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88–055 PDF 2003

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

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)

CONTENTS

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)

(1)

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 proVerDate 11-MAY-2000 15:32 Jul 24, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 88055.TXT SBANK4 PsN: SBANK4
2

found 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 rentto-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 lowincome 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.

3

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

4

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

5

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 moderateincome 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

6

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 moderateincome 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/

7

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

8

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.

9

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.

10

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 awardmaking 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 geoVerDate 11-MAY-2000 15:32 Jul 24, 2003 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 88055.TXT SBANK4 PsN: SBANK4
11

graphically, 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.

12

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.

13

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.

14

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 highquality 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 MexicanAmericans 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

15

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

16

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

17

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 innercity 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.

18

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 ‘‘leapfrogging’’ 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

19

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-cardbased 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

20

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

21

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 lowincome 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).

22

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.

23

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

24

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 lowincome 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 fiVerDate 11-MAY-2000 15:32 Jul 24, 2003 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 88055.TXT SBANK4 PsN: SBANK4
25

nancial 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.

26

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.

27

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 lowerincome 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

28

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 longterm, 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.

29

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 Statechartered 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.

30

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.

31

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.

32

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 moderateincome.

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

33

them loyal customers of a bank and to enable the bank to crosssell 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, laborintensive 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

34

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

35

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 lowincome 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

36

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:]

37

1Michael H. Moskow, Fostering Mainstream Financial Access: www.chicagofed.org/unbanked,

Chicago Fed Letter, Number 162 (Feb. 2001)(http://www.chicagofed.org/publications/fedletter/

2001/cflfed2001l162.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). 3 Id.

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

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 indiVerDate 11-MAY-2000 15:32 Jul 24, 2003 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 88055.TXT SBANK4 PsN: SBANK4
38

4Moser, supra note 1. 5 Caskey, supra note 2. 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).

cated that they are not comfortable dealing with banks or letting them know their

private financial information.

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

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.

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 convenience, 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 lowincome 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

39

8 66 Fed. Reg. 66,975 (Dec. 27, 2001).

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.

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.

40

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.

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.

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.

41

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’’ lowand 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.

42

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 ongoing 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 communitybased 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 re- ceive 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

43

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.

44

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 inkind 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

45

1See 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.

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 nocharge 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

46

2 A. Kennickell et al., Recent Changes in Family Finances: Results from the 1998 Survey of

Consumer Finances, Federal Reserve Bulletin, January 2000. 3Survey 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. 5See generally, S. Beverly & M. Sherraden, Institutional Determinants of Saving: Implications for Low-Income Households and Public Policy, Journal of Socio-Economics. 6W. 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. 7P. 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.

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.

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

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

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 lowincome 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.

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 payVerDate 11-MAY-2000 15:32 Jul 24, 2003 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 88055.TXT SBANK4 PsN: SBANK4
47

10See 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. 11The 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. 12 ETA Conjoint Research, Dove Associates, May 1999, www.fms.treas.gov/eta/conjoint.pdf. 13 J. Caskey, Lower Income Americans, Higher Cost Financial Services, Filene Research Institute and Center for Credit Union Research, University of Wisconsin-Madison, 1997. 14S. 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). 16P. Beckett, Banks Are Using a National Database to Blacklist Customers for Slip-Ups, Wall

Street Journal, Aug. 1, 2000.

day 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.

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 lowerincome 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.

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.

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

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 checkwriting privileges, that pose little risk of overdraft.

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

48

17 R. Avery et al., Changes in the Distribution of Banking Offices, 83 Federal Reserve Bulletin

723 (September 1997). 18See Kennickell (2000). 19Public Law 104–134 (1996). 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 av- erage 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. 22The 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.

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.

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.

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.

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 pay- ment 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

49

23Funding for the Treasury Department’s EFT ’99 public education campaign ended in September 2001. 24Shorebank is a premier example of a Community Development Financial Institution (CDFI),

a specialized financial intermediary serving low-income communities. Of the 553 CDFI’s cer- tified 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. 25See 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.

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.

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.

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

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.

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26Treasury’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. 27See 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.

Research. Treasury would fund research into the financial services needs of lowincome 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 lowincome 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.

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 lowincome 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 uniondriven) 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

51

30See M. Stegman, et al., Creating a Scorecard for the CRA Service Test, Policