana
Native American Development Corporation, a community development
financial institution in Billings, Montana, has been selected to
receive a First Accounts grant in the amount of $425,812. The grant
funds will be used to connect 290 unbanked low- and moderate-income
individuals on Wind River, Crow, Northern Cheyenne, and Flathead
Reservations to insured accounts at insured depository institutions
over 2 years. The project will promote financial literacy, giving 20
hours of college credit or TANF credit, award certificates accepted by
the CDFI, and provide free checking and savings accounts. Three
automated teller machines will be installed to increase access to
financial services. The project focuses on employers' involvement at
three levels: employed participants will seek direct deposit with their
employers; employers with five or more employees participating in the
project will join the Coordinating Team; and the Coordinating Team will
serve as advisors to the project. Additional funding will come from
First Interstate Bank and J.M. Cozzens.
New York
National Credit Union Foundation in Washington, DC, in
collaboration with the New York Credit Union Foundation has been
selected to receive a First Accounts grant in the amount of $765,806.
The grant funds will be used to connect 2,100 unbanked low- and
moderate-income individuals in rural and metropolitan counties of New
York State--Albany area; New York City; Buffalo/Niagara area; and
Tompkins, Washington, Warren, and Saratoga Counties--to insured
accounts at insured depository institutions over 2 years. The New York
Credit Union League, working with five credit unions, Cornell
University, and Cornell Cooperative Extension will provide low-cost
accounts to individuals new to the workforce at urban, metropolitan,
and rural credit unions. This is an employer-based project in which
employers will identify employees and provide training space for an
educational component--the WorkForce Development Initiative--delivered
by Cornell Cooperative Extension. Four portable automated teller
machines will be used for education. The project
focuses on new workforce entrants.
Additional funding and in-kind contributions will be coming from
the New York Credit Union Foundation and the New York State Credit
Union League.
North Carolina
Latino Community Credit Union in Durham, North Carolina, has been
selected to receive a First Accounts grant in the amount of $1,334,000.
The grant funds will be used to connect 6,600 unbanked low- and
moderate-income individuals in two North Carolina regions to insured
accounts at insured depository institutions over 2 years. The project
will open two branches of the Latino Community Credit Union to provide
low-cost electronic accounts, on-site financial education, an employer
outreach program, and special deposit products to meet the needs of
Latino immigrants. The project focuses on Latino immigrants in nonurban
areas of the State. The State Employees' Credit Union is making an in-
kind contribution to the project.
Ohio
Fifth Third Bank in Columbus, Ohio, has been selected to receive a
First Accounts grant in the amount of $760,863. The grant funds will be
used to connect 1,000 unbanked low- and moderate-income individuals in
south, near east, near north, and west sides and the north east
quadrant of Columbus to insured accounts at insured depository
institutions over 2 years. The Bank is collaborating with the Ohio CDC
Association, The Ohio State University Extension Center, Homes on The
Hill, Columbus Neighborhood Housing Services, MiraCit Development
Corporation, South Side CAN, and Northside Development Corporation in
``Community Partners Banking on the Unbanked.'' The project will
provide financial and economic literacy training, install three
automated teller machines, and connect individuals to Totally Free
Checking accounts. Four public-sector employers--City of Columbus,
Central Ohio Transit Authority, Columbus Metropolitan Housing
Authority, and Columbus Public Schools--are committed to market the
program to their employees. The project is a collaborative, city-wide
model to reach unbanked persons throughout the community. Additional
funding and in-kind contributions are coming from Fifth Third Bank.
Texas
National Credit Union Foundation in Washington, DC, in
collaboration with El Paso Credit Union Affordable Housing, a credit
union service organization, has been selected to receive a First
Accounts grant in the amount of $92,504. The grant funds will be used
to connect 4,000 unbanked low- and moderate-income individuals in El
Paso and El Paso County to insured accounts at insured depository
institutions over 2 years. The service organization will work with
eight credit unions to reach out and engage unbanked persons in their
areas to low-cost electronic checking and savings accounts. In
addition, a homeownership counselor located at each credit union will
explain how to take advantage of account features. Additional funding
and in-kind contributions are coming from National Credit Union
Foundation, Texas Credit Union Foundation, and the eight participating
credit unions--El Paso Area Teachers Federal Credit Union, El Paso Bell
Federal Credit Union, Fort Bliss Federal Credit Union, Golden Key
Federal Credit Union, Government Employees Credit Union of El Paso,
Mountain Star Federal Credit Union, and West Texas Credit Union.
Wisconsin
Legacy Bank in Milwaukee, Wisconsin, has been selected to receive a
First Accounts grant in the amount of $342,467. The grant funds will be
used to connect 500 unbanked low- and moderate-income individuals in
Milwaukee to insured accounts at insured depository institutions over 1
year. The bank has established an alliance with the Child Care
Directors' Group and the Early Childhood Council of Milwaukee to bank
child care providers, providers' employees, and the parents served by
the providers and to give on-going support and services to ensure the
sustainability of the banking relationship. Three automated teller
machines will be installed, including one at a child care facility used
by 1,500 adults weekly. The project focuses on the child care industry
and on maintaining accounts that are established. In addition to
conducting seminars on how to use bank products, Legacy Bank will
monitor accounts weekly. Problematic customers will be invited for
additional education and counseling with Family Services of Milwaukee
and the University of Milwaukee-Wisconsin Extension. Additional funding
is coming from Legacy Bank.
Mid-Atlantic Region
Boat People S.O.S. in Falls Church, Virginia, has been selected to
receive a First Accounts grant in the amount of $604,492. The grant
funds will be used to connect 1,120 unbanked low- and moderate-income
individuals in the District of Columbia; Northern Virginia; Suburban
Maryland; Camden, New Jersey; Philadelphia, Pennsylvania; and Hampton
Roads, Virginia to insured accounts at insured depository institutions
over 2 years. The project will target Vietnamese refugees and
immigrants in the United States for less than 10 years and individuals
60 years of age and over to open bank accounts with its partner
Citibank, which is offering no-charge or low-charge checking accounts
and workshops on financial literacy. Individuals will receive free tax
counseling and tax return preparation and individual development
account enrollment, if eligible. Beginning in the mid-Atlantic States,
the project will spread to 12 locations across the United States. Local
partnerships of community-based organizations will continue the
activities. Citibank and volunteers from the community-based
organizations are making in-kind contributions to the project.
Northwestern Region
National Credit Union Foundation in Washington, DC, in
collaboration with Washington Credit Union League has been selected to
receive a First Accounts grant in the amount of $532,570. The grant
funds will be used to connect 14,100 unbanked low- and moderate-income
individuals in California, Nevada, Washington, Oregon, Idaho, Montana,
North Dakota, and Utah to insured accounts at insured depository
institutions over 18 months. The project will provide basic consumer
financial education and the individuals will develop responsible, low-
cost, trusting relationships with mainstream financial institutions.
Participants will also gain access to affordable international money
transfer services at greatly reduced costs through the credit unions
using IRNet'. The project will be implemented through a
network of experienced financial specialists in each of the eight
States. Twenty-seven credit unions are participating. The project
focuses on financial literacy in rural areas as a means of connecting
individuals to insured accounts.
----------
PREPARED STATEMENT OF MICHAEL S. BARR
Assistant Professor of Law
University of Michigan Law School
May 2, 2002
Chairman Sarbanes, Ranking Member Gramm, and distinguished Members
of the Committee, I appreciate the opportunity to be here today to
discuss how to bring more Americans into the financial services
mainstream.
My testimony today is based on my experience serving as Deputy
Assistant Secretary of the Treasury for Community Development Policy,
and research undertaken with the assistance of the Ford Foundation as a
nonresident Senior Fellow at the Brookings Institution and now an
Assistant Professor at the University of Michigan Law School.\1\
---------------------------------------------------------------------------
\1\ See generally, M. Barr, Access to Capital and Financial
Services in the 21st Century: Five Challenges for the Bush
Administration and the 107th Congress, http://www.brook.edu/urban/
capitalxchange/article4.htm, reprinted in 16 Notre Dame Journal of Law,
Ethics & Public Policy 101 (2002). I am exploring the issues raised in
this testimony in greater detail in an academic article in progress,
``Banking the Unbanked,'' the research for which is being funded by the
Ford Foundation and supported by the Brookings Institution.
---------------------------------------------------------------------------
The Unbanked
Access to basic financial services--owning a bank account, having
the tools to manage household finances, and being able to save for the
future--is critical to success in the modern American economy. Yet
today, nearly 10 million U.S. households--9.5 percent of U.S.
households--lack the most basic financial tool, a bank account. Twenty-
two percent of low-income families--over 8.4 million families earning
under $25,000 per year--do not have either a checking or savings
account.\2\
---------------------------------------------------------------------------
\2\ A. Kennickell et al., Recent Changes in Family Finances:
Results from the 1998 Survey of Consumer Finances, Federal Reserve
Bulletin, January 2000.
---------------------------------------------------------------------------
The consequences of not having access to mainstream financial
services can be
severe.
First, the ``unbanked'' face high costs for basic financial
services. For example, a 2000 Treasury study found that a worker
earning $12,000 a year would pay approximately $250 annually just to
cash payroll checks at a check cashing outlet,\3\ in addition to fees
for money orders, wire transfers, bill payments, and other common
transactions. Regular payments with low credit risk that could be
directly deposited into bank accounts, with significantly lower payment
systems costs, form the bulk of checks cashed at these check cashing
outlets: nearly 80 percent of checks cashed at check cashing outlets
are regular payroll checks, and another 16 percent are Government
benefit checks.\4\
---------------------------------------------------------------------------
\3\ Survey of Non-Bank Financial Institutions, U.S. Department of
the Treasury, April 4, 2000.
\4\ Check cashers focus on these checks to reduce credit risk.
These operations often require extensive efforts to reduce risk of
fraud, and credit risk from checks from unknown and/or small employers.
---------------------------------------------------------------------------
The costs of these basic financial transactions can undermine
public initiatives to move families from welfare to work, as former
welfare recipients often lack access to the banking system, and pay
high fees to cash their checks. High cost financial services can also
diminish the effectiveness of the Earned Income Tax Credit (EITC), a
tax incentive that rewards work and helps bring families out of
poverty. One survey found that 44 percent of a sample of EITC
recipients in inner-city Chicago used a check cashing service to cash
their Government refund check. EITC recipients, lacking savings or
access to other forms of short-term credit, are also likely to use
high-cost refund anticipation loans.
Second, low-income families need to save to cushion themselves
against personal economic crises, such as injury or loss of a job, and
to save for key life events, such as buying a home, sending their
children to college, or entering old age. Yet low-income families,
particularly those without bank accounts, often lack any regular means
to save.\5\ Bill Gale of the Brookings Institution has shown that,
after controlling for key factors, low-income households with bank
accounts were 43 percent more likely to have financial assets than
households without bank accounts.\6\ Moreover, the tax system, through
which the bulk of Government savings benefits are provided, largely
subsidizes savings for higher-income households. The Treasury
Department estimates that more than two-thirds of tax expenditures for
pensions go to households in the top 20 percent of the income
distribution, while the bottom 40 percent get only 2 percent of the tax
benefit.\7\ Most low-income workers work for firms without savings
plans or are themselves not covered by such plans.\8\ Bank
accounts can be important entry points for the provision of regular
savings plans
for low-income workers, for example, through payroll deduction.
