**TO:** Chief Executive Officers and Compliance Officers of All National
Banks, Department and Division Heads, and All Examining Personnel

**PURPOSE AND SUMMARY**

This advisory highlights the range of financial literacy activities in
which banks have participated that have been effective in enhancing
consumer financial skills and extending the reach of banks' products and
services to underserved or unbanked markets.

While most individuals continue to enjoy the benefits of the longest
period of sustained economic growth in the United States, a sizable
portion of the U.S. population remains on the fringes of the banking
system. According to the 1998 Survey of Consumer Finances published by
the Federal Reserve Board, 10 percent of U.S. households do not have a
depository account with a financial institution. Additionally, the
number of check-cashing stores continues to rise, while the national
savings rate has fallen to the lowest level in recent history. Concerns
regarding abusive lending practices also indicate a need for consumer
education. However, financial literacy programs afford a means to
address these circumstances by providing individuals with a better
understanding of bank products and services that meet their needs.
Understanding the range of available financial products and services
enables consumers of all income levels to make better-informed choices
in the financial marketplace.

The Office of the Comptroller of the Currency (OCC) encourages bank
participation in financial literacy initiatives. Involvement in these
programs helps banks develop new customers while enhancing their
visibility in the communities they serve. Bank participation in
financial literacy programs also may receive positive consideration
under the Community Reinvestment Act.

The advisory is accompanied by a resource directory available on the OCC
Web site at www.occ.treas.gov/cdd/commfoc.htm that provides information
about programs and initiatives that illustrate the categories of
financial literacy activities described herein.

CONTENTS

Strategies and Approaches [2](#strategies-and-approaches)

Basic Financial Services and Asset Building
[3](#basic-financial-services-and-asset-building)

School Age Programs [3](#school-age-programs)

Adult Basic Financial Services [4](#adult-basic-financial-services)

Individual Development Account [5](#individual-development-account)

Retirement and Financial Security
[6](#retirement-and-financial-security)

Credit Management and Credit Repair
[6](#credit-management-and-credit-repair)

Homeownership Counseling
[7](#in-order-to-educate-individuals-who-have-serious-credit-difficulties-banks-provide-assistance-to-organizations-that-offer-consumer-credit-education-programs.-many-retail-banks-also-support-educational-programs-by-providing-staff-and-materials-for-credit-training-classes.-individuals-who-complete-any-of-these-educational-programs-are-potential-bank-customers.)

Recognizing and Avoiding Abusive Lending Practices
[8](#recognizing-and-avoiding-abusive-lending-practices)

Small Business and Microenterprise Technical Assistance
[8](#__RefHeading___Toc500818649)

Financial Literacy and the CRA [9](#financial-literacy-and-the-cra)

Conclusion [10](#conclusion)

# **STRATEGIES AND APPROACHES**

There are numerous ways for banks to participate in efforts to better
inform individuals of the workings of the financial marketplace and the
benefits and disadvantages of particular financial products.
Individually, or working with community organizations and governmental
agencies, banks help develop financial literacy programs, provide
employees to serve as educators and trainers, and participate in
programs aimed at elementary and secondary schools. Banks also support
financial literacy organizations through volunteer staff assistance,
loans, and contributions.

It is sometimes difficult to distinguish between financial literacy and
marketing efforts by banks to solicit new customers. Fundamentally, this
advisory is organized around the elements of financial literacy programs
that educate individuals about their financial services options.
However, many banks have found that literacy programs are an integral
part of attracting new customers.

The advisory highlights several broad categories of financial literacy
activities that help potential bank customers participate in the U.S.
financial system and help banks strengthen their communities. Banks may
be involved in these programs either through their own efforts or
through joint initiatives with not-for-profit and governmental
organizations.

-   *Basic financial services and asset-building programs* provide a
    working knowledge of financial products, financial planning, and an
    overview of the U. S. banking system.

-   *Credit management and repair programs* enable individuals to
    correct and learn from previous financial mistakes.

-   *Homeownership counseling* prepares individuals for what is often
    the largest single investment in a lifetime.

