**Statement for the Record**

**JoAnn M. Johnson, Chairman**

**National Credit Union Administration**

# U.S. House of Representatives

**Appropriations Subcommittee on Financial Services and General
Government**

**"Financial Services for Disadvantaged Communities"**

**Thursday, March 1, 2007**

On behalf of the National Credit Union Administration (NCUA), I am
pleased to offer testimony on the subject of "Financial Services for
Disadvantaged Communities."  This is an important public policy topic
that Congress should explore, and I commend Chairman Serrano, Ranking
Member Regula and the other members of the Subcommittee for your active
interest in learning more about the parameters of the problems facing
these communities, as well as some of the steps that are being taken,
and should be taken, to mitigate the situation.

 

The NCUA is the independent federal agency that charters and regulates
federal credit unions and insures accounts in federal and the
overwhelming majority of state-chartered credit unions across the
country through the National Credit Union Share Insurance Fund
(NCUSIF).  NCUA receives no operating appropriations from Congress, and
is funded by credit union fees.

 

A credit union is a member-owned, not-for-profit cooperative financial
institution.  There are 8,462 federally insured credit unions, which
hold \$701 billion in assets, as of December 31, 2006. There are
approximately 87 million credit union members in the United States.

 

 

**I.  Disadvantaged Communities**

 

Consumers in disadvantaged communities can be described by law and
regulation in various ways.  For the purpose of this testimony, the term
"low income" will be used to describe consumers in these communities and
shall be considered synonymous with the terms "unbanked", "underbanked",
"distressed", and "underserved".  NCUA describes "low-income" as members
who make less than 80% of the average for all wage earners as
established by the Bureau of Labor Statistics; or whose annual household
income falls at or below 80% of the median household income for the
nation as established by the U.S. Census Bureau.[^1] 

 

The Center for Financial Services Innovation (CFSI), an affiliate of the
ShoreBank Corporation, a Chicago institution whose mission is to
encourage financial services industry efforts to serve un-and
underbanked consumers, reported to NCUA in August 2006 that as many as
28 million people are "unbanked." Another 45 million people or 19.4% of
all U.S. households have an account relationship with a traditional
financial institution (for the purpose of this testimony we are defining
traditional financial institutions as credit unions, banks, and
thrifts), but continue to use a broad array of nontraditional financial
services to meet their needs.[^2] These nontraditional financial
services are accessible, but are usually provided at a higher cost to
the consumers. 

 

A 2005 study, "*Banking the Unbanked: Helping Low-Income Families Build
Financial Assets,*" delineated the reasons consumers use nontraditional
services or remain "unbanked."  Those reasons include: limited
traditional financial institution options; desire for immediate access
to financial services; reluctance to maintain a stipulated balance in a
depository account; lack of information regarding access to a
traditional financial institution; distrust of mainstream financial
institutions; inability to understand the costs or evaluate options;
belief that evidence of asset accumulation may negatively impact
eligibility for public assistance; and difficulty in managing debt.  A
strategy identified by this report to encourage low-income consumer use
of traditional banking services entailed basic financial education
accompanied by information regarding the benefits of using mainstream
financial institutions, tailored to specific consumer needs (e.g.,
cultural and language-sensitivity).[^3]^ ^

 

[Financial Service Options in Disadvantaged Communities]{.underline}

 

While the above-referenced barriers and disincentives facing consumers
in disadvantaged communities have resulted in lower participation in
traditional financial institutions, the financial service needs are
essentially similar if not identical to those in non-disadvantaged
communities.  Financial education, transactional services, depository
services, short-term credit, business lending, and homeownership
products are examples of the types of financial service
offerings consumers expect regardless of their income level or net
worth.   

In particular, low-income consumers most commonly use transactional and
short-term credit products to address their immediate financial
needs.[^4]  Transactional products/services include check-cashing, money
orders, electronic money transfers, and stored value cards.  These
services are available from a variety of outlets including
nontraditional financial institutions, places of employment,
supermarkets, currency exchanges, post offices, and check-cashing
outlets.  The fee to cash a payroll or government check varies from no
cost to 3% of the check amount.[^5] Personal checks are cashed at an
average cost of 15% of the amount of the instrument.[^6]  It is
significant to note that traditional financial institutions generally do
not charge account holders fees for cashing checks. 

Additionally, non-traditional financial service providers typically
charge high fees for money orders and electronic money transfer
services.[^7] On the other hand, NCUA is aware of numerous credit unions
offering free or low cost money transfers.[^8] 

 

Another type of short-term credit product is primarily known as a
"payday loan." A 2005 study indicated that the cost of payday loans
typically ranges from \$15 to \$22 per \$100 for a two-week loan, an
annualized 391% to 572% interest rate.[^9] 

In 2004, there were 22,000 payday loan stores extending about \$40
billion in loans.[^10]  

Other examples are "rent to own" credit products, which allow consumers
to acquire goods by installment, and tax refund anticipation loans
(RALs), which are short-term cash advances against a customer's
anticipated income tax refund.  The Brookings Institute reports that the
rate of interest on these RALs generally exceeds 200%, and can be higher
in some cases.[^11]  It is important to note that the Federal Credit
Union Act (FCU Act) imposes an 18% usury ceiling, which limits the rate
federal credit unions can charge on loans.  

 

All consumers, including those located in disadvantaged communities,
want financial services and products that are affordable, accessible,
and focused on their needs.  The costs for transactional and short-term
credit products from nontraditional financial sources are not affordable
for low-income consumers and in many cases exacerbate their economic
distress.  The challenge for traditional financial institutions is to
make these products accessible and affordable to low-income consumers.  

 

**II.  NCUA and Industry Outreach Efforts**

The NCUA and the credit union industry have historically devoted
resources to addressing the needs of disadvantaged communities. The
following are examples of those outreach efforts.