---------------------------------------------------------------------------
\5\ See generally, S. Beverly & M. Sherraden, Institutional
Determinants of Saving: Implications for Low-Income Households and
Public Policy, Journal of Socio-Economics.
\6\ W. Gale & S. Carney, Asset Accumulation Among Lower-Income
Households, prepared for Benefits and Mechanisms for Spreading Asset
Ownership in the United States, Ford Foundation Conference, December
1998.
\7\ P. Orszag & R. Greenstein, Toward Progressive Pensions: A
Summary of the U.S. Pension System and Proposals for Reform,''
background paper for ``conversation on Coverage,'' Pension Rights
Center, Washington, DC, July 24-25, 2001. Hereinafter, Orszag &
Greenstein.
\8\ Id.
---------------------------------------------------------------------------
Third, the unbanked are also largely cut off from mainstream
sources of credit necessary to leverage their hard work into financial
stability. Without a bank account, it is more difficult and more costly
to establish credit or qualify for a loan. A Federal Reserve study
found that a bank account was a significant factor--more so than
household net worth, income, or education level--in predicting whether
an individual holds mortgage loans, automobile loans, and certificates
of deposit.\9\ Account ownership in and of itself is no panacea,
however; even low-income individuals with bank accounts often lack
savings, and turn repeatedly during the year to payday lenders, who
charge on average 474 percent APR.\10\ Thus, strategies to bring the
unbanked into the financial services mainstream need to include
initiatives designed to increase savings for short-term financial
stability and improve access to less expensive forms of credit where
appropriate, as, for example, with overdraft protection or account-
secured loans.
---------------------------------------------------------------------------
\9\ J. Hogarth and K. O'Donnell, Banking Relationships of Lower-
Income Families and the Governmental Trend Toward Electronic Payment,
Federal Reserve Bulletin, July 1999.
\10\ See Consumer Federation of America Payday Lender Survey 2000.
This APR is the equivalent of a $36 fee for a 2 week, $200 loan.
Indiana's Department of Financial Institutions found that consumers
took an average of 13 loans per year, 10 of which were rollovers of
earlier loans. An Illinois Department of Financial Institutions survey
found an average of 10 loan contracts over 18 months.
---------------------------------------------------------------------------
Barriers to Banking
While the financial system works extraordinarily well for most
Americans, many of the low- and moderate-income individuals face a
number of barriers to account ownership.
First, regular checking accounts may not make economic sense for
many lower-income families.\11\ Consumers who cannot meet account
balance minimums for a checking account at a bank pay high monthly
fees, and most banks also levy high charges for bounced checks that
low-income families with little or no savings face a high risk of
paying and can ill-afford. Financial institutions may also charge high
fees for their money orders or other products that their typical
customers do not often use.
---------------------------------------------------------------------------
\11\ The 1998 Survey of Consumer Finances asked unbanked
individuals why they did not own a checking account. The most cited
reasons were not writing enough checks to make an account worthwhile,
minimum balances and services charges were too high, not having enough
money, and not wanting to deal with banks. The last factor may or may
not have solely economic motivations. Id.
---------------------------------------------------------------------------
Studies have confirmed that many of the unbanked would become
``banked'' if they found a product that worked for them.\12\ In fact,
the unbanked have responded to account products tailored to their
needs. For example, Banco Popular of Puerto Rico introduced Accesso 24,
an electronic account, with no minimum monthly balance, free direct
deposit, unlimited ATM access, and a low monthly fee. The bank has
enrolled tens of thousands of customers in the product since 1995.
---------------------------------------------------------------------------
\12\ ETA Conjoint Research, Dove Associates, May 1999,
www.fms.treas.gov/eta/conjoint.pdf.
---------------------------------------------------------------------------
Cultural issues and reluctance to use banks may matter, but many of
the unbanked already use, or have used, the banking system. Nearly half
the unbanked, according to one study, use banks, thrifts, or credit
unions to cash checks,\13\
although the figure may be significantly lower in some inner-city
communities.\14\
Between 48 and 70 percent of the unbanked have had an account at a
financial institution at some time in the past.\15\
---------------------------------------------------------------------------
\13\ J. Caskey, Lower Income Americans, Higher Cost Financial
Services, Filene Research Institute and Center for Credit Union
Research, University of Wisconsin-Madison, 1997.
\14\ S. Rhine et al., The Role of Alternative Financial Services
Providers in Serving LMI Neighborhoods, Changing Financial Markets and
Community Development, Federal Reserve Conference, April 5-6, 2001
(only 15 percent of surveyed unbanked households used financial
institutions to cash checks in Chicago).
\15\ Compare Kennickell (2000) (48 percent) with Caskey (1997) (70
percent).
---------------------------------------------------------------------------
Second, many unbanked persons may not qualify for conventional bank
accounts because of past problems that these persons have had with the
banking system. Nearly seven million individuals are currently recorded
as having had their accounts closed for prior problems, such as writing
checks with insufficient funds or failing to pay overdraft charges, in
the ChexSystem, a private clearinghouse used by most banks to decide
whether to open bank accounts for potential customers.\16\ Records of
prior problems are kept in the system for 5 years, during which time
these individuals will be unable to open a conventional bank account at
most banks, thrifts, and credit unions. While some individuals
undoubtedly pose undue risk for account ownership, many potential
customers could readily and responsibly use bank accounts. Banks could
obviate this concern by working with the private clearinghouses to
better distinguish among types of past problems; by offering accounts
contingent on completion of financial counseling; and by offering
electronically-based accounts with on-line bill payment or automatic
money orders, and without check-writing privileges, that pose little
risk of overdraft.
---------------------------------------------------------------------------
\16\ P. Beckett, Banks Are Using a National Database to Blacklist
Customers for Slip-Ups, Wall Street Journal, Aug. 1, 2000.
---------------------------------------------------------------------------
Third, while many urban communities contain adequate numbers of
both banking institutions and alternative financial services providers,
in some low-income urban and rural communities, banks, thrifts, and
credit unions are not as readily accessible to potential customers as
such institutions are in higher-income areas. A 1997 Federal Reserve
Board study found that low-income central city neighborhoods have fewer
bank offices per capita than higher-income areas and those outside the
central city.\17\ Similar patterns may persist in the distribution of
ATM's: In New York and Los Angeles, there are nearly twice as many
ATM's per resident in middle-income zip codes as there are in low-
income zip codes, according to 2000 Treasury Department research.
---------------------------------------------------------------------------
\17\ R. Avery et al., Changes in the Distribution of Banking
Offices, 83 Federal Reserve Bulletin 723 (September 1997).
---------------------------------------------------------------------------
Fourth, financial institutions may be reluctant to expend the
resources for research, product development, training, marketing, and
education, necessary to expand financial services to lower-income
clientele. Financial institutions may need incentives to pursue
research and product development with respect to accounts for low-
income customers. Further market research would help to define the
product needs of low-income families and existing products will likely
need to be modified to serve this clientele.
Marketing of new products to low-income persons, and training of
local banking personnel, are both critical to the success of any new
product development, yet given the expense and the expected low
returns, are often not fully pursued even when financial institutions
decide to become involved with offering financial services to low-
income customers. If the unbanked do not know about the availability of
new products and services, they are not likely to seek out financial
services at banking institutions. If local banking personnel are not
informed about new offerings, the unbanked will find it difficult to
open accounts even where local branches are convenient and accessible.
Moreover, at least for a segment of the low-income population, lack
of financial education with respect to account ownership, budgeting,
saving, and credit management is a significant barrier to personal
financial stability. The benefits of financial education are not likely
to be fully captured by the financial institution, so such education at
any scale will likely need to be funded from sources in addition to the
financial institution.
Expanding Access to the Financial Services Mainstream
While important challenges are still largely in front of us, some
progress has been made in recent years in expanding access to financial
services. The period 1995 to 1998 marked a decline in the percentage of
low-income families who are unbanked from 25 to 22 percent.\18\ This
decline in the percentage of unbanked may reflect in part strong
economic growth in the late 1990's that improved the incomes of
households at the bottom of the income distribution for the first time
in decades.
---------------------------------------------------------------------------
\18\ See Kennickell (2000).
---------------------------------------------------------------------------
The Treasury Department's efforts to increase electronic payment of
Federal benefits, pursuant to the Debt Collection Improvement Act of
1996,\19\ has also helped to spur innovation in this area. Under
Treasury's Electronic Funds Transfer (EFT '99) program, direct deposit
into bank accounts has increased as a portion of all Federal benefit
payments from 58 percent in 1996 to 76 percent in 2001. This increase
in benefit payments reflects in part an increase in direct deposit to
existing accounts, and in part an increase in the percentage of benefit
recipients who have obtained bank accounts.
---------------------------------------------------------------------------
\19\ Public Law 104-134 (1996).
---------------------------------------------------------------------------
Moreover, Treasury launched the Electronic Transfer Account (ETA),
a low-cost electronically-based bank account for Federal benefit
recipients.\20\ Under the program, Treasury provides financial
institutions offering ETA's with a one-time payment of $12.60 per
account to offset the costs of opening the accounts.\21\ As of spring
2002, nearly 600 banks, thrifts, and credit unions were offering ETA's
at over 18,000 locations nationwide.\22\ Over 28,000 benefit recipients
have opened these ETA's thus far, and new ETA account holders are being
signed up at a rate of over 1,000 per month. The ETA could make faster
progress were additional funds made available for marketing and
training.\23\ Anecdotally, banks are reporting that they are also
signing up more than three direct deposit relationships into regular
banking accounts for every ETA opened.
---------------------------------------------------------------------------
\20\ ETA's are individually owned bank accounts that accept
electronic Federal benefit, wage, salary, and retirement payments, and
other deposits as permitted by the offering financial institution.
Banks may charge up to $3 per month for these accounts. The accounts
permit at least four cash withdrawals per month, require no minimum
balance, and provide the same consumer protections as other accounts.
\21\ Research conducted for the Treasury Department by Dove
Associates concluded that the average cost of opening an ETA account is
$12.60. Actual costs vary significantly by institution. The $12.60 does
not include costs for marketing, training, of education, technology
platform changes, or research. Treasury estimates from other account
products suggest that marketing ETA's would cost $9 to $11 per account.
\22\ The largest banks offering ETA's include Bank One, Bank of
America, Fleet Bank, J.P. Morgan Chase Bank, U.S. Bank, and Wells
Fargo. The top five ETA providers are Banco Popular de Puerto Rico,
Bank of America, Wells Fargo, Union Bank, and U.S. Bank. EFT Exchange,
Spring 2002.
\23\ Funding for the Treasury Department's EFT '99 public education
campaign ended in September 2001.
---------------------------------------------------------------------------
More recently, a number of banks, thrifts, and credit unions have
begun to experiment with a variety of products designed to serve the
needs of low-income individuals. As I mentioned, Banco Popular has made
great strides in reaching the unbanked of Puerto Rico. In the States,
Bank One, as you will hear today, is experimenting with using a broader
range of credit criteria for opening accounts. Shorebank has focused on
bringing EITC recipients into the banking system.\24\ Fleet is working
with a nonprofit organization, Doorways to Dreams, to create an
Internet platform for low-income savers.
---------------------------------------------------------------------------
\24\ Shorebank is a premier example of a Community Development
Financial Institution (CDFI), a specialized financial intermediary
serving low-income communities. Of the 553 CDFI's certified to date by
the Treasury Department's CDFI Fund, 159 are banks, thrifts, or credit
unions offering depository services. In a 2000 survey, 21 CDFI's
provided 141,440 checking and saving accounts to low-income customers.
These accounts had balances averaging $1,815. These depository CDFI's
also offered 985 Individual Development Accounts (IDA's) with an
average balance of $395 per account. Testimony of Tony T. Brown,
Director, CDFI Fund, Before the Senate Appropriations Subcommittee on
VA, HUD, and Independent Agencies, Hearing on fiscal year 2003
Appropriations, April 24, 2002, www.treas.gov/press/releases/
po3037.htm.
---------------------------------------------------------------------------
A number of banking institutions, including Wells Fargo, have
recently begun to work with the Mexican government to accept Mexican
consular identification documents for Mexican immigrants in the United
States seeking to open bank accounts. Similarly, recent efforts to
reduce the costs of sending remittances abroad, such as Bank of
America's dual-ATM card, hold promise for bringing immigrant
communities into the banking system. President Bush and Mexican
President Vicente Fox have made progress on reducing the costs and
increasing the benefits of the nearly $10 billion in annual United
States-initiated remittances to Mexico issue an important part of their
mutual agenda.\25\
---------------------------------------------------------------------------
\25\ See Partnership for Prosperity, Report to President Vicente
Fox and President George W. Bush, Monterrey, Mexico, March 22, 2002,
pp. 3-4, 9; See also, Inter-American Development Bank's Multilateral
Investment Fund, www.iadb.org/mif/website/static/en/remit.asp
(describing remittance patterns). The World Council of Credit Unions
has developed a project to provide for lower-cost remittances initiated
at U.S.-based credit unions. A major barrier is the development of ATM
infrastructure in recipient countries.
---------------------------------------------------------------------------
First Accounts
In this regard, Treasury's First Accounts initiative could play an
important role in fostering innovation by the financial services
sector. With the Government helping to serve as a catalyst, banks can
harness technology to reduce costs, lower risk, and democratize access
to financial services for low-income families. Transaction accounts
with debit cards but no checks can reduce risk to banks and account
holders by preventing accounts from being overdrawn; lower the cost of
processing each transaction and increase the efficiency of the payments
system by reducing paper checks; expand availability much more cheaply
than branches; and decrease the safety risk to low-income customers who
cash their regular payroll or benefit checks and carry large sums of
cash.
The First Accounts initiative grew out of Treasury's research on
the financial services needs of the unbanked for EFT '99. Treasury
estimated that at least half of the 10 million unbanked households do
not receive Federal benefit payments and thus would be ineligible to
open ETA's. In addition, banks participating in the ETA program
reported that significant numbers of unbanked persons who were not
Federal benefit recipients had sought to open ETA's; these persons are
part of the likely target market for First Accounts. Treasury research
suggests that unbanked persons who do not receive Federal benefit
payments are, on average, younger, more urban, more likely to be from a
minority community, have larger families, and are more likely to be
receptive to signing up for electronically-based accounts than the
unbanked Federal-benefit-recipient population.
As initially conceived, the First Accounts initiative had four main
components:
First Accounts. Treasury would help to offset the costs financial
institutions incurred in offering low-cost, electronic banking accounts
to low-income individuals.
Access. Treasury would help to defray the costs of expanding access
to ATM's, POS, Internet, or other distribution points in low-income
neighborhoods with low
access.
Financial Education. Treasury would support financial institution
and nonprofit initiatives to provide financial education and counseling
to low-income households.
Research. Treasury would fund research into the financial services
needs of low-income individuals and development of financial products
designed to meet these needs.
The First Accounts initiative properly focuses on the need for
incentives to get financial institutions started in serving low-income households. As discussed above, the costs of research and development,
new account opening, expanded distribution, and financial education are serious barriers today to expansion of account ownership. The First
Accounts initiative can help to accelerate improvements in this market.
As Assistant Secretary Bair has explained, Treasury has issued a
request for proposals under the First Accounts Program in December
2001. The Department received 231 responses from a wide variety of
organizations: banks, thrifts, and credit unions; employers and labor
and employer organizations; community-based organizations; State and
local governments; and others. As reported by the Department, the
results of the first round of funding are impressive. The challenge
going forward is to continue funding the First Accounts initiative at
sufficient levels and for a sufficient time to help transform the
market for low-income financial services. Only a sustained commitment
to the First Accounts initiative will provide financial institutions
with sufficient incentive to make the necessary investments in
research, technology platform changes, training, marketing, and
education necessary to serve low-income unbanked and underbanked
households. Over time, as financial institutions become expert at
serving the low-income customer segment, the need for Governmental
incentives may become less important.
Banks, thrifts, and credit unions could, under the First Accounts
initiative, experiment with a wide variety of techniques to expand
access to the unbanked, and to provide an increasing range of services
to the underbanked.\26\ Low-cost electronic transaction accounts can be
attractive to the unbanked and can be offered at reasonable cost.\27\
Banks may wish to experiment with accounts with savings features,
including payment of interest or separate savings ``buckets'' within
accounts; these features are also likely to be attractive to the
unbanked and low-cost.\28\ Similarly, low-income individuals need a
convenient and low-cost means to pay bills; automated money orders,\29\
on-line bill payment, alternative means of foreign country remittance,
and other low-cost payment methods can help to reduce the cost of basic
transactional services for the poor.
---------------------------------------------------------------------------
\26\ Treasury's Notice of Funds Availability (NOFA) issued in
December 2001 barred using First Accounts funds for IDA matches or to
increase services to those with bank accounts. In my view, neither
prohibition is required by the Congressional appropriations, and
neither serves an important program interest.
\27\ See ETA Conjoint Research, Dove Associates, May 1999,
www.treas.gov/eta/conjoint.pdf (research summary) and
www.fms.treas.gov/eta/etamodel.xls (market model); ETA Initiative:
Optional Account Features, Dove Associates, June 1998,
www.fms.treas.gov/eta/features.pdf (waterfall analysis).
\28\ Id. Savings features boosted take up rates by up to one-third
and accounted for one-quarter of the reason why an individual might
sign up for electronically-based accounts.
\29\ Caskey (1997) found that 69 percent of surveyed unbanked
persons used 10 money orders per year, and 39 percent used more than 30
money orders per year to pay bills.
---------------------------------------------------------------------------
In addition, the First Accounts initiative has the potential to
help spur ``leapfrogging'' in technology for low-income financial
services, in analogous ways to how the Internet and cellular telephone
technology have permitted developing countries to leapfrog in
telecommunications infrastructure. To offer a few examples that could
be subjected to the test of market feasibility: With sufficient
incentives, providers of the network infrastructure for debit and
credit cards, or providers of back-office data and information
processing functions for banks and mutual funds, may be induced to
explore ways that low-income customers could be served by financial
institutions on shared technological platforms. As access to the
Internet expands in low-income communities, e-finance can increasingly
be made available to the poor at Internet kiosks. Or companies that are
exploring ways to expand the use of cellular phones to transact
financial services for high-income clientele could be encouraged also
to focus attention on expanding banking account access for the low-
income market that currently utilizes prepaid cellular phones.
The First Accounts initiative can also help to spur employer-driven
(or union-
driven) strategies to expand access to banking services. Large
employers can reap
significant benefits from moving more of their workers to direct
deposit of payroll, driving down their payroll processing costs,
increasing the effective take home pay for their workers, and reducing
problems from theft or fraud associated with checks. Employers can help
to reduce costs for reaching their unbanked employees with financial
education and marketing of new products. Moreover, many employers have
already become active in educating their workers about advanced
payments under the EITC. At the same time, financial institutions
already provide important payroll and other banking services for
employers, and some have been experimenting with employer-focused,
debit card-based payroll systems for their clients' employees. These
employment relationships may provide a solid foundation for encouraging
direct deposit into low-cost electronic banking accounts and systematic
savings programs for low-income workers.
Other Initiatives
The Community Reinvestment Act
The Community Reinvestment Act (CRA) also has an important role to
play. CRA has helped to expand access to credit for homeownership in
low-income communities. The CRA service test, however, which evaluates
bank and thrift performance in meeting transaction, savings, and other
community needs, has received inadequate attention from bank regulators
in CRA examinations.\30\ Examiners should focus on the extent to which
banks and thrifts are actually attracting low-income customers with
innovative retail products and services. Given the importance of
technology in serving low-income clients in a cost-effective manner,
service examinations should move away from an overwhelming focus on
bank branches toward a more qualitative assessment of the extent to
which technology-based products are expanding access for low-income
persons.
---------------------------------------------------------------------------
\30\ See M. Stegman, et al., Creating a Scorecard for the CRA
Service Test, Policy Brief #96, The Brookings Institution, March 2002.
---------------------------------------------------------------------------
Individual Development Accounts
Bank account ownership can be an important step for low-income
families to begin to save, for both shorter-term financial stability
and longer-term savings goals. In addition, for intermediate-term
saving needs, such as homeownership, college education, or
entrepreneurial ventures, Individual Development Accounts (IDA's) are
providing a new means for low-income households to save.
Evidence to date suggests that low-income individuals can save if
given the opportunity to do so. For example, 44 percent of low- and
moderate-income workers participate in 401(k) plans if offered the
chance to participate.\31\ Some 73 percent of Federal employees earning
$10,000 to $20,000 annually participated in the Federal Government's
Thrift Saving Plan, and over half of those earning under $10,000 also
participated.\32\ Similarly, the American Dream Demonstration has been
piloting IDA's for low-income individuals. The demonstration has found
that low-income individuals in the program were able to save an average
of $25 per month (2.2 percent of average income).\33\ The demonstration
also suggests that financial education, a regular saving program, and
matching funds can increase participation and improve retention.\34\
Nationwide, there are some 10,000 IDA holders in the American Dream
Demonstration and other IDA demonstration programs.\35\
---------------------------------------------------------------------------
\31\ Orszag & Greenstein.
\32\ Id.
\33\ M. Sherradan, et al., Savings and Asset Accumulation in
Individual Development Accounts, Center for Social Development,
Washington University in St. Louis, 2002.
\34\ Id.
\35\ Assets, A Quarterly Update for Innovators, Corporation for
Enterprise Development, Winter 2002, p. 1.
---------------------------------------------------------------------------
The challenge is to bring these IDA programs to scale. The Savings
for Working Families Act, introduced by Senators Lieberman and
Santorum, is a promising approach. Under the Act, financial
institutions offering IDA's would receive tax credits annually
offsetting up to $500 in matching funds and $50 in account
administration costs. The current legislation, drafted with an overall
cap on accounts, would provide for 900,000 new IDA's at a cost of $1.7
billion.\36\ This legislation could help to transform financial
services for the poor, by moving from small-scale, nonprofit
focused efforts to a large-scale, financial-institution driven
financial product that meets the longer-term savings needs of low-
income families.\37\ As with bank accounts for low-income persons,
technology will need to play a central role in driving down the costs
of IDA provision.\38\
---------------------------------------------------------------------------
\36\ U.S. Department of the Treasury, General Explanations of the
Administration's Fiscal Year 2003 Revenue Proposals, February 2002, pp.
37-38.
\37\ The legislation could also be modified to provide for a
similar tax credit to financial insti-
tutions for providing low-cost electronic banking accounts for low-
income persons. Such a tax
credit would be the easiest way to bring the First Accounts pilot to
scale if the demonstration proves successful.
\38\ The Fleet/Doorways to Dreams test of Internet-based IDA
programs will prove instructive in this regard.
---------------------------------------------------------------------------
Financial Education
Studies find that financial education does matter in changing the
financial behavior of individuals, particularly low-income persons.
Financial education can increase participation in saving plans and
increase the level of saving. Financial education, however, can be
costly, and education focused on low-income persons is unlikely to be
undertaken in a significant way absent Governmental and nonprofit
support. The First Accounts pilot currently includes financial
education as an eligible use, and it is my understanding that Treasury
has recently created a new Office of Financial Education to promote
financial literacy.\39\ Presumably, a portion of First Accounts funding
could be made available to this office to support community-based
financial education initiatives focused on account ownership and
savings. Experience to date suggests that education initiatives are
most successful when they focus on life decisions that the individual
is currently facing: for example, how to improve credit standing to
purchase a home, whether and how to begin saving for college. The
Cleveland Saves initiative sponsored by the Consumer Federation of
America can serve as a model for other such programs.
---------------------------------------------------------------------------
\39\ See Treasury Secretary Paul H. O'Neill, Keynote Address to
Jump$tart Coalition for Personal Financial Literacy, April 23, 2002,
www.treas.gov/press/release/po2035.htm.
---------------------------------------------------------------------------
Conclusion
Financial and technological innovation has been a hallmark of U.S.
financial markets. Financial institutions can harness that innovation
to meet the needs of low-income Americans. The First Accounts
initiative is an important part of catalyzing private sector efforts to
use financial and technological progress to expand access to financial
services for low- and moderate-income families. By helping these
families to enter the financial services mainstream, First Accounts and
related
initiatives can help to transform financial services for low-income
persons. Such a
transformation is a key to promoting greater economic opportunities for
low-income communities in the 21st Century.
----------
PREPARED STATEMENT OF FRAN GROSSMAN
Executive Vice President
Shorebank Advisory Services
May 2, 2002
Good morning. My name is Fran Grossman, and I am the Executive Vice
President of Shorebank Advisory Services. SAS is the consulting arm of
Shorebank Corporation, the Nation's first and largest community development bank holding company with $1.3 billion in assets and operations in Chicago,
Cleveland, Detroit, Washington State and the Upper Peninsula of
Michigan. In addition, Shorebank assists other development organizations across the United States and around the world. At the heart of our business operations is the belief that we can change communities for the better by matching residents' determination and vision with our financial resources
and market knowledge. Over our 30 year history, we have
provided more than $1 billion in financing to homeowners and landlords,
small business owners and churches, nonprofit organizations and community
residents.
I have been involved in community development banking and finance
for 20 years. Prior to joining Shorebank in 1999, I was President of
Bank of America, Illinois Community Development Corporation, and I
initiated and led the community development finance group at
Continental Bank and Bank of America, Illinois. Currently I am a board
member of the Coalition of Community Development Financial Insti-
tutions, the Community Development Bankers Association, and the
National Association of Affordable Housing Lenders. I especially want to
thank NAAHL for its commitment to working with us to make banking more responsive to low- and moderate-income families.
I also want to thank the Members of the Banking Committee, Sheila
Bair and the Treasury Department for your support of the First Accounts
initiative and other efforts to bring the unbanked into the financial
mainstream. We all are here today because we want to develop
initiatives to provide wealth-building opportunities for more
Americans. This is no easy task. The First Accounts initiative is a
strong first step in recognizing that solutions will be born in large
part out of private-sector innovation. But it is only one step along a continuum of initiatives and policies that are needed.
Assets are a crucial ingredient in the recipe for financial
stability and wealth accumulation. Assets link individuals to
mainstream financial institutions and capital markets. This in turn
increases access to networks that connect people with jobs and other
resources. Many low-income families are already savers, whether or
not they have a bank account. But without the connection to a formal
financial institution, these families will face more obstacles along
the path to longer-term prosperity.
Low-income people with bank accounts are more likely than the
unbanked to save regularly, to have a car loan, and to have a home
mortgage. Yet at least 10 percent of American families--including 25
percent of African-American and Hispanics--have no bank account. The
majority of these unbanked consumers have incomes below $25,000. They
say they are uncomfortable in banks, don't trust banks or think that
they don't have enough money to open an account. Some have privacy con-
cerns, while others are shut out of the system because of lack of
identification or poor credit. As a result, most of them have no assets.
Yet, they are generating positive economic activity. They receive
paychecks and tax refunds. Some own cars and homes. Often, they have
accumulated significant amounts of consumer debt. Clearly some are
saving. They just need an institutional mechanism to facilitate the
growth of their assets over the long-term. The rapid growth of the
fringe financial services sector suggests that the unbanked have a
demand for financial services that is not adequately met by the
existing supply. Traditional checking accounts are predicated on
consumer liquidity, a luxury poor people do not generally have. Even
banks that have one or two products appropriate for modest-income
consumers generally lack a full line of products that would enable
consumers to build on their initial successes. The location and feel of
typical bank branches often are not convenient or comfortable for the
poor. And while the financial services industry is quite sophisticated
about segmenting upper-income consumers and crafting appropriate
marketing messages, little attention has been paid to outreach efforts
at the lower end of the income scale.
Over the past 6 years, Shorebank has focused significant energy on
serving the unbanked. We have experimented with new products, delivery
systems and outreach strategies. One of the first new products we
introduced, in 1998, was an Individual Development Account. An IDA is a
savings account that is matched dollar for dollar for low-income
families saving to buy a home, start a small business or go to college.
As one program participant put it, IDA's are ``an IRA for the rest of
us.'' To date, we have opened nearly 600 accounts, trained hundreds in
money management techniques and witnessed the transformational effects
of the program. One participant, a 20 year Shorebank employee, began
contributing to the company's 401(k) program after she successfully
saved for a downpayment on a house and literally began to see her money
grow.
In an effort to increase customer convenience and decrease delivery
costs, we have worked with customers who are unfamiliar or
uncomfortable with technology to learn how to use ATM cards, point-of-
sale machines, and Internet banking. In one of our lobbies, we have
installed a freestanding computer with Internet access that customers
can use free of charge to check their account online, sign up for an
e-mail account, or simply surf the Web.
This morning, I would like to focus on one very promising outreach
strategy for bringing the unbanked into the financial mainstream--
linking tax refunds with bank accounts. As you know, the Earned Income
Tax Credit is the largest Federal antipoverty program, both in terms of
dollars and participation levels. In 2001, more than $30 billion was
paid out to some 18 million households. The average credit was about
$1,600.
The EITC has incredible reach in low-income communities, and
Shorebank has sought to harness the power of this popular incentive.
Three years ago, we opened our bank lobbies in Chicago to volunteer tax
preparers from the Center for Law and Human Services, one of the
largest and most successful VITA programs in the country. As working
families waited to have their taxes prepared, personal bankers were on
hand to open free savings accounts for those who wanted one. No initial
deposit was required as long as the customer agreed to have her tax
refund electronically deposited into the account. An ATM card was made
available, and the account earned interest. We called it the Extra
Credit Savings Program.
Through a formal evaluation of the initiative, we interviewed those
who opened accounts and we tracked their account usage over time. A
copy of the full evaluation will be included in the official record.
Let me share some of the key results.
Twenty percent of all the individuals who had their taxes
prepared at the bank agreed to open an account. More than 60
percent were previously unbanked. This was a very disadvantaged
group of mostly single mothers. Their average income was about
$9,000. Nearly one-third were TANF recipients, and 50 percent were
Food Stamp recipients.
When asked why they decided to open an account, nearly half
mentioned a desire to save. Six months later, 62 percent said the
account had helped them change spending patterns or helped them to
save.
Over time, half of the unbanked used their accounts for
something other than short-term storage of their tax refund. Some
of them arranged to have their paychecks directly deposited to the
account each month. Others saved additional funds or signed up for
other bank products.
The following year, approximately one-third of all
participants again used their account to deposit their tax refund.
These positive results encouraged us to continue. Over the past 3
years, we have opened 350 accounts with tax refunds totaling more than
$250,000. We also have helped others replicate the initiative across
the country. Several of the bank regulatory agencies have embraced the
concept and are working to spread the word. Last year, for instance,
the IRS partnered with the FDIC to encourage links between tax
preparation programs and financial institutions.
Why did the Extra Credit Savings Program work? We found three
primary keys to success:
First, the timing of the outreach was critical. People said yes to
a bank account because they anticipated having money available.
Second, the size of the refund was important. The larger the
anticipated refund, the more likely people were more likely to say yes
to a bank account.
Third, technology was crucial for both the consumer and the bank.
The combination of an electronically filed tax return and a directly
deposited tax refund meant that customers could receive their refund in
as few as 8 days. This shortened waiting period comes closer to being
competitive with refund anticipation loan providers. Meanwhile, direct
deposit and ATM usage reduced transaction costs for the bank.
These lessons, along with our other experiences in this arena,
demonstrate the complexity of the issue. Universal access to financial
services and wealth-building opportunities is a multifaceted challenge
that requires multiple initiatives by both the public and private
sectors.
First, we should fully leverage the power of the Earned Income Tax
Credit by institutionalizing the link between the tax system and
financial services. Just like the Motor Voter law that allows Americans
to register to vote while applying for a driver's license, tax refund
recipients should be able to sign up for a bank account while having
their tax returns prepared. The technology to open accounts
electronically already exists and further bolsters the Treasury's goal
of increasing electronically-filed returns. Now, we need another line
on the 1040 that asks the question, ``Do you want a bank account?'' and
a system to facilitate the transaction.
Second, I ask for your support for the Savings for Working Families
Act. Title II of S. 1924 would expand IDA's to 900,000 working families
over the next decade, and I hope it will be included in the Finance
Committee Chairman's mark on the charity bill. IDA's have been piloted
successfully across the country, proving that the poor can and will
save when offered an appropriate financial product, a meaningful
incentive and adequate information. For many, IDA's are an entry point
into the banking system that can lead to full participation in the
financial mainstream. By linking financial services to real
opportunities for wealth creation, IDA's demonstrate to the uninitiated
that a banking relationship is vital to their long-term prosperity.
Third, we must strengthen the CRA service test. CRA has the power
to spur financial innovation. Recent studies have confirmed CRA's
effectiveness as a catalyst in broadening homeownership and small
business opportunities for low- and moderate-income families. But while
the lending and investment tests both require quantifiable results, the
service test can be met simply by demonstrating that a retail product
or service is available to low-income consumers. Rather, financial
institutions should be held accountable for the level of retail
services being provided, and deposit accounts should be subject to a
similar spatial distribution analysis as loans.
In conclusion, I hope I have successfully demonstrated that the
issue of access to financial services for modest-income families is
important, complicated, and solvable. It is important that we have
reasonable expectations and see the First Accounts initiative as a step
in the right direction. There are no easy answers, but with all of our
hard work, we can succeed in broadening financial opportunities for
everyone. Thank you for the opportunity to be here today.
PREPARED STATEMENT OF JAYE MORGAN WILLIAMS
Senior Vice President and
Managing Director of Community Investment
Bank One Corporation
May 2, 2002
Chairman Sarbanes, Ranking Member Gramm, and Members of the
Committee, I appreciate the opportunity to be here today on behalf of
Bank One \1\ to discuss our commitment to helping American families
gain access to the financial services mainstream and to share some of
our experiences in doing so. We are particularly proud to share this
panel with our colleagues and partners from Shorebank and the Woodstock
Institute, whose dedication to this problem has been a source of
inspiration and encouragement to us and to others in the banking
system. We are also pleased to share the panel with Professor Barr,
whose leadership we admired so much at the Department of the Treasury,
and with Mr. Rufino Carbajal, Jr., President of the West Texas Credit
Union and Member of the Texas Credit Union Commission, whose
initiatives in underserved communities in Texas set an example for us
all.
---------------------------------------------------------------------------
\1\ Bank One Corporation is the Nation's sixth largest bank holding
company, with assets of more than $265 billion.
Our commitment to the so-called ``unbanked'' stems from our core
belief that helping families gain access to the banking system is good
for these families, good for individual communities, good for the
national economy, and good business for Bank One, both near and long-
---------------------------------------------------------------------------
term.
But as the other witnesses at this hearing have so eloquently
testified, the reasons that more than 10 million American families do
not have an insured bank account are complex and varied. So logically
enough, there is no ``one size fits all'' solution for the unbanked population. To devise appropriate programs to help the unbanked population find footing in the banking system requires creativity, adaptability, and above all patience.
Before describing some of our programs, I would like to briefly
summarize what we at Bank One have learned as we have pursued our
commitment to help bring families into the mainstream financial system:
Our Programs are Works in Progress. As hard as we try, we are
just beginning to understand the multitude of reasons that 10
million American families are unbanked. Devising programs that
succeed is often a matter of trial and error. We are proud of our
efforts and humble about our errors, which often teach us the most.
Financial Literacy is Essential for a Successful Banking and
Credit Relationship. We believe we can trace our biggest
disappointments in these programs to instances when ``the cart was
put before the horse,'' that is when low-income participants
entered into banking or credit relationships with too little
understanding of the fundamentals of consumer finance. We at Bank
One believe that financial literacy training is absolutely critical
to the success of programs serving the unbanked.
Partnerships are Essential. Our partnerships with community
groups, advocacy organizations, and community banks are essential
to mounting programs that reach the unbanked population in
meaningful ways. This is not a battle that can be won with a ``go
it alone strategy.''
I would like to now briefly discuss four of our current programs
for bringing more American families into the financial mainstream.
The Alternative Banking Program
I would like to turn first to Bank One's Alternative Banking
Program, or ABP, which we are proud to participate in through the
Chicago CRA Coalition, an organization represented by one of my
copanelists today.
The ABP offers checking accounts designed to appeal to low-income,
unbanked consumers. These accounts differ from our traditional accounts
in that they are easier to qualify for and less expensive to maintain. Applicants may be approved with no credit history, or with a borderline
credit history. An account can be opened with a balance of only $10, as opposed to $250 for a traditional account, and may be held with no balance
at all.
In exchange for the more flexible credit criteria, ABP accounts do
have some modest restrictions. For example, the limit on daily ATM
withdrawals is $50 a day, as opposed to $300 for a traditional account,
and the funds aren't available until 3 days after deposit, as opposed
to 2. The ABP program is intended to be a transitional ``starter''
account; the goal of the program is to bridge account holders into
mainstream financial services. After 1 year of successful account
management, an account holder may apply to upgrade to a traditional
account.
But, as is true of all of our programs for the unbanked, customers
must be educated in the basics of consumer finance in order to succeed.
For this reason, we conduct workshops in the ``ABC's of Banking'' in
the neighborhoods surrounding each banking center where the program is
offered. These workshops, staged with the help of community groups,
offer training in basic skills such as check writing, balancing a
checkbook, and family budgeting.
We are encouraged by the results we are seeing. Since we rolled out
the program in March 1999, every single new ABP account holder would
have been ineligible for a traditional Bank One account, mostly due to
lack of credit. Yet, the average checking balance is approximately
$1,100 and savings $1,600. We are very proud of this result as it
represents significant savings for low-income individuals.
Although the majority of the ABP accounts perform very well, we
have learned that applicants with preexisting credit problems are the
least likely to succeed. These are the applicants who ``put the cart
before the horse.'' We are pursuing better ways to work with applicants
who must not only learn the basics of consumer finance, but also must
``unlearn'' bad habits and attitudes about financial institutions. For
example, credit impaired applicants might do better with a more limited
account without check writing, and thus without the risk of overdraft.
Communities Banking for Safety
Many who are unbanked have an even more basic concern than
financial security--and that is personal safety. A bank account
promotes both. Sadly, people who deal only in cash, rather than keeping
their money in a bank, put themselves at risk of violent crime. This is
the concern underlying our Communities Banking for Safety Program. In
partnership with the Dallas City Police Department, the Mexican
Consulate, and other local banks, Bank One participates in ongoing
community meetings to promote trust in the United States banking system
among immigrants. They often have no comparable system in their home
countries, and we help them understand the personal risk they take in
carrying cash.
In conjunction with this outreach effort, we have made it easier
for Mexican immigrants to qualify for accounts. As with the Chicago ABP
pilot, applicants with no or minimal credit history may qualify, and,
in deference to the special needs of immigrants, Bank One expanded the
list of acceptable forms of ID to include the Mexican Consular ID,
commonly called the ``Matricula,'' instead of a driver's license or
Social Security card. The Matricula is accepted everywhere Bank One
does business, not only in Dallas. And another form of ID, the Mexican
Voter Registration card, is accepted as a secondary form of ID. We have
sought to reassure undocumented immigrants that we are interested in
their safety, not their immigration status. Finally, although financial
literacy is not formally a part of the police initiative, Bank One
offers bilingual training in that subject.
Although the program began just 2 months ago, several hundred
accounts have been opened already as a result of these outreach efforts
and the more flexible qualification requirements. This means that
several hundred individuals and families now have more personal safety
and financial security.
Bank on the Job
It might surprise some Members of the Committee to learn that many
unbanked Americans work in regular paying jobs in the mainstream
economy. We see the workplace as a very promising arena for both
financial education and initiating banking relationships. Last fall in
Dallas we initiated a pilot as part of an ongoing program known as Bank
on the Job. Through employers, we are offering low-income workers free
checking accounts if they sign up for direct deposit of their
paychecks. At the same time, representatives from Bank One's Community
Investment Department provide onsite training in a variety of subjects
including budgeting, managing accounts, saving, and homebuying.
One Dallas employer reported to us that a check cashing truck
showed up outside his building every Friday, charging his employees as
much as 5 percent of their hard-earned paychecks. The employer was only
too happy to partner with Bank One and boost his employees' take home
pay. We are finding that with proper guidance many employers are
beginning to realize that there are benefits for them, too. A
financially secure employee is less distracted on the job and more
productive.
Although this began as a Dallas initiative, Bank One now provides
financial literacy training in Houston, Tulsa, Fort Worth, and several
other cities. We hope to expand this program eventually to all of the
markets we serve.
Paycard
Our Paycard Program is another workplace initiative that we
undertake in partnership with employers. The program allows companies
to pay unbanked employees through credit to a Bank One Visa stored
value card. Bank One is currently marketing this product to the
employees of some of our large corporate customers, including
McDonald's and Lowe's. In early summer, we hope to expand this program
to middle market companies.
The Paycard has many advantages for the unbanked. First, it allows
employees to circumvent the check cashers. Second, the Paycard is safer
than carrying cash because it can be replaced if lost or stolen,
enjoying the full protection of Visa's security policy. Third, since
the Paycard can be used to make online payments, its use helps to
bridge the digital divide. Finally, while a Paycard is not the
equivalent of a checking account--its holder is still ``unbanked''--we
believe that it may alleviate distrust in mainstream financial services
and lead card holders to seek out a broader relationship with the issuing bank.
The Role of the Federal Government
Before concluding, I would like to use this opportunity to
recognize the leadership of the Treasury Department and this Committee
in addressing the problem of the unbanked. Chairman Sarbanes has done
so much to raise the profile of this issue and to support efforts to
resolve it. The Treasury Department has also demonstrated an ongoing
commitment to bringing unbanked Americans into the financial
mainstream. In 1999, Treasury introduced the Electronic Transfer
Account, or ETA. This program, in which Bank One is proud to be an
early participant, provides a basic, all electronic account for the
receipt of Federal payments, including salaries and retirement
benefits. Now, the Treasury Department is building on that earlier
effort with its First Accounts Program. As Assistant Secretary Bair has
testified, this program awards grants to organizations--not only
financial institutions but community groups, employers, labor
organizations, and others--that contribute to the goal of bringing
basic financial services to the unbanked.
As I said at the outset, partnership is essential to the success of
programs that reach the unbanked in meaningful ways. The First Accounts
grants will support partners for future Bank One initiatives and will
encourage other financial institutions to undertake programs similar to
those I have described here today. Involving more institutions and
experimenting with different strategies will help all of us bring more
American families into the financial mainstream.
Conclusion
In conclusion, we emphasize Bank One's commitment to helping the 10
million American households who are outside the financial mainstream
become full participants in the American economy through a banking
relationship. We hope that the experiences we have shared with you
today will add to our collective understanding of what works and what
does not, and that other institutions will take advantage of this
knowledge. Perhaps the most important lesson we can share with the
Committee is this: Addressing the needs of the unbanked population will
require a sustained team effort involving mainstream financial
institutions, community institutions, advocacy groups, and Government.
It will require diverse programs, trials and errors, and constant
monitoring, reevaluation, readjustment, and redesign. It will be hard
work. But we believe it can succeed.
We thank the Committee for inviting us to share our experiences.
----------
PREPARED STATEMENT OF MARVA E. WILLIAMS
Senior Vice President
Woodstock Institute
May 2, 2002
My name is Marva Williams. I am the Senior Vice President of the
Woodstock Institute. I am grateful to Chairman Sarbanes, Ranking Member
Gramm, and other Members of the U.S. Senate Committee on Banking,
Housing, and Urban Affairs for this opportunity to discuss expanding
opportunities for lifeline banking for lower-income consumers. I am
also pleased to join my fellow panelists, the Honorable Sheila Bair,
Michael Barr, Fran Grossman, and Jaye Morgan Williams.
The Woodstock Institute, in partnership with Chicago-area banks, is
expanding opportunities for lower-income consumers to establish deposit
accounts, improve their financial literacy, and develop assets. The
Woodstock Institute has a 29 year record of policy research, public
education, and technical assistance to promote access to safe and sound capital and credit in lower-income and minority neighborhoods. The
Institute has a specialized knowledge of lower-income families' use
of financial services and has expertise on the quality and quantity of
basic retail services that financial institutions provide to lower-
income consumers.
Importance of Lifeline Banking
Limited access to the financial mainstream and poor financial
literacy skills are major barriers to asset development. Poor financial
literacy has a detrimental impact on personal financial management--
affecting the consumer's ability to own a home, find employment, buy a
car to get to work, purchase life insurance, rent an apartment, or pay
tuition. Consumers without a relationship with a mainstream financial
institution also pay high transaction fees at check cashers. According
to a Woodstock Institute study, check cashers charge up to three times
as much as financial institutions for basic financial services but do
not provide key services like savings accounts and financial advice. In
addition, some check cashers offer predatory services with exorbitant
fees, including payday loans.
Lifeline banking is also the foundation of asset development.
Consumers need affordable means to cash checks and pay bills. In
addition, retail products enable and encourage savings habits and can
help build credit.
Challenges to Lifeline Banking
Prior to developing remedies, we conducted research to identify the
reasons that lower-income consumers remain ``unbanked'' or dissatisfied
with mainstream financial institutions. These barriers include:
Limited Access: Bank branches have abandoned many inner-city
communities. Bank mergers involving institutions with overlapping
branch locations have caused a decline in the number of bank branches
per capita in lower-income communities as the newly merged institutions
close branches to reduce costs. Further, banks often have inconvenient
hours and are not accessible on evenings and weekends. Finally,
residents of lower-income communities may also have problems accessing
automated teller machines (ATM's). Community Reinvestment Act
regulations provide an opportunity to promote increased access. The
Service Test, which assesses the market penetration of a bank's retail
products, record of opening and closing branches, and other factors.
The Service Test examination should be strengthened to include an
assessment of the income and other characteristics of a bank's account
holders to determine if they are meeting the service needs of their
assessment area.
Costs: It can be prohibitively expensive for lower-income people to
maintain bank accounts. They may face high minimum balances, initial
deposits, or even monthly service fees.
Credit status: Some banks conduct credit checks and scoring for
their applicants. Consumers with little or no credit or a slightly
blemished credit record can be disqualified from opening a bank
account.
Trust: Some ``unbanked'' consumers may have attempted to access
bank services in the past and been repelled for a variety of reasons.
Some may worry that financial institutions share account information
with others, including creditors. In addition, poor communication
regarding account guidelines can also lead to misunderstandings for
account holders. Some consumers may feel uncomfortable continuing a
relationship with a bank that has denied them a loan.
Financial literacy: Lifeline banking requires significant person-
to-person training and education on balancing checkbooks, planning
monthly finances, using an ATM, etc. Without the skills to manage
accounts, consumers may be faced with high fees for nonsufficient funds
and other transactions. They might become frustrated and close their
accounts. In addition, some consumers are uncomfortable using
electronic technologies that are associated with many lower-cost
accounts, including ATM's, Point of Sale terminals (POS), and Internet
banking.
Lack of information or poor marketing: Many banks have affordable
accounts that are directed to lower-income consumers. However, the
account features are not well marketed to lower-income communities and
to people are not aware of affordable
options.
Lifeline Account Features
Establishing checking and savings accounts with traditional
financial institutions can be a major challenge for lower-income
consumers. The following features of a model lifeline checking account
mitigate the barriers that many unbanked consumers face:
No credit check
Flexible ID requirements
Ten dollars or less opening requirement
No minimum balance
No monthly service fee
No teller charges
Unlimited check writing
Free withdrawals from bank-owned ATM's
Promotion of direct deposit of paychecks and Government
benefits
Intermediate Products: Checking account products may not be
suitable for all consumers. In fact, one of the reasons that people
frequent check cashers is that they serve as one-stop-shops for cashing
checks and paying bills. However very few financial institutions
provide inexpensive electronic bill payment services. The North Side
Community Federal Credit Union, a Chicago community development credit
union, and First Bank of the Americas allows owners of savings accounts
to pay utilities and other bills electronically.
Woodstock Institute Experiences with Lifeline Banking
Bank One Alternative Banking Program: The Woodstock Institute and
the Chicago CRA Coalition negotiated a CRA agreement with Bank One when
it purchased First Chicago Bank in 1998. In addition to increasing
small business and residential lending and community development grants
and investments, Bank One agreed to increase services to unbanked
consumers. Working with members of the Chicago CRA Coalition, the bank
developed the Alternative Banking Program (ABP). ABP is a safe,
convenient, and inexpensive alternative to using check cashing
services. Customers who do not meet Bank One's traditional credit
scoring criteria, due to borderline credit or no credit history, may be
eligible to establish an ABP account due to its more flexible credit
scoring criteria.
ABP is not a separate banking product--customers have access to
Bank One checking and savings accounts that have features similar to a
model lifeline account:
$10 opening deposit
Low or no minimum balance
Low or no service fee
Unlimited check writing
Unlimited use of Bank One ATM's
Some free teller transactions, depending on account
Free financial literacy training
The account features were designed to address many concerns that
lower-income unbanked consumers express. It is low-cost, accessible at
all Bank One branches and ATM's, and includes the availability of
financial literacy classes for account holders. Further, although
applicants with a credit history must have suitable credit scores,
people with no or borderline credit may open accounts. In exchange for
a more flexible credit scoring criteria, the Bank did establish some
modest restrictions on the ABP. However, after 1 year, account holders
can apply to upgrade their accounts to traditional account products.
The ABP is not only an innovation for Bank One--it is also a means
for bank staff to learn more about providing services to lower-income
consumers. Therefore, community reinvestment staff held two focus group
meetings with account holders to learn how the program was faring.
Focus group participants identified several
important concerns, including the need for access to telephone banking
to obtain
information on account balances and withdrawals, and the importance of
providing alternative bill payment mechanisms for savings account
holders.
ABP has allowed thousands of consumers, many with no credit record,
to establish checking and savings accounts. In addition, the Bank has
cross-sold other products to ABP customers, including consumer loans,
certificates of deposit, and installment loans. ABP has also influenced
the establishment of more flexible criteria for other Bank One retail
accounts. However, ABP is only available at eight branches in the city
of Chicago, and should be expanded to reach more unbanked consumers.
Financial Literacy and Lifeline Banking Partnerships: The Coalition
has also developed relationships with Fifth Third Bank, Charter One
Bank FSB, and LaSalle Bank. Unlike Bank One, these banks have accounts
that meet many of the criteria for lifeline checking accounts. In these
cases, the Chicago CRA Coalition helped the banks to (1) develop
financial literacy curricula suitable for lower-income consumers, and
(2) establish relationships with community partners to identify
workshop topics and market and cosponsor workshops.
These efforts have resulted in the integration of financial
literacy programs within each bank's retail banking divisions. Fifth
Third retail management staff have joined with community reinvestment
staff to offer financial literacy programs and have developed several
creative marketing and program partnerships with community
organizations. Charter One retail and community reinvestment staff have
participated in ``train the trainer'' financial literacy workshops
offered by a local cooperative extension office and are currently
developing a financial literacy curriculum.
LaSalle and the Coalition developed an exemplary financial literacy
curriculum that addresses the financial management concerns of lower-
income consumers. The Chicago CRA Coalition also helped LaSalle
establish a very fruitful partnership with Chicago Commons. Chicago
Commons is a multiservice settlement house that provides job-training
services through its Employment and Training Service Center (ETC) to
lower-income people moving from welfare to work. The Bank teaches its
financial literacy curriculum in eight classes over a period of about 2
weeks. Approximately 32 students participate in each course, which
culminates in a trip to a local LaSalle branch where accounts can be
opened. The partnership is ongoing.
Community Development Credit Unions: Community development credit
unions (CDCU's) focus on providing financial services and loans in
lower-income communities. The Woodstock Institute has documented
several innovative financial service partnerships developed by CDCU's.
Central Appalachian Peoples Federal Credit Union operates in 23
rural counties that are among the poorest and least educated in the
Nation (see Figure 4). Isolated from larger cities, the community is
poorly served by traditional financial institutions and unemployment is
high. The credit union leverages deposits with Government and private
funding to provide much needed access to home mortgages, small business
and consumer loans, and deposit services.
Northeast Community Federal Credit Union (Northeast Community FCU)
provides a safe place to save for lower-income San Franciscans.
Organized in 1981, the credit union is committed to serving the unmet
financial needs of low-income community residents, many of who are
recent immigrants or refugees from cultures where financial
institutions are not accessible or trustworthy. Further, some members
are concerned that maintaining a deposit account will violate
citizenship or immigration regulations. Northeast Community FCU works
with local community organizations to provide financial literacy regarding
the practices of U.S. financial institutions. It also educates members
about the disadvantages of taking out high cost loans that are heavily marketed in this community.
Since its founding in 1981, Quitman County Federal Credit Union
(Quitman County FCU) has focused on reaching its African-American, low-
income community base. The membership is largely made up of single
women, minorities, and public aid recipients. Quitman County FCU also
manages a youth credit union program that not only helps young people
save but also encourages them to serve their poverty-stricken community
in rural Mississippi. Its members run the Youth Credit Union. They
elect their own Board, hold monthly meetings, and operate various
committees to manage the credit union's affairs. The Youth Credit Union
Program offers financial workshops that explain the hazards of using
subprime lenders, manual and computer bookkeeping and accounting
techniques, and checkbook balancing among other financial topics.
Lessons in Lifeline Account Programs
Financial Literacy: Barriers related to trust, low financial
literacy, and marketing can be addressed through effective financial
literacy training. Banks should work in partnership with the community
and other nonprofit organizations to provide financial literacy workshops
and counseling. The workshops should include the following topics:
Budgeting and personal finance management skills.
Tools to make informed decisions when choosing accounts,
applying for loans, or credit cards, etc.
Skills needed to manage accounts, such as balancing
checkbooks, managing funds availability timetables, and using
electronic banking services.