-   Education aimed at *recognizing and avoiding abusive lending
    practices* can protect individuals at risk of obtaining
    inappropriate loan products.

-   *Small business and microenterprise technical assistance* provides
    entrepreneurs with practical business knowledge.

# **BASIC FINANCIAL SERVICES AND ASSET BUILDING**

Introducing individuals to basic financial services, such as checking
and savings accounts, helps them accumulate wealth, keep transaction
costs down, and secure access to credit. Nonbank institutions, such as
check-cashing outlets, are clearly meeting some of the current needs of
the unbanked. However, banks can educate individuals that depository
institutions may be better able to serve their broader needs by
providing access to savings instruments, relatively inexpensive
transaction services, secure banking transactions, consumer protections,
and safeguards against theft.

Building assets allows households a greater opportunity to become
participants in a growing economy and to develop a cushion for
downturns. The development of assets, large or small, is the first step
in the process of introducing a household into the financial mainstream,
increasing financial stability, encouraging better consumer habits, and
eventually increasing a household's stake in the health and wealth of a
community. Asset development through saving and investing enables
individuals and families to plan for the future and set long-term goals.
Assets are a source of future income and can leverage the accumulation
of additional assets such as a retirement fund, a home, a college
education, or a small business. Many organizations provide programs for,
and information about, building assets, and banks can market many of
these products to individuals in need of asset-building products.

## School Age Programs

Studies released by the National Bureau of Economic Research (NBER) and
the National Endowment for Financial Education (NEFE) have shown that
personal finance education improves students' saving and spending habits
and money management skills. The 1997 NBER study found that exposure to
financial services education in school increases asset accumulation once
these students reach adulthood. In other words, those who are taught to
save as teenagers will save more during adulthood. The 1998 NEFE study
was designed to measure the effectiveness of the NEFE's curriculum. It
found that three months after completing the curriculum, a significant
number of the high school students surveyed had begun to track their
expenses, set aside money for future purchases, discuss money management
with family members, and understand the cost of buying on credit. Many
banks, in cooperation with local school districts and community
organizations, have developed grade-appropriate teaching materials and
curricula. Bank officers also serve as advisory board members to local
chapters of national financial education organizations. As there is no
single curriculum for personal finance, schools use a variety of
approaches suited to elementary and secondary schools.

Bank-sponsored programs at the elementary school level include school
savings programs that award prizes to students who open savings
accounts. Some programs are structured like clubs, and may be called
young investor clubs, in which membership entitles the student to a
newsletter and other benefits. Interest is paid on savings, and each
child receives a quarterly statement. These clubs, originally designed
for the children of bank customers, have now become a tool for outreach
to local schools.

Some banks provide on-site educational sessions by sending bankers into
elementary school classrooms to open accounts for children and to
discuss how the accounts work and how interest is calculated. Topics
progress in complexity as the students get older. Special bank products
that encourage students to establish good money management habits
include the classroom savings account. With this account, students
jointly raise money for their class during the school year. Along with a
faculty advisor, classmates decide before the end of the school year if
they want to distribute the money among themselves, use it for a trip,
or donate the money. Banks have also established on-line programs that
teach young children the fundamentals of saving and banking. For
example, programs may use characters and stories to introduce these
concepts combined with on-line games and calculators that enable
students to determine how long it would take to save enough money to
purchase particular items.

High school curricula include life skills (like balancing a checkbook)
and school-to-career programs that emphasize careers in the financial
services industry. These programs may include field trips, guest
speakers, investment clubs, Individual Development Account (IDA)
programs, and stock market simulation games. The success of these
programs is measured in a greater number of young adults with improved
credit, savings, and budgeting skills. Nearly half of the high school
students who participated in the NEFE's financial planning programs
started saving or began saving more.

Other secondary school programs include on-site banks and peer loan
groups. School-based bank branches range from full-service offices that
serve the entire community, to mini-banks that provide services to
students only. Bank staff members teach the students how to be tellers
and how to use computers to record transactions. Staff members
responsible for various banking functions, including marketing and
security, may discuss their areas of expertise and help the students
understand how to make a branch run successfully. As part of their
curriculum, the students may work on projects such as marketing plans
for the branch.