 

[Low-Income Designation and Community Development Revolving Loan Fund
(CDRLF)]{.underline}

 

A 1970 amendment to the FCU Act provided a framework for low-income
designated credit unions.  For the purpose of implementing the
amendment, Congress specifically directed NCUA to define "low income." 
NCUA's definition of a low-income individual is one who earns less than
either 80% of the average for all wage earners, as established by the
Bureau of Labor Statistics, or whose household income is at or below 80%
of the median household income as established by the U.S. Census
Bureau.  The NCUA\'s 2007 National Median Household Income Standard is
set at \$39,858 and the NCUA\'s 2007 Wage Earner Standard for an
individual is set at \$23,857.

 

NCUA has made an aggressive effort to educate qualifying credit unions
on the benefits of the low-income designation. As a result, the number
of low-income designated credit unions (LICUs) increased from 645 credit
unions at year-end 2000 to 1,053 credit unions as of December 31, 2006.
These credit unions represent 12% of the total number of federally
insured credit unions and held \$23.6 billion in assets, or
approximately 3.4% of the total assets in the credit union system. 
Low-income designated credit unions serve 4.4 million members.

NCUA has issued regulations implementing the statutory provisions to
allow low-income designated credit unions to receive deposits from
nonmembers, accept secondary capital accounts, provide exemption from
the aggregate member business loan limit, and participate in the CDRLF
program. 

 

In 1979, Congress created the CDRLF to provide low interest loans and
Technical Assistance Grants (TAGs) to low-income designated credit
unions.  The creation of this fund recognized the financial assistance
some low-income designated credit unions required to be successful.

 

NCUA has administered the CDRLF since 1987.  This program, which is
available only to low-income designated credit unions, provides
technical assistance grants and low-cost loans to those low-income
designated credit unions interested in enhancing service to their
membership.  Since inception, the CDRLF granted 278 loans totaling
\$43.1 million and more than 2,100 grants totaling \$6.9 million, as
outlined in the following chart. 

  --------------------- -------------------- ----------------- ------------------ ----------------- --
  **Fiscal Year**       **Appropriations**                     **Approvals**                        

                        **Loans**[^12]       **TAGs**          **Loans**          **TAGs**[^13]     

  1979 to 1996          \$6,000,000          \$0               \$16,400,000       \$ 696,000        

  1997                  \$1,000,000          \$0               \$ 2,261,000       \$ 215,461        

  1998                  \$1,000,000          \$0               \$ 2,365,000       \$ 357,224        

  1999                  \$2,000,000          \$0               \$ 1,900,000       \$ 343,549        

  2000                  \$1,000,000          \$0               \$ 5,583,000       \$ 292,729        

  2001                  \$650,000            \$350,000         \$ 2,657,000       \$ 369,815        

  2002                  \$650,000            \$350,000         \$ 3,259,000       \$ 668,044        

  2003                  \$700,000            \$300,000         \$ 1,004,997       \$ 460,242        

  2004                  \$200,000            \$1,000,000       \$ 1,797,458       \$1,225,565       

  2005                  \$200,000            \$800,000         \$ 1,669,000       \$ 949,219        

  2006                  \$0                  \$950,000         \$ 4,214,000       \$1,371,130       

  **Total**             **\$13,400,000**     **\$3,750,000**   **\$43,110,455**   **\$6,948,978**   
  --------------------- -------------------- ----------------- ------------------ ----------------- --

 

The 2007 budget request for the CDRLF is \$950,000 in TAGs. In 2006,
NCUA approved \$1.3 million in grants to 294 credit unions.  These
low-income designated credit unions used the grant and loan funds to
touch the lives of the members of their communities by:

 

-   Overcoming the language barrier with translated financial service
    materials;

-   Offering free income tax return services;

-   Opening offices to better serve their members;

-   Providing financial education opportunities; and

-   Providing loans to develop alternative loan programs to combat
    predatory lending.

 

Here are just a few specific examples of CDRLF fund use by low-income
designated credit unions:

 

-   Coastal Waters Federal Credit Union, a \$7 million institution
    located in Alabama, has a membership that includes the underserved
    community of Mobile, Alabama.  The credit union installed an ATM
    machine that charges no fees for credit union members.  This ATM and
    the credit union office are accessible to residents using public
    transportation.

 

-   Desert Sage Federal Credit Union, a \$1.6 million institution,
    located in Idaho, provides ATM/debit card services for members who
    are seasonal migrant workers.

 

-   Houston Teamsters Federal Credit Union partnered with TransUnion and
    the Gulf Coast Community Services Association to create a Credit
    Score Enhancement Program.  This program provides a process for
    community residents to receive their personal credit score, advice
    on how to improve their score, automated home valuations and auto
    pricing reports. 

 

[NCUA Outreach Efforts]{.underline}

 

Over the years, NCUA initiated a number of programs focused on assisting
low-income designated credit unions. These initiatives provide increased
opportunities for FCUs to diversify their membership profile and to
assist low-income designated and small credit unions as they manage
their operations in accordance with ever increasing and complex laws and
regulations.  The ultimate objective is to increase the number of
low-income individuals joining credit unions and receiving valuable,
affordable services. This process is made more difficult because credit
unions that typically attempt to serve this population are themselves
small and possess minimal resources.

The Access Across America initiative, announced in February 2002,
incorporated the agency's activities for low-income designated and small
credit unions, as well as federal credit unions expanding into
underserved areas.  The program has been designed to partner with
federal government agencies and other organizations to identify and
facilitate the use of resources available for credit unions to assist in
their efforts to serve individuals in underserved areas.  Workshops
continue to provide partnering opportunities with federal government
agencies, as well as non-profit and private organizations.