Information on investment and savings options.
Program Marketing: Financial institutions' marketing of these new
products should include not only information on account features and
advantages, but should also include outreach and information on how the
products are preferable to check cashers and the other benefits of a
mainstream banking relationship. In addition, marketing strategies
should be developed with community-based organizations and in
cooperation with organizations involved in consumer credit issues.
Targeted marketing efforts, such as community newspapers and radio ads,
should be considered as well.
Program Diversity: It is also important to understand that there is
a diversity of ``unbanked'' consumers. For instance, minority consumers
are more likely than other consumers to be dissatisfied with the
quality of their financial services are. When asked by a 1999 survey
(conducted by the Metro Chicago Information Center) how well their
banking needs were being met, 16 percent of African-Americans and 25
percent of Latinos responded ``not too well'' or ``not at all,''
compared to only 7 percent of whites. Recent immigrants often
experience great difficulty developing savings. Many have poor literacy
skills, distrust financial institutions or may have concerns about
their legal status that keep them isolated.
Bank Staff: A major component of the success of the program hinges
on the enthusiasm of bank staff to work with lower-income consumers.
For instance, one of the recruitment techniques is for tellers to
encourage people who cash checks at the bank to apply for checking or
savings accounts. Banks should use their in-house communication
mechanisms to inform staff of new programs and branch managers should
hold short orientation meetings with customer service staff explaining
the importance of the bank's efforts to address the financial service
needs of its community. Management should also set performance goals
and incentives.
Reducing Consumer and Bank Expenses: Inexperienced account holders
should have accounts that allow some protections from NSF fees.
Further, many retail account products are not profitable. According to
one expert on financial services, financial institutions make 80 percent
of their profit on retail products from only 20 percent of their customers. Therefore, it is also important to consider how banks can cut costs:
Phone banking: Banks should provide information on account
balances and other account activity by phone so that account
holders can avoid NSF fees. This will also reduce teller expenses.
Electronic access: Banks can also improve services and
decrease costs by enabling low-income consumers to conduct
financial transactions electronically. Services may include
Internet banking, smart ATM's, electronic bill payment and money
order machines and debit cards.
No overdrafts: All checks that will cause a negative balance
should be returned.
Limit withdrawals: ATM withdrawals should be limited to $50/
day.
Funds availability: Account holders may not be able to access
funds deposited by check for up to 2 business days. However,
immediate access should be allowed for cash and direct or
electronic deposits.
Second-day approval for new accounts: To reduce criminal
exploitation of lifeline accounts, banks should impose a waiting
period of 24 hours to establish new accounts. This will allow the
bank to more fully investigate applicants and deter fraud activity.
Account Disclosures: It is important that consumers understand
account provisions. Therefore, they should be translated from
``legalese'' into standard language, making it understandable for
readers of all levels. In addition, many of the materials should also
be translated into Spanish or other languages as appropriate.
CRA Service Test: In 1995, the Community Reinvestment Act (CRA) was
amended to concentrate on bank performance in three areas: lending,
investment, and services. Creative and innovative bank products and
services, such as the establishment of lifeline accounts and financial
literacy workshops, can help a bank achieve a satisfactory rating under
the Service Test. Further, the Woodstock Institute encourages the
strengthening of the Service Test by requiring banks to collect and
report information on the income and race of deposit account holders.
----------
PREPARED STATEMENT OF RUFINO CARBAJAL, JR.
Manager, West Texas Credit Union
On Behalf of
Credit Union National Association (CUNA)
May 2, 2002
Good morning, Chairman Sarbanes, Senator Gramm, and Members of the
Committee. I am honored to appear before you this morning to present
testimony on the plight of the ``unbanked'' and ``underserved.'' I am
Rufino Carbajal, Jr., Manager of the West Texas Credit Union, a $34
million credit union serving over 11,000 members in El Paso, Texas. I
appear before you today on behalf of the Credit Union National
Association (CUNA), which represents over 90 percent of the Nation's
approximately 10,400 State and Federally chartered credit unions and
their 82 million members.
In announcing this hearing, Chairman Sarbanes indicated that
approximately 10 percent of households in the United States are
`unbanked,' and that most of these individuals ``predominantly come
from low-income households and often must utilize high-cost services
offered by fringe financial service providers in order to conduct
routine transactions such as check cashing and bill payment. In
addition, the `unbanked' have had a difficult time establishing
traditional forms of credit, receiving bank loans, acquiring financial
assets, and saving for the future.''
I am uniquely positioned to address these concerns. As manager of
my credit union for 26 years, I have been a pioneer in and become an
authority in serving the underserved. Even when I was the only employee
of the credit union, I realized that there was a need to serve the
underserved community of El Paso, which is one of the poorest
Metropolitan Statistical Areas in the Nation. I originally served the
membership of the Tri-State Wholesale Associated Grocers, but after the
association ceased operations, Tri-State merged with West Texas Credit
Union. Our field of membership now serves many blue-collar workers,
such as those in the garment industry and the Ysleta Del Sur Pueblo
reservation. Over the years, I have served as a mentor for many credit
unions even smaller than ours, and I have been a consultant for credit
unions in Guatemala and for the World Council of Credit Unions (WOCCU).
My testimony this morning will focus not only on the efforts of
West Texas Credit Union to serve the underserved, but on those of
credit unions across the Nation as well. I will describe several
programs designed to attract and retain the unbanked, including efforts
to help credit unions get involved in the First Accounts Program.
First Accounts
I am pleased that a major focus of this morning's hearing is the
implementation of the First Accounts Program.
CUNA is strongly committed to the principle of access to financial
services by consumers, including those of modest means, and supports
the First Accounts Program, which is designed to make basic financial
institution accounts available to low- and moderate-income consumers.
According to the Federal Reserve Board's 1998 Survey of Consumer
Finances and the Treasury Department's Notice of Funds Availability
regarding First Accounts, almost 1 family in 10 in this country does
not have a share draft/checking account or a savings account. These
families generally have annual incomes of less than $25,000.
There are many reasons why an individual may not have an account
with a financial institution. These include lack of awareness about the
importance of efficient management of their financial resources--
however meager--and how institutions, like credit unions, will provide
financial counseling, education, and guidance to help individuals
develop financial plans to maximize their funds and plan for the
future. Financial education is a hallmark of the credit union system
and credit unions offer such education through a variety of programs
that are described throughout my
testimony.
Individuals, such as immigrants, may also be reluctant to approach
a financial institution because they fear they lack proper
documentation. This may become even more problematic as the Treasury
Department implements the ``Know Your Customer (Member)'' rules under
the USA PATRIOT Act. We urge Congress and Treasury to ensure these
rules will not have a chilling effect on the ability of immigrants to
fully participate in our society, including through the use of
financial institutions. We further urge Congress and Treasury to allow
institutions to rely on documents such as Matricula issued by the
Mexican Embassy's local offices in this country to verify an
individual's identity.
Without access to these very basic services, such individuals are
severely limited in the choices they have to conduct the business of
their daily lives. They are likewise disadvantaged in preparing for the
future. Recognizing there is a role for the Federal Government to play
in helping to address this situation, Congress has appropriated $8
million for the First Accounts Program implemented by the Treasury
Department.
Under the program, Treasury will provide grants to eligible
entities, such as insured credit unions, to offer low-cost savings and
share draft/checking accounts to low- and moderate-income consumers.
Such accounts could be offered electronically, such as through an ATM,
and ideally would also be accompanied by financial education to
encourage the use of the account and highlight its advantages.
We are gratified that Treasury has reached out to credit unions to
apply for the First Accounts. CUNA President & CEO Dan Mica and the
senior staff met with Assistant Secretary for Financial Institutions
Sheila Bair in March, and she strongly encouraged credit unions, as
well as other financial institutions, to seek grants through First
Accounts.
In fact, West Texas Credit Union is one of 39 credit unions in 13
States included in the application of CUNA's National Credit Union
Foundation. Over 2 million unbanked consumers reside in communities
served by this application. The Foundation has requested $3.7 million
to fund a program that will provide banking services to over 28,000
unbanked consumers over a period of 24 months. Participating credit
unions have pledged to invest $1 million into our First Accounts
Program.
The Foundation's First Accounts Program covers a vast array of
approaches. Some credit unions, notably those in New York and Michigan,
have formed strategic partnerships with universities (Cornell
University and the University of Michigan) to provide the financial
literacy components of the program. The credit unions will provide the
financial services.
The Foundation's First Accounts Program has several themes: (a)
there is a strong orientation toward serving the unbanked African-
American and Latino consumer; (b) the application covers urban
communities of Los Angeles, Seattle, Portland, and New York to rural
communities located in South Dakota, Iowa, and Idaho.
The Foundation's application also attempts to reach out to several
distinctive audiences. For example, in Iowa an applicant will seek to
use first accounts funds to provide financial services to the large
influx of Bosnians and Hispanics through community partnerships. In
Michigan, the applicant will use first accounts fund-
ing to provide financial services to persons with disabilities and
other low-income individuals.
In short, the Foundation program model is rich in creativity,
diverse in categories of persons who will be served, and national in
scope.
Remittances
You may recall this Committee's hearing on February 28 regarding
the status of international remittances. CUNA and WOCCU submitted a
statement for that hearing's record which provided details about the
desperate need for affordable remittance services, the difficulties in
providing these services, and the industry-leading efforts of credit
unions in this area.
As you learned from that hearing, there is a growing population of
Hispanic and other individuals in this country who for one reason or
another are not able to utilize traditional financial institution
services. These individuals frequently send their hard-earned pay to
their parents, children, brothers, and sisters in Mexico or other
homelands. Those who do not have access to a credit union or other
financial institution must use wire services that charge outrageously
high fees to execute the transaction.
I am proud to say that West Texas Credit Union has been offering
its members the opportunity to wire money back to Mexico and uses the
WOCCU service called International Remittance Network
(IRNet'). This service saves our users at least one-third
the cost of using a high-cost money transfer agent. Our credit union
has many individuals in our field of membership with familial ties to
Mexico, and we know they send funds to relatives in Mexico using wire
transfer services that charge as much as 28 percent of the amount
transferred. By providing IRNet' services, we offer members
an inexpensive way to wire money to family in Mexico, or in 42 other
countries, at an affordable price. For peace of mind, members also
receive a free 3 minute phone call to inform the recipient of the
transfer. The program has shown moderate success.
CUNA's February 28 statement noted that while many credit unions
are leading the way in ensuring that immigrants have access to
affordable remittance and financial services, these efforts could be
significantly enhanced if Congress would amend the Federal Credit Union
Act to allow credit unions to provide these services to nonmembers
within the field of membership. I am very excited that the House of
Representatives has initiated legislation to do just that. H.R. 3951,
``The Financial Services Regulatory Relief Act of 2002'' provides
credit unions the authority to sell travelers checks and cash checks
for nonmembers within their field of membership. And H.R. 4612, ``The
Expanded Access to Financial Services Act,'' would allow the same
authority, as well as provide credit unions the opportunity to provide
wire transfer and money order services to nonmembers within the field
of membership.