Peer-lending programs have been developed that teach students how credit
decisions are made and how they can further their chances of gaining
credit. Bank loan officers advise the student-run loan committees, but
allow the students to make the credit decision for their peers. The loan
fund is typically held in an account at the bank and is capitalized with
fundraisers. Loans to students are made for school-related expenses such
as athletic equipment, club materials and supplies, graduation fees, and
class events.

Bank involvement in school-age programs not only provides education, but
also promotes name recognition for the bank. In addition, when students
participating in these programs come from unbanked households, they may
share their knowledge of products and services promoted by the bank with
family members who have a need for them.

## Adult Basic Financial Services 

Since people have varying backgrounds and financial concerns,
educational programs that are tailored to the needs and interests of
specific groups help ensure that financial services education reaches
the desired audience. Some banks have found that the best way to
increase consumer knowledge is not necessarily by providing literature
or seminars at branches, but by having bank officers or employees make
in-person presentations to groups such as local community or religious
organizations. These presentations are designed to educate potential
customers on basic financial services and may cover such topics as
deposit and checking products, credit products and restoration, check
cashing, and first-time homeownership.

The makeup of the target audience may require that educational
presentations and materials be prepared in a variety of languages, and
that bank employees have the language skills to communicate with these
potential customers. In addition, banks have realized that immigrants
from a number of countries may not be familiar with financial
institutions and may need to develop a level of trust in banks, if they
did not use banking services in their country of origin.

In response to these needs, banks have also developed on-the-job
financial literacy seminars with the full support of employers who have
a substantial number of immigrants on their payroll. The seminars cover
topics including financial services at U.S. banks, the importance of
good credit, the home purchase process, managing a checkbook, and
retirement planning. Employers benefit from these workshops because they
want to see a financially secure workforce that results in less employee
turnover. Banks benefit by reaching a target market that may not have
established banking relationships. Presentations or seminars that bank
employees lead provide an opportunity to cross-sell bank services, by
promoting not only deposit products, but also lifeline checking accounts
and introductory credit products such as credit builder loans and
secured credit cards.

Participants in basic financial services programs learn whether having a
bank account or using a check casher is in their best interest, and how
to choose the financial institution that will best meet their needs.
They learn how to open and maintain savings or checking accounts, how to
use automated teller machines (ATMs), and how to benefit from the
electronic payment of funds, including Social Security, federal
retirement benefits, and welfare. Banks are attracting check-cashing
customers with lower check-cashing fees, savings clubs, direct deposit
products, and alternative products, known as access, basic banking, and
lifeline checking accounts. These entry-level products and services, as
well as more user-friendly facilities and employees who speak the
languages of these potential customers, are all designed to bring the
unbanked into bank branches. The long-term goal is to transition
individuals who operate in the cash economy and customers with
alternative accounts into traditional banking customers who use a
variety of banking services, including credit products.

## Individual Development Account

The IDA is a matched savings account, similar to a 401(k) that can be
used for a specifically defined purpose, such as purchasing a home,
seeking post-secondary education, or capitalizing a small business.
Individuals make regular savings deposits in their IDAs that are then
matched by funds from the sponsoring bank, foundation, other charitable
organization, or local government agency that seeks to promote a
specific wealth-building initiative. Income eligibility requirements
vary, but generally limit participation to low- and moderate-income
households.

IDA programs often include counseling and training for program
participants. For example, to support a homeownership IDA, some banks
provide pre-purchase homeownership counseling to program participants
while the IDA is growing. This counseling may include household
budgeting, financial record keeping, and developing long-term economic
plans. Banks benefit from offering the IDA by attracting new customers
who are candidates for using a range of deposit, credit, and investment
products and services as their savings grow.

The IDA provides an incentive and the institutional support necessary
for individuals to save and acquire productive assets. Banks usually
partner with local community groups to offer an IDA product, with the
bulk of the program administration and implementation being the
responsibility of the community group sponsor. Banks should ensure that
the community groups have the internal capacity and expertise to
administer an IDA program. Operational management of the accounts is
handled by the bank as an extension of the bank's normal business
activities.