NCUA specifically promotes financial education initiatives in the Access
Across America program, an ongoing effort by the NCUA to encourage
credit unions to proactively work with a wide array of federal programs
in an effort to improve service to members, particularly in low-income
and underserved areas.  Access Across America is emblematic of NCUA's
commitment to fostering economic empowerment through credit union
membership, and in over a dozen programs in every region of the United
States, credit unions have received practical, useful information on how
to reach more low-income consumers.  The next Access Across America
Summit, to be held March 6, 2007, in Tampa, Florida, will focus on the
Volunteer Income Tax Assistance (VITA) program, as well as alternatives
to payday lenders and high-cost check cashers.

As an adjunct to the Access Across America initiative, the Partnering
and Leadership Successes (PALS) program was introduced in 2003 to
provide best practices in serving members and marketing to potential
members in underserved areas and communities.  The agency coordinated
widely attended workshops where a mix of credit unions presented
programs focused on serving those in the lower economic strata.  These
programs included partnering opportunities with the Neighborhood
Reinvestment Corporation, Latino outreach, and micro-business lending
opportunities with the Small Business Administration. NCUA has
incorporated the most successful aspects of PALs into the Access Across
America programs and plans to continue to offer these valuable efforts
in the future.  

 

In 1993, NCUA created the Office of Community Development Credit Unions
dedicated to ensuring the long-term viability of small and low-income
designated credit unions.  Today this activity is handled by the Office
of Small Credit Union Initiatives (OSCUI), which has expanded from a
staff of six and a budget of \$756,000 in 2004, to 24 staff and a \$3.9
million budget in 2007.

OSCUI conducts regional and national training workshops on a variety of
topics to help small and low-income designated credit unions succeed. 
For example, in 2006, OSCUI held 20 national workshops covering subjects
such as establishing financial literacy programs, disaster recovery
planning, and compliance with the Bank Secrecy Act.  Approximately 1,900
credit union representatives from 1,060 credit unions attended these
workshops.  NCUA has scheduled another 20 workshops in 2007.  Marketing
to potential members and developing products designed for low- to
moderate-income members will be discussed at this year's workshops.

 

Additionally, OSCUI coordinates with NCUA's regional offices to conduct
smaller roundtable training sessions focused on the needs of small and
low-income designated officials.  More than 2,000 credit union officials
received training at these OSCUI events nationwide last year. 

 

Finally, OSCUI's 15 economic development specialists (specialists)
provide one-on-one direct assistance and training to officials of small
and low-income designated credit unions around the country.  The
specialists assist with areas such as strategic planning, adding new
products and services, board and supervisory committee training, policy
development, and grant writing.  They also facilitate partnerships
within the credit union system. For example, a specialist facilitated a
partnership between low-income designated NCP Community Development FCU
in Norfolk, VA, and ABNB FCU in which ABNB is providing back office
operational support, as well as financial counselors and other services
to NCP members.  

[Office of Economic Opportunity (OEO) Initiative]{.underline}

 

Although credit unions have been and continue to be very successful in
helping their traditional membership base to secure and enjoy the
benefits of fairly-priced financial services delivered in a cooperative
structure, a concerted effort to specifically deploy credit unions to
alleviate poverty ended with indifferent results.  In the 1960s, as part
of President Lyndon Johnson's "War on Poverty," a new type of credit
union was established specifically to serve identified low-income
groups.  The Bureau of Federal Credit Unions (NCUA's predecessor agency)
set up over 700 credit unions, with assistance from the Office of
Economic Opportunity (OEO), to serve fields of membership comprised
exclusively of low-income groups. 

 

Unfortunately, credit unions established in low-income areas, solely
dependent on self-generated capital, proved less viable as a financial
cooperative.  Virtually all of these credit unions were closed or merged
out of existence.  This experience demonstrated the difficulty of
sustaining a credit union structure in which the membership consists
exclusively of low-income individuals. 

 

NCUA concluded from this initiative that a financially diverse
membership provides a much better opportunity for success in serving low
income individuals.      

 

[Credit Union Outreach Efforts]{.underline}

 

Credit unions provide services and products that are affordable,
accessible and are focused on the needs of their own membership.  In
addition, many credit unions voluntarily assume additional
responsibilities by partnering with community organizations and other
credit unions to provide financial education, and other forms of
outreach focused on specific needs of low-income or foreign-born
members. 

For example:

 

-   The S.C. State Credit Union, a \$382 million institution, provides
    financial counseling for individuals who seek assistance with
    everyday budgeting or who may be experiencing difficulty paying
    their creditors.  Eight hundred sessions are held each year with 300
    members counseled annually.  The debt management program enrolls
    nearly 700 members each year and has paid over \$2 million to
    creditors during its six-year life span.

 

-   A partnership between the Internal Revenue Service's Community
    Coalition program and 65 credit unions implements outreach, tax
    preparation, and asset building strategies (e.g., Earned Income Tax
    Credit (EITC), Individual Development Accounts and financial
    education) for low- and moderate-income persons.  The credit unions
    are limited by their field of membership to offer financial services
    and reasonably priced RALs only to their members. 

 

-   The New York City Financial Network Action Consortium (consisting of
    Lower East Side People's FCU, Union Settlement FCU and Brooklyn
    Cooperative FCU) is part of the New York City EITC Coalition.  The
    Coalition's outreach campaign is provided in 11 languages on public
    transportation and in fast-food restaurants. The Coalition hosts 45
    VITA sites, with a minimum of eight volunteers at all times, which
    are open days, evenings and weekends.  In 2006, the Coalition
    prepared 65,325 returns and helped consumers apply for nearly \$100
    million in EITC.  The Lower East Side People's FCU and Harlem's
    Foodchange process Individual Taxpayer Identification Number
    applications and offer Individual Development Accounts (IDAs) in
    conjunction with financial literacy training with the Foodchange's
    site in Harlem touted as the nation's busiest civilian-based free
    tax preparation site.