Having the authority to cash checks and provide wire transfer
services to nonmembers within the field of membership would further
enhance the ability of credit unions to reach the ``unbanked'' and
``underserved'' and provide an affordable and financially sound
alternative to high-cost payday lenders. It would allow credit unions
to play an even more important role in combating predatory lending
practices. And by getting the ``unbanked'' in the door with these
services, we would hope to gain their trust, respect, and loyalty so
that they would join the credit union as full-fledged members.
Individual Development Accounts (IDA's)
I am proud that West Texas Credit Union is one of many credit
unions that are among the leading providers of Individual Development
Accounts (IDA's). Referring again to Chairman Sarbanes' announcement of
the purpose of this hearing, one of the issues referred to was the
inability of the ``unbanked'' to acquire financial assets and save for
the future. If ever there was a product developed to serve exactly that
purpose, it is the IDA. And if ever there was an institution developed
to provide these accounts, it is the credit union, whose mission of
``People Helping People'' fits perfectly with the goal of IDA's.
IDA's are savings accounts with the added benefit of matching funds
by Government and private organizations. Participants must meet certain
requirements such as, income qualification (usually 200 percent below
the poverty level), and attendance at educational sessions. Each
participant sets a savings goal for a specific purpose. The funds can
only be used for the purposes of buying a first home, education, and/or
to start a small business.
West Texas Credit Union, in partnership with El Puente Community
Development Corporation (CDC), began offering IDA's in October 2001. El
Puente CDC is a nonprofit organization. It provides new sources of
social, educational, and economic opportunity such as enterprise
development, bilingual on-the-job training and access to technology,
and promotes community revitalization through building the capacity of
individuals and families to decide and design their futures. Once a
participant reaches his or her goal, El Puente CDC will authorize the
withdrawal of the funds for the above-stated reasons. But before the
funds are withdrawn the
account holder must complete a course in financial literacy.
Legislation currently before Congress would greatly enhance the
number of IDA's in existence within credit unions and other financial
institutions. The Savings For Working Families Act (SWFA) has been
introduced both as a free-standing bill and incorporated within other
legislation. The House has passed its charitable giving bill, which
includes the SWFA, while S. 1924, the CARE Act, includes it in the
Senate. The CARE Act is currently pending before the Finance Committee.
Essentially, the SWFA would provide tax credits for matching funds to
IDA's, dramatically increasing the market for IDA's. I urge the Senate
to support this very important initiative.
Financial Literacy
Credit unions recognize that it is necessary to offer some form of
financial literacy training to successfully integrate the ``unbanked''
into the financial mainstream. We also believe that similar to a
``continuing education'' requirement for many professionals such as
doctors and lawyers, consumers require similar continuing financial
education to help them navigate the many pitfalls and opportunities
available to them. As detailed in CUNA's statement for the record of
this Committee's February 6 hearing on Financial Illiteracy, that is
why credit unions have traditionally made financial education a part of
their mission. Credit unions, including West Texas, provide financial
information and training to members on a one-to-one basis. Many credit
unions, including West Texas, actively work in schools to teach
personal finance skills to children and teenagers. CUNA has formed a
national partnership with the National Endowment for Financial
Education (NEFE) to teach the High School Financial Planning
Program' to high school seniors across the Nation. And
financial literacy is another aspect of providing Individual
Development Accounts (IDA's), described above, which are also available
through many credit unions in addition to West Texas.
Throughout the course of the year, we participate in several
programs that bring financial awareness to our members. Every spring we
organize a Credit Fair. We bring together the Consumer Credit
Counseling Services and the Credit Bureau of El Paso to advise members
on building and maintaining good credit. Other topics include the
following: learning to be debt free, how to live within your means, and
how to save for the future. We have a good turn out every year and our
members show gratitude for the added convenience of bringing these
services to them.
In order to promote International Credit Union Day, in October, and
National Credit Union Youth Week, in April, we have participated in
local high school presentations. In these presentations we teach the
importance of financial literacy to our youth. We cover topics such as,
``Time Is On Your Side,'' which explains the benefits of saving at an
early age. Money management is emphasized. We review a ``good'' credit
report and a ``bad'' one, while explaining why it is important to
maintain ``good'' credit. Students, as well as teachers, are grateful
for our involvement with the youth.
Every quarter in our bilingual newsletter we include articles that
increase our members' financial awareness. We try to tackle issues that
are of interest to our members and affect our community.
Affordable Housing Program
In the year 2000, a study was performed by a group of professors
from New Mexico State University. The study indicated that a
substantial market exists in El Paso County for affordable housing
which is not being served. As previously mentioned, El Paso is one of
the poorest Metropolitan Statistical Areas in the Nation.
With grant money from CUNA's National Credit Union Foundation and
the Texas Credit Union League State Credit Union Foundation, eight
credit unions located in El Paso County, Texas, chartered and wholly
own the El Paso Affordable Housing Credit Union Service Organization
(AHCUSO). The AHCUSO is an affordable mortgage and homeownership-
counseling agency. AHCUSO's mission is to provide financial literacy
and homeownership counseling to thousands of low-income El Paso county
residents.
The AHCUSO has partnered with the El Paso Housing Authority and has
committed $1.8 million to the financing of affordable homes, of which
approximately $500,000 has been closed. HUD provides down payment
assistance, and the financing and servicing is being done by the
AHCUSO.
Presently, negotiations are going on with Fannie Mae in an effort
to get them to relax their underwriting criteria in order to provide
more affordable housing to the El Paso community.
Credit Unions Combat Predatory and Payday Lenders
Over the past decade, high-cost credit facilities, such as payday
lenders and subprime mortgage lenders, have flourished across the
country, particularly in the
underserved areas. Unfortunately, many of these lenders incorporate
predatory
practices into their programs, such as exorbitant fees and interest
rates, frequent ``flipping'' of the loans to needlessly increase costs,
undisclosed balloon notes and unnecessary insurance premiums.
Credit unions have stepped up their efforts to combat predatory
lenders in neighborhoods by offering affordable alternatives for both
payday loans and mortgage loans. A ``payday loan'' refers to the use of
a post-dated check to receive a small loan until the next payday.
Generally, the annual percentage rate for a payday loan is more than
400 percent.
The demand for these payday loans continues to increase, and there
are now more payday lenders across the country than credit unions.
To reverse this disturbing trend, credit unions have developed
affordable alternatives to the high-cost payday loan. For example, some
credit unions offer their members up to $300 at 18 percent with up to 6
months to pay back the loan, as long as the member has direct deposit.
Some credit unions offer emergency loans, for specific purposes, with
no fees or interest attached. Some credit unions have opened facilities
in underserved neighborhoods to offer not only small unsecured loans,
but also low-cost check cashing, affordable money orders, bill-paying
services, bus tokens, and free credit counseling.
Credit unions also have developed a variety of subprime lending
programs to help consumers build credit, get into homes with as little
as 1 percent down, and pick up smart credit habits as they reduce their
loan rates. For example, one credit union program offers subprime loans
at 2 percent or 4 percent above normal rates, depending on collateral.
The credit union drops this subprime rate to the prime rate when the
borrower has made 12 on-time payments.
Another credit union program offers its subprime borrowers several
ways to reduce their interest rates. For example, attending one
consumer credit counseling class reduces the rate by \1/2\ percent;
attending more than one class will reduce the rate by 1 percent;
depositing $15 a month into a savings account for a year reduces the
rate by \1/2\ percent; and for each year the debt does not increase,
the rate drops 1 percent.
In cities like El Paso, predatory lending practices have reached
epidemic proportions. Credit unions are uniquely positioned to help
combat these practices, particularly if given additional tools to do
so.
Finally, CUNA applauds Chairman Sarbanes and other Members of the
Committee for your commitment to eliminating predatory lending
practices through the introduction of ``The Predatory Lending Consumer
Protection Act of 2002.'' We look forward to reviewing the details of
the bill and working with the Committee staff to support the passage of
an effective antipredatory lending law.
Conclusion
In conclusion, on behalf of CUNA, I am grateful for the opportunity
to have commented on the plight of the ``unbanked'' and ``underserved''
and how West Texas Credit Union and credit unions across the country
are trying to reach out and bring them into the financial mainstream.
There is no more pressing need in my opinion, for it is only through
economic opportunity that we can solve many of the problems facing our
Nation's poorest and most deprived individuals. I have witnessed first-
hand that poor people want to work and know even with a little bit of
savings they can grow and thrive. Whether it is through the First
Accounts Program, affordable housing programs, enhanced IDA's, expanded
opportunities to serve their communities, or financial literacy, credit
unions stand ready to meet this very important challenge.
----------
STATEMENT OF CLIFFORD N. ROSENTHAL
Executive Director
National Federation of Community Development Credit Unions
May 2, 2002
The National Federation of Community Development Credit Unions
(NFCDCU) is a nonprofit association that represents those credit unions
with the specific mission of serving low- to moderate-income
communities. Many of the people served by our credit unions come from
the ranks of the ``unbanked.'' They are people whose ``life savings''
sometimes hover in the double digits, who live from paycheck to
paycheck and cannot afford the high fees that most banks would charge
customers with their modest balances. Some are recent or longstanding
immigrants.
Our 215 member community development credit unions (CDCU's) are
found in 40 States, the District of Columbia, and Puerto Rico. They
serve more than a million people living in urban, rural, or
reservation-based communities. They have served unbanked American
communities for as long as 70 years.
In the last decade, several Federal initiatives have begun to aid
CDCU's in our work of providing financial services to the unbanked. The
Community Development Financial Institutions (CDFI) Fund, in
particular, has made a dramatic difference in the ability of some of
our credit unions to reach out far more widely to the unbanked. CDFI
Fund assistance has enabled them to open branches in places like San
Francisco's Tenderloin district (Northeast Community FCU), in a
farmworker community of Watsonville, California (Santa Cruz Community
CU), in the South Bronx (Bethex FCU) and the Lower East Side (Lower
East Side People's FCU) of New York City. It has enabled a county-wide
credit union in Mississippi (Quitman/Tricounty FCU) to add two more
counties to its service area, and has enabled
a credit union that serves the Navajo and other reservations to add
electronic
services. Many of these changes would have been impossible without the
CDFI Fund. For this reason, it is vital that the Senate Banking
Committee, in reviewing service to the unbanked, add its voice in
support of increased appropriations for the CDFI Fund.
The First Accounts Program through the U.S. Treasury is an
intriguing and a
potentially important initiative. Our organizations, like many others,
applied to the First Accounts initiative of the Treasury Department.
Regardless of whether we are successful, we commend the Treasury
Department for encouraging creative, diverse approaches to delivering
services to the unbanked. Since this is the first effort of its kind,
we will look forward with interest to the results of the Treasury
Department's award program. Inevitably, revisions and more precise
targeting of the program will be required after the initial round. But
we encourage the continuation of this significant effort.