## Retirement and Financial Security

Planning for retirement will remain an important concern for U.S.
consumers as life expectancy continues to rise. Many individuals who do
not have pension plans through their employers may need to supplement
Social Security with other retirement benefits. Through supporting
outreach such as public education campaigns, banks have helped educate
adults of all ages on the benefits of participating in an individual
retirement account (IRA), and of investing in stocks, bonds, mutual
funds, and insurance. Banks also work with community organizations to
deliver financial seminars that focus on financial security and planning
for retirement.

# **CREDIT MANAGEMENT AND CREDIT REPAIR** 

Good credit is an essential tool for economic viability in our society.
Unfortunately, many prospective borrowers have a limited credit history,
no credit history, or derogatory credit. While many lenders now have
programs that acknowledge a lack of, or limited, credit history by using
utility bills and rent receipts as a credit history substitute,
derogatory credit presents a problem for many individuals that is
difficult to overcome. Promises of quick "credit repair" are often
unfounded. In many cases, potential borrowers may have to wait for
specified time periods for derogatory items to be removed from their
credit reports. However, a number of organizations provide credit
counseling and structure repayment arrangements enabling individuals to
develop a path for reestablishing good credit. Even with derogatory
items on a credit report, lenders may look more favorably on loan
applications from borrowers who have repaid their debts.

Debt management plans administered by these organizations help put
individuals on a budget that requires a certain percentage of their
income go to living expenses, with the remainder to pay down debts.
Programs such as these enable individuals to take responsibility for
past credit problems through learning the lessons of sound money
management. This may allow individuals with previously impaired credit
to qualify for mortgages faster than would otherwise be possible, if
they can show reduced non-mortgage debt.

# In order to educate individuals who have serious credit difficulties, banks provide assistance to organizations that offer consumer credit education programs. Many retail banks also support educational programs by providing staff and materials for credit-training classes. Individuals who complete any of these educational programs are potential bank customers. 

# **HOMEOWNERSHIP COUNSELING**

Buying a home is often the largest single investment in a lifetime.
Banks providing mortgage financing to first-time purchasers have learned
that educated borrowers are more likely to avoid delinquencies and
foreclosures. In fact, some mortgage insurers allow borrowers who have
been counseled to become eligible for lower-cost mortgage insurance
premiums. Prospective homebuyers need to know how much to save for the
down payment and closing costs, how to manage their credit history so
that they can eventually qualify for a loan, and the benefits of having
a home inspection report. Likewise, prospective homeowners may need
training in home maintenance and budgeting, and may require counseling
if they have encountered previous credit problems.

Homeownership counseling can be beneficial to traditional, first-time
homebuyers, as well as borrowers who apply for affordable mortgage
products. In fact, many lenders require completion of homeownership
counseling with a certified housing counselor in order to qualify for a
low down payment mortgage. Additionally, banks that sell loans to the
national secondary market entities know that these institutions have
developed a strong interest in the value of pre-purchase homeownership
counseling both to minimize default risk and to reach their affordable
housing goals. Banks may also use pre-purchase homeownership counseling
to introduce prospective customers to nontraditional mortgage products
that they provide under special purpose credit programs. Banks can also
use the opportunity at homeownership counseling seminars to cross-sell
other retail financial products.

Banks generally participate in homeownership education either through
working with a counseling agency (a nonprofit or public agency that
provides the training), or through establishing their own proprietary
counseling programs. There are a number of nationally recognized
counseling curricula now in use. Also, the Department of Housing and
Urban Development certifies housing counseling agencies and provides
them with technical assistance and financial support. Through outreach
with real estate agents and through public education, the counseling
agencies often identify potential homeowners, who are then referred to a
participating bank.