>  

In addition to the financial education efforts and coalitions, credit
unions form partnerships and operate programs designed specifically for
members in disadvantaged communities. Particularly noteworthy examples
are:

-   Fort Campbell Federal Credit Union, a \$231 million financial
    institution, created the Home Front Mortgage Program to help active
    duty military personnel stationed at Fort Campbell buy houses in
    Tennessee or Kentucky by eliminating down payments. First-time
    home-buyers attend homeownership counseling provided by a non-profit
    housing organization.

-   Bull's Eye Credit Union, a \$106 million institution located in
    Wisconsin, has senior staff personally visit an assisted living
    facility to cash checks for the residents at an assisted living
    facility. Many of the residents do not drive and the convenience of
    cashing a check assists this underserved membership.

-   The Founders Federal Credit Union, a \$1 billion institution located
    in South Carolina, serves several underserved areas. The credit
    union developed new products to better serve the Hispanic market
    that includes bilingual marketing materials, free money transfers,
    Spanish Call 24 (account access by telephone), Spanish ATMs, Spanish
    Founders Online and a Spanish Visa Helpline.

-   Hawthorne Credit Union, a \$157 million institution located in
    Illinois, employs bilingual staff in every member contact area. In
    fact, the credit union can converse with members in more than seven
    languages. In 2003, they expanded their services to the Hispanic
    community by offering a bilingual website, financial education, and
    audio response programs.

-   Northeast Community Federal Credit Union in San Francisco, CA works
    with the Mayor's Office of Business and Economic Development to
    deliver targeted small business technical assistance to an
    underserved low income Asian American community focused on starting
    or expanding small businesses.

-   W.C.T.A. Federal Credit Union partnered with the State of New York
    Mortgage Agency (SONYMA) to offer affordable mortgage loans to
    first-time home buyers. The SONYMA Partnership Program offers low
    down payment requirements, flexible underwriting requirements,
    interest rate lock-in periods that are longer than conventional
    lock-in periods, and closing cost assistance. As part of this
    program, the member is required to complete a financial education
    course through a SONYMA approved source.

-   Less than a year after converting to a community charter in 2005
    American Heritage Federal Credit Union opened a state-of-the-art
    branch in the Hunting Park neighborhood of Philadelphia. The new
    branch has attracted 150 new members each month and over \$2 million
    in new deposits from the underserved area.

 

[Financial Literacy: An Ounce of Prevention]{.underline}

NCUA has identified one obvious area of improvement that could assist
all consumers in improving their overall economic health: financial
literacy.  

 

By providing basic information about wise use of credit and the
advantages of prudent money management, financial education fosters
financial stability for individuals and entire communities.  The more
consumers know about credit and financial services, the more likely they
are to increase savings, become homeowners, and improve their financial
position.  A white paper prepared by the U.S. Department of Treasury's
Office of Financial Education released October 2002 found that "four in
ten Americans admit that they are living beyond their means primarily
because of the misuse and misunderstanding of credit.  Studies show that
individuals who have received financial education participate in, and
make larger contributions to, employer 401(k) programs and have a
significantly higher savings rate."[^14] Credit unions offer a number of
financial education programs, including the National Endowment for
Financial Education (NEFE) program at schools, Operation Hope\'s Banking
On Our Future, Credit Union National Association Thrive by Five,
<Googolplex@school>, and the Federal Deposit Insurance Corporation\'s
Money Smart.

NCUA is a member of the Financial Literacy and Education Commission (the
Commission), a federal entity established under Title V, the Financial
Literacy and Education Improvement Act, as part of the Fair and Accurate
Credit Transactions Act of 2003, to improve financial literacy and
education of persons in the United States.

The principal duties of the Commission include: (1) encouraging
government and private sector efforts to promote financial literacy; (2)
coordinating financial education efforts of the federal government,
including the identification and promotion of best practices; (3) the
development of a national strategy to promote financial literacy and
education among all American consumers; (4) the establishment of a
website to serve as a clearinghouse and provide a coordinated point of
entry for information about federal financial literacy and education
programs, grants, and other information; and (5) the establishment of a
toll-free hotline available to members of the public seeking information
about issues pertaining to financial literacy and education.

In addition to serving as a member of the Commission, Chairman Johnson
has served as Chairman of its MyMoney.gov website subcommittee since
October 2006.  The MyMoney.gov web site was created to provide public
access to financial education tools and resources, which will empower
Americans to save, invest and manage money wisely to meet personal
goals.  In this role, the Chairman coordinates the efforts of twenty
federal agencies to improve financial education across the nation. 

 

While NCUA does not view financial education as a panacea for the
problems confronting consumers in an increasingly complex marketplace,
its importance to credit unions and their members is emphasized at every
opportunity.  The advertising slogan "an educated consumer is our best
customer" resonates when it comes to financial literacy, particularly
regarding those in the lower echelons of the economic spectrum. 

 

**III.  Predatory Lending Mitigation**

 

[NCUA and Industry Initiatives]{.underline}

 

NCUA has worked with the credit union industry to ensure that credit
union members are offered short-term loans at reasonable interest
rates.  From a regulatory perspective, NCUA limits the amount credit
unions can be charged for loans by regulating the statutorily mandated
18% interest rate (usury) ceiling that federal credit unions can charge
on loans or lines of credit.  On September 30, 2006, Congress passed the
Financial Services Regulatory Relief Act of 2006, which included a
provision to allow federal credit unions to offer money transfer
instruments, including international and domestic electronic fund
transfers and check cashing services, to persons in the field of
membership.  NCUA issued a final rule in January 2007 implementing these
new provisions in the law.

 

In addition to the regulations, NCUA has provided guidance about matters
of regulatory concern by issuing three Letters to Credit Unions (LCU) on
the topic of risk-based and predatory consumer lending.  The first, an
August 1995 LCU discussed risk-based lending in the form of a
comprehensive whitepaper that encourages credit unions to consider
risk-based lending as a "tool to reach out to the underserved." A June
1999 LCU discussed Risk Based Lending issues and asserted that the
purpose of credit union risk-based lending is to make loans available to
members who might not otherwise qualify.  Finally, an April 2001 LCU
encouraged credit unions to proactively protect their members from
predatory lenders and provided information about predatory and payday
lending. 

 

Finally, as previously noted, NCUA provides grant and loan funds for
low-income designated credit unions attempting to develop alternative
loan programs to combat predatory lending. 

 

The credit union industry has encouraged credit unions to provide
alternatives for predatory lending.  Publications issued by the Credit
Union National Association, including *Credit Union Alternatives to
Payday Lending* (December 2000), and *Subprime Doesn\'t Have to be
Predatory* (July 2001), are examples of trade association-based
initiatives outlining practical methods to combat predatory practices. 
The National Association of Federal Credit Unions wrote an article for
*Military Money* magazine regarding this issue.[^15] The National
Federation of Community Development Credit Unions also has a program,
the Predatory Relief and Intervention Deposit (PRIDE), designed to
combat predatory lending by educating credit unions on offering
affordable loan alternatives.

 

Credit unions have developed a number of alternative loan products in
response to predatory lending specifically designed to steer members
away from predatory lenders and to the traditional financial institution
niche.  These alternative loan products, known as credit builder loans,
subprime loans, people helping people loans and micro loans all
represent market-driven, practical attempts at providing consumer
alternatives.

 

An example was cited by the Annie E. Casey Foundation's 2005 Low-Cost
Payday Loans: Opportunities and Obstacles report that named the (North
Carolina) State Employees' Credit Union's *Salary Advance Loan* (SALO)
as the largest and most successful payday loan alternative model.[^16]
This revolving loan has a maximum outstanding balance of \$500, offered
at an APR of 12% or \$2.50 for a two-week loan.  One of the most
innovative features is that 5% of each advance is placed in a special
unrestricted savings account.  If the member withdraws the savings, he
or she cannot receive another SALO for six months.  In addition, members
must have their paycheck directly deposited.  About 40,000 members use
the product and about 70% use it once a month.  The average SALO is
\$367 and the average repayment period is 20 days.  SALOs totaling over
\$305 million have been provided to members. 

 

There are several low-income credit unions in the New York City area
(e.g., Bronx, Spanish Harlem, Manhattan, and Bushwick) that offer
alternative loan products.  Love Gospel Assembly FCU, Neighborhood Trust
FCU, Brooklyn Cooperative FCU, and Union Settlement FCU offer consumer
loans and micro-enterprise loans to members with unfavorable credit
reports and nontraditional sources of income. One of their products is a
micro-enterprise loan at a 12% interest.  Start-up businesses without
two years of financial statements can borrow up to \$10,000, while
established businesses can borrow up to \$50,000 without any additional
security.  Established businesses can borrow more than \$50,000 if
secured by real estate.  The credit union also offers small personal
loans at 14% interest to individuals who would otherwise not qualify for
a loan. 

 

[Predatory Lending -- The Military Experience]{.underline}

 

Members of this community and their families have been victimized by
unscrupulous and abusive lenders.  As more fully documented in a study
released by the Defense Department in the summer of 2006, products
offered by payday lenders, car title lenders, tax refund anticipation
lenders and rent-to-own companies have created such financial difficulty
for many soldiers and their families as to literally undermine the
readiness of the force.  In response, Congress included language in the
John Warner National Defense Authorization Act for Fiscal Year 2007
imposing several limitations and consumer protection measures for credit
products offered by lenders to military personnel and their dependents. 
The Defense Department, in consultation with the Treasury Department,
the Federal Trade Commission, and the federal financial institution
regulators, including NCUA, is presently preparing regulations to
implement these safeguards. 

 

Federal credit unions have a long history of support and service to
members of the military.  At present, there are 92 federal credit unions
whose field of membership consists primarily of active duty and retired
military personnel, including some of the largest credit unions in the
country.  Credit union membership eligibility is available to virtually
every service member and to the members of his or her family.  More
importantly, credit unions offer the types of products and services,
including financial literacy education and financial counseling and
loans at reasonable rates, that can help these individuals meet their
financial obligations without exacerbating their overall financial
condition.

**IV. Access to Credit Unions: a Historical Perspective**

Despite attempts by credit unions to mitigate or in some cases resolve
the financial service access problems confronting disadvantaged
communities, the largest and most discernable obstacle to greater credit
union involvement is the legal constraint on credit union
membership.  Not every consumer is eligible to join a credit union. In
the case of low-income areas, the opportunities may be even more
limited.  Given the market reality that the majority of credit unions
are employment-based, it is less likely that an unemployed or under
employed person will be eligible for membership.  This lack of access
compounds the economic distress already facing such persons. 

Since their inception in the United States, nearly a century ago, credit
unions have served as a financial resource and option for
consumers.[^17] Individuals who have the ability to join a credit union
have found tangible financial benefits from membership in these
not-for-profit financial cooperatives.  

 

[Principal FCU Characteristics]{.underline}

 

The FCU Act was adopted during the Great Depression, a time when
financial distress was commonplace and acutely affected the average
working person.  Roy Bergengren, a founder of the North American credit
union movement, cited the role that credit unions could play in
combating predatory lending practices, such as those associated with
"loan sharks," in testimony before the U.S. Senate Banking Committee in
1933.  He stated that credit unions provide an opportunity for average
consumers to learn "what dividends are, what interest is, what money is
all about, how to manage it conservatively and for their own best
interests."  Mr. Bergengren's vision was a credit union industry that
could "promote the public good by developing thrift . . . , solving the
short-term credit problems of the workingman, the small business man,
and the farmer, freeing them from the usurious money lenders, and
teaching sound economic lessons at a time when such teaching is very
essential."[^18]^ ^

The FCU Act prescribed the structure of these institutions, including
the following requirements and limitations:

-   Democratically controlled, each member having one vote, with no
    proxies allowed.  Each member is an equal owner regardless of the
    dollar amount of shares owned;

-   Managed by a volunteer board of directors elected by and from the
    membership;

-   Not-for-profit, designed to provide a safe, convenient place for
    members to receive prudent and productive financial services; and

-   Limited to serving people within a defined field of membership (FOM)
    based on a common bond of employment, association, or community. 