Formal partnerships between banks and counseling agencies take a number
of forms, with the bank usually providing some type of financial
assistance to support the educational program. Banks also provide staff
to lead classes. Counseling may be provided as part of a particular
homeownership incentive program sponsored by a nonprofit organization, a
public agency, or a bank, and may include down payment or closing cost
assistance, "soft second" loans, and screening for admission to federal,
state, or local subsidies. Many programs also offer post-purchase
counseling to assist in money management, home maintenance, landlord
training for two-to-four family owner-occupied properties, and workout
schemes to prevent foreclosure.

Working with counseling agencies enables banks to establish
relationships with some minority and non-English speaking communities
that lenders might not ordinarily reach. Local nonprofit agencies have
already gained the trust of the communities they serve and are
positioned to provide homeownership counseling in a manner and setting
that will be well received. Further, after receiving counseling from a
trusted organization in the community, borrowers that experience
financial difficulties will be more likely to return to the agency after
purchasing the home.

In order to control the counseling process and their prospective
mortgage customer, some banks have chosen to set up their own counseling
programs. Banks provide special evening or weekend counseling classes in
conjunction with a real estate agent or private mortgage insurer in
order to offer homeownership counseling on a group basis. Banks also
partner with employers or affinity groups to provide targeted
homeownership education, often at a work site, in order to attract
individuals that they would not ordinarily reach.

# **RECOGNIZING AND AVOIDING ABUSIVE LENDING PRACTICES**

Objective, fairly applied subprime and risk-based lending has been
important in expanding access to credit. However, certain lending
practices  largely engaged in by non-depositories  have come under
intense scrutiny. Most of these practices involve the setting of rates,
fees, and other terms and conditions in a manner that drastically
departs from those used by more traditional and responsible prime and
subprime lenders. (See OCC Advisory Letters AL 2000-7, issued July 25,
2000, for more information on abusive lending practices; AL 2000-10,
issued November 27, 2000, for information on payday lending; and AL
2000-11, issued November 27, 2000, for information on title loan
programs.)

Financially unsophisticated individuals may easily become targets of
abusive lending practices. For example, after years of paying down their
mortgage balance and enjoying value appreciation, homeowners may build
up significant equity. Certain lenders attempt to convince these
homeowners that high-priced refinance products are all they can qualify
for due to less-than-perfect credit. The interest rates and loan terms
on automobile title loans may make it difficult or impossible for
borrowers to reduce their indebtedness. And the inappropriate use of
payday loans can force borrowers into a treadmill-like cycle of debt
from which it is difficult to exit.

Financial literacy efforts help individuals avoid becoming victims of
abusive lending practices. Banks have supported educational campaigns
aimed at warning borrowers about these practices. These campaigns have
used a combination of advertisements and public service announcements to
educate borrowers about abusive lending practices.

Banks also provide financial support to organizations that help
individuals avoid some financial products that might pose threats to
them, possibly resulting in the loss of their homes or valued
possessions. Government agencies and nonprofit organizations are
collaborating with banks in providing education to help minimize the
financial hardship of a predatory loan. The goal is to keep resident
owners in their homes, avoid foreclosure, and keep neighborhoods intact.
In conjunction with these educational efforts, banks have capitalized
loan funds to refinance loans that have predatory
features.[]{#__RefHeading___Toc500818649 .anchor}

# **SMALL BUSINESS AND MICROENTERPRISE TECHNICAL ASSISTANCE**

Educational outreach may also be targeted to prospective small business
and microenterprise[^1] entrepreneurs. While access to credit was
originally the greatest concern for microenterprises, the advent of
specialized loan pools and loan programs has made the need for training
and technical assistance equally important. In order to cultivate new
markets and mitigate the risks inherent in this type of lending, banks
with a small business focus provide staff to teach training classes and
offer technical assistance to promising entrepreneurs.

Banks have developed a variety of programs to provide assistance to
microenterprises and small businesses. Some banks conduct seminars for
start-up business entrepreneurs and existing small business owners on
how to write a business plan in order to qualify for a bank loan. Banks
have also formed partnerships with organizations of retired business
executives to provide technical assistance to small businesses. And
banks have launched their own intermediaries to provide access to
capital, information, technical assistance, and advocacy for segments of
the small business sector that have traditionally had limited access to
financing  namely minority- and women-owned businesses.