  

The role that credit unions can and do play in assisting consumers is
unchanged, even though the marketplace, technology and consumers
themselves have evolved.

 

[History of the Common Bond]{.underline}

 

There are statutory and regulatory limits to the access that consumers
have to credit union service. 

 

Congress has set forth specific criteria regarding eligibility for FCU
membership.  The limitation is the statutory common bond, or the legally
authorized FOM. Every FCU has an FOM, which requires that membership
services be limited, in most cases, to those who (1) are within the FOM,
and (2) become a member of the FCU. 

 

Since 1934, FCUs have been defined, at least in part, by whom they can
serve.  This characteristic (i.e., common bond) creates an inherent
conflict with the ability of a credit union to affirmatively reach out
to individuals and groups that may be in underserved or disadvantaged
areas to the extent they are outside the credit union's prescribed FOM.
In general, an FCU's common bond has been limited to an occupational
group, associational group, or a community.  In the decades that have
followed the enactment of the FCU Act, dramatic changes in the overall
economic environment in which credit unions must operate have occurred. 
These changes have required that credit unions adapt in order to meet
the financial needs and expectations of their members.

 

 

[Field of Membership Modernization]{.underline}

 

In reaction to the Supreme Court ruling overturning NCUA's policy
allowing multiple common bond credit unions, Congress passed the Credit
Union Membership Access Act (CUMAA), Pub. L. 105-219, in 1998. This new
law partially reestablished NCUA's multiple common bond policy that had
enabled federally chartered credit unions to expand their membership
over the preceding two decades. 

 

CUMAA restored the ability of FCUs to form multiple common bond credit
unions, consisting of groups, such as for employment, each with its own
distinguishing characteristics. CUMAA also specifically authorized these
credit unions to add underserved areas to their FOMs.[^19]^ ^ Based on
its assessment of the legislative history of CUMAA, NCUA also permitted
single-sponsor and community credit unions to add underserved areas to
their FOMs.  The concept reflected a recognition that geographic areas
exist in the United States that exhibit certain criteria, such as a
declining population base or increasing rates of unemployment, that can
result in diminished access by residents and businesses to traditional
financial products and services. 

 

Although the "underserved" designation is not strictly a function of
income level of the residents, it is expected that over time broader
demographic representation among the membership will occur in FCUs that
have added underserved areas. As discussed more fully below, data
collected recently by NCUA tend to bear this out.

 

CUMAA partially reconciled the constraints of the occupational common
bond with the expectation that FCUs should more affirmatively reach out
to individuals who are underserved or lack access to financial services.
Specifically, CUMAA provided a mechanism by which certain, but not all,
FCUs may fulfill that aspiration.  It allowed multiple common bond FCUs
to add members outside their traditional FOM, while preserving the
overall integrity of the common bond principle.  This change allowed
such FCUs to provide products and services to those who were otherwise
excluded from membership.  As stated above, in an effort to assure
maximum ability to provide services to lower-income individuals, NCUA
initially allowed all charter types of FCUs to add underserved areas to
their FOM. Since the adoption of the law, 641 FCUs have added 1,414
underserved areas to their fields of membership. 

 

Banking industry trade associations have opposed NCUA's efforts to
enhance or expand FCU outreach to underserved areas.  In November 2005,
the American Bankers Association and three Utah banks filed suit in
federal court and successfully challenged the addition of an underserved
area to a specific federal community charter in Utah.  In May 2006, the
NCUA amended its regulations so that only multiple common bond credit
unions can add underserved areas to their FOM. 

 

NCUA's ability to provide greater flexibility for all FCUs to serve
individuals

outside their traditional membership base is now limited to only one
charter type, that of multiple-group credit unions.  This limitation
appears to be a direct contradiction of congressional intent to
reconcile the constraints of the occupational common bond with the
expectation that all FCUs should serve more individuals who are
disadvantaged or lack access to financial services.  This apparent
conflict can only be corrected by Congressional action to change the
statute. 

 

[Current Situation]{.underline}

 

Today, FCUs have three types of charters:

 

-   Single common bond charters limit credit union membership to
    individuals who qualify under discrete, relatively narrow criteria. 
    A single common bond can be classified as occupational or
    associational.  Occupational common bonds relate to employment; for
    example, firefighters, soldiers, and nurses share occupational
    common bonds.  Associational common bonds relate to participation in
    associations; for example, participants in professional societies,
    labor unions, and religious organizations share associational common
    bonds.

-   Multiple common bond charters including two or more single common
    bond groups.  They generally occur when a single common bond FCU
    elects to add a second group to its field of membership.  The
    majority of groups added to multiple common bond charters have been
    small businesses and associations, which would likely not otherwise
    have had credit union service.  Since January 2000, multiple common
    bond FCUs added 75,969 groups.  Of these, 66,921 groups, or 88%, had
    less than 200 employees or members.

-   Community charters are based on a single, geographically defined,
    local community where individuals have common interests and/or
    interact.  While some FCUs were originally chartered to serve
    communities, many others have converted to community charters since
    the 1990s to compensate for the closure of sponsors.  For example,
    in Flint, Michigan, FCUs that originally provided service to the
    autoworkers converted to a community charter when the automobile
    industry in Flint declined.

The following chart reflects the percentage of FCUs by charter type as
of February 1, 2007.  Seventy-seven percent of all FCUs share a common
bond of occupation or association.  

![](media/image1.png){width="5.011805555555555in"
height="2.5131944444444443in"}

FCUs have historically focused on serving working or employed
individuals, such as small business owners, entrepreneurs, blue-collar
workers in manufacturing jobs, laborers, employees in service positions,
military personnel, members of labor unions and farmers.  Although the
FCU system has evolved to meet changing economic and demographic
conditions in the United States, its success has not come at the expense
of fidelity to its founding principles, which remain unchanged.

 

As discussed in CUMAA, FCUs remain "member-owned, democratically
operated, not-for-profit organizations generally managed by volunteer
boards of directors."  CUMAA provided a mechanism by which multiple
common bond FCUs may deliver financial services to individuals and
families living in areas traditionally underserved by other financial
institutions.  While this important authority only applies to multiple
common bond FCUs, it nevertheless will allow for expansion into
underserved areas by 44% of FCUs.  As stated above, an expanded
implementation of this authority will require further action by
Congress.

 

In the past decade, there also has been a growth in the number of credit
unions converting to community charters.  These conversions of single
and multiple common bond FOMs to broader-based community charters are
expected to enhance the ability of credit unions to reach disadvantaged
individuals, since community charters encompass a relatively more
diverse income population than the more traditional membership base.

 

[Member Service Assessment Pilot Program]{.underline}

 

During 2006, at the direction of the House Ways and Means Committee and
in consultation with the Government Accountability Office, NCUA
undertook its first ever Member Service Assessment Pilot Program
(MSAP).  This comprehensive study entailed review of over 14 million
records obtained from 448 federal credit unions and was conducted over
the course of several months at a cost to the agency of just over \$1
million.  NCUA provided copies of the report to Congress and the GAO. 
Our essential findings can be summarized as follows:

 

-   FCU membership is principally comprised of working individuals.

 

-   FCUs designated as low-income, with underserved areas, or with a
    community base have better opportunities to serve lower income
    groups and individuals and generally have more diverse membership
    profiles as compared to FCUs with more restrictive common bonds and
    fields of membership. 

 

-   Changes in membership profiles do not occur immediately -- they take
    time.  Consequently, while the percent of FCUs serving a community
    base has recently increased, the membership profiles cannot be
    expected to differ from the traditional occupational or
    associational charter until a considerable period of time has
    elapsed that allows for the new market penetration.

 

Additionally, the MSAP results bolster NCUA's long-standing view that
the FCU common bond limitation is the overriding factor that impacts
membership demographics.  Interpreting MSAP data or any other data
developed purporting to evaluate the membership of FCUs is best
understood and applied within the context of whom FCUs can legally
serve, i.e., those within a specified FOM.  Relevant to this discussion,
it is essential to have an understanding that:

 

-   The common bond constraint, imposed by statute, limits NCUA's
    flexibility.  As a result, the ability of FCUs to serve groups not
    included in the traditional membership base is also restricted.

 

-   Developing FCU chartering policies that not only comply with the
    statutory common bond requirement, but also encourage and permit
    reaching out to those outside the traditional membership base, has
    been a regulatory challenge.

 

Congress has recognized the inherent conflict FCUs face in trying to
reach out to less advantaged individuals and groups outside the
traditional FOM while operating within a statutory framework that
clearly defines who FCUs can serve.  As a result, some flexibility has
been legislated.  Nevertheless, the essential characteristics of common
bond have been steadfastly retained since 1934.  Consequently, the
primary membership nucleus for FCUs remains those who historically avail
themselves of the financial services offered by FCUs \-- working
individuals.  The chart below provides an illustration of the impact
common bond restrictions have on member demographics.

  ---------- ------------------- ------------- ---------- ----------- ------------------- --------
  **Median   **Observation of                                                             
  Family     Membership Income                                                            
  Income     Characteristics**                                                            
  (MFI) as a                                                                              
  % of MSA                                                                                
  MFI**                                                                                   

             **Charter Types**                                        **Other             
                                                                      Characteristics**   

             Single Occupation   Single        Multiple   Community   Underserved Areas   Low
                                 Association   Common                                     Income
                                               Bond                                       

  \<70%      10.65%              10.63%        10.81%     10.73%      12.74%              11.62%

  \<80%      18.37%              14.17%        18.96%     19.13%      21.97%              21.08%

  \<90%      29.07%              26.74%        30.11%     32.34%      34.49%              41.03%

  \<100%     41.62%              40.04%        44.87%     47.78%      50.22%              61.21%

  \<110%     54.45%              56.95%        57.42%     62.81%      63.05%              77.36%

  \<120%     67.19%              72.16%        68.99%     73.48%      73.13%              85.72%

  \<130%     76.61%              82.40%        77.59%     81.73%      80.57%              88.55%
  ---------- ------------------- ------------- ---------- ----------- ------------------- --------

 

As part of NCUA\'s continuing efforts to improve and support the
industry\'s outreach to individuals and groups outside the traditional
field of membership, the Chairman created the NCUA Outreach Task
Force.  This Task Force, which began its work in December 2006, has
a goal to provide a better understanding of and evaluation of the
NCUA's efforts to help the expansion of credit union services into
persons in all economic strata. 

 

Given that the MSAP specifically recommended that the NCUA Board:  1.)
evaluate the effectiveness of NCUA programs focused on assisting low and
moderate income individuals; 2.) consider the enhancement and full
utilization of the system to monitor FCUs receiving benefits under the
CDRLF program; and 3.) consider reassessment of NCUA's formula for
determining if an FCU qualifies for low-income designation, the Task
Force will be asked to assess the agency's current role and efforts with
respect to credit union services to their members, including financial
literacy and alternatives to predatory lending practices.