Banks also provide financial or teaching assistance to business
development centers, which in turn offer technical assistance and
mentoring services to small businesses and entrepreneurs. Likewise,
small business incubators, which provide lower rents, shared facilities
and expenses, cooperative services, and technical assistance to
microenterprises and small businesses in an early growth stage can
benefit from bank support. Business development centers and incubators
are sometimes affiliated with business schools of nearby colleges and
universities. The goal is to see their small business clients/tenants
ultimately graduate and move to the next growth stage.

Success in these technical assistance programs is measured by
better-prepared loan applicants, job creation, wealth building, and
continued local economic development. Small business loan customers
ultimately become prime candidates for other traditional banking
products and services, including business checking accounts, lines of
credit, and cash management services. Banks that participate in these
programs report that they have consistently been rewarded with new
customers who provide a solid base for cross-selling other financial
products and services as they transition into traditional customer
relationships.

# **FINANCIAL LITERACY AND THE CRA**

Through the Interagency Questions and Answers[^2] (Q&As), the OCC and
other financial institution regulatory agencies have interpreted the
Community Reinvestment Act (CRA) and its implementing regulations as
recognizing the importance of financial literacy programs in serving the
credit needs of low- and moderate-income individuals. In addition to
opening new business opportunities through an expanded customer base, a
bank's participation in, or support for, certain programs may receive
consideration under the lending, investment, and service tests of the
CRA regulations. Such programs must have a community development
purpose, which is defined to include community services targeted to low-
and moderate-income individuals. While large banks are reviewed under
these three tests, small banks may receive consideration under the CRA
for lending to financial literacy providers and are eligible to receive
consideration for investments and services if their lending performance
exceeds satisfactory standards.

-   Lending Test

Loans to organizations to be used for financial literacy programs
targeted to low- and moderate-income individuals will be considered
under the lending test. The Interagency Q&As define community
development loans to include loans to "not-for-profit organizations
serving . . . community development needs;" and loans to "financial
intermediaries including Community Development Financial Institutions
(CDFIs), Community Development Corporations (CDCs), . . . \[and\]
community loan funds or pools . . . that primarily lend or facilitate
lending to promote community development." *See Q&A §§\_\_.12(i) &
563e.12(h)-1.* Community development activities are defined to include
"educational, health, or social services targeted to low- or
moderate-income persons." *See Q&A §§\_\_.12(h) & 563e.12(g)-1*.

-   Investment Test

Investments in, or contributions to, a program, activity, or
organization that provides financial services education programs
targeted to low- and moderate-income individuals will be considered
under the investment test. The Interagency Q&As note that qualified
investments include, but are not limited to, investments, grants,
deposits, or shares in or to "not-for-profit organizations serving . . .
community development needs, such as counseling for credit,
home-ownership, home maintenance, and other financial services
education." *See Q&A §§\_\_.12(s) & 563e.12(r)-4.*

-   Service Test

Community development services, which include, but are not limited to,
providing bank staff to serve as educators in financial literacy
programs targeted to low- and moderate-income individuals, will be
considered under the service test. The Interagency Q&As state that
examples of community development services include "providing technical
assistance on financial matters to small businesses"; "providing credit
counseling, home buyer and home maintenance counseling, financial
planning or other financial services education to promote community
development"; and "establishing school savings programs and developing
or teaching financial education curricula for low- or moderate-income
individuals." *See Q&A §§\_\_.12(j) & 563e.12(i)-3.*

# **CONCLUSION**

For more information about the various types of initiatives described
here, access the Financial Literacy Resource Guide on the Community
Affairs page of the OCC Web site, www.occ.treas.gov/cdd/commfoc.htm.
Community Affairs officers at OCC's district offices also are available
to answer questions.

Anna Alvarez Boyd

Deputy Comptroller for Community Affairs

[^1]: The Small Business Administration defines a microenterprise as a
    business that has less than five employees, requires start-up
    capital of less than \$25,000, and has limited access to traditional
    bank financing.

[^2]: See 65 *Federal Register* 25088 (April 28, 2000).