 

>  

**V. Conclusion**

 

Disadvantaged communities suffer from economic hardships that are made
more difficult by the types of financial products that appear to be
prevalent.  The number of predatory lenders has increased
exponentially while some traditional financial service providers are
unwilling, or in the case of credit unions, prohibited from providing
even basic lifeline offerings.

 

Credit unions have been demonstrated to be a low-cost, convenient,
member-focused form of financial institution for consumers across the
economic spectrum.  They play an important role in mitigating the
hardships faced by those in disadvantaged communities, and NCUA is
confident that they will continue to expand and refine their outreach
efforts, within the framework created by Congress. 

 

Despite legal and operational constraints related directly to the
history of federal credit union field of membership, credit unions are
performing well in fulfilling their statutory mission of meeting the
credit and savings needs of their members.  Trends in the industry
suggest that the broader a credit union's field of membership, and the
more inclusive a credit union can be with respect to low-income and
underserved areas, the more opportunity low-income consumers have to
obtain fairly priced financial services. 

 

There is an additional time element:  the longer a credit union has in
establishing itself in a disadvantaged community, the more accepted it
is by consumers who are unfamiliar with traditional financial service
providers. 

 

Credit unions are not the problem in these disadvantaged communities,
but they can be a solution by serving as an accessible and affordable
alternative for low-income consumers. 

 

 

[^1]: The Office of the Comptroller of the Currency uses a similar
    standard to determine the needs of the "unbanked" in the study, "The
    Role of Banks and Nonbanks in Serving Low- and Moderate-Income
    Communities" that was presented to the Federal Reserve System
    Conference "Changing Financial Markets & Community Development" held
    on April 5-6, 2001, in Washington, DC.

[^2]: Director Jennifer Tescher's "Credit Unions and the Underserved:
    Opportunity and Innovation" presentation \[slide 6\], August 30,
    2006, NCUA Regional Conference.

[^3]: "Banking the Unbanked -- Helping Low-Income Families Build
    Financial Assets" by Pamela Friedman released by The Finance Project
    on September 2005. Findings and strategies mentioned throughout the
    report. The Finance Project was founded in 1994 with support from a
    consortium of national foundations interested in ensuring the
    viability and sustainability of promising initiatives that
    contribute to better futures for children, families, and
    communities. Their mission is to support decision-making that
    produces and sustains good results for children, families, and
    communities. The Finance Project develops and disseminates research,
    information, tools, and technical assistance for improved polices,
    programs, and financing strategies.  

[^4]: "Banking the Poor" by Michael S. Barr, University of Michigan Law
    School -- A Working Paper Prepared for The Brookings Institution
    Center on Urban and Metropolitan Policy dated July 2003 page 6.

[^5]: "The Role of Banks and Nonbanks in Serving Low- and
    Moderate-Income Communities" presented to the Federal Reserve System
    Conference "Changing Financial Markets & Community Development" held
    in Washington, DC on April 5/6, 2001, by Constance R. Dunham, Senior
    Financial Economist of the Office of the Comptroller of the
    Currency.

[^6]: "Banking the Underbanked Helping Low-Income Families Build
    Financial Assets" by Pamela Friedman, September 2005, Page 3.

[^7]: "Distributing Prepaid Cards through Worker Centers: A Gateway for
    Asset Building for Low-Income Households" by The Center for
    Financial Services Innovation by Janice Fine, Lauren Leimbach, and
    Katy Jacob dated October 2006, Page 17. Amounts were reduced to
    reflect current fees as reflected by providers.

[^8]: Found at the World Council of Credit Unions, Inc.'s (WOCCU)
    International Remittance Network (IR*net*) website. IR*net* is a
    platform to provide credit unions with a tool to reach and serve
    members and potential members around the world, providing them with
    access to safe and affordable international and domestic money
    transfers (remittances). The network was created to respond to an
    increased demand for money transfer services and high fees being
    charged to utilize such services.

[^9]: A Report by the Isenberg School of Management, University of
    Massachusetts at Amherst Prepared by the Annie E. Casey Foundation 
    "Low Cost Payday Loans: Opportunities and Obstacles." dated June
    2005, Page 3.

[^10]: [Id.]{.underline}

[^11]: "Step in the Right Direction: Recent Declines in Refund Loan
    Usage Among Low-Income Taxpayers" by Alan Berube and Tracy Kornblatt
    released by the Brookings Institution dated April 1, 2005, Page 2.

[^12]: The Community Development Credit Union Transfer Act (of 1986)
    transferred the CDRLF's administration to NCUA. The program was
    dormant prior to the transfer.

[^13]: NCUA started the TAG program in 1993.

[^14]: \"Integrating Financial Education into School Curricula: Giving
    America\'s Youth the Educational Foundation for Making Effective
    Financial Decisions Throughout Their Lives by Teaching Financial
    Concepts as Part of Math and Reading Curricula in Elementary,
    Middle, and High Schools - A White Paper Prepared by the United
    States Department of the Treasury Office of Financial Education
    October 2002, Pages 1 and 3.

[^15]: "Ten Reasons To Join Your Credit Union" issued in the Military
    Money Magazine published in the Spring 2005 issue on page 20.

[^16]: A Report by the Isenberg School of Management, University of
    Massachusetts at Amherst Prepared by the Annie E. Casey Foundation 
    "Low Cost Payday Loans: Opportunities and Obstacles" Page 3.

[^17]: The first credit union in the United States was formed in 1908 in
    New Hampshire.  The first credit union chartering statute
    was enacted by by the Commonwealth of Massachusetts in 1909. 

[^18]: *Credit Unions:* Hearing before the Subcommittee of the Senate
    Committee on Banking and Currency, 73d Cong. 35 (1933); (statement
    of Roy Bergengren).

[^19]: 12 U.S.C. § 1759(c)(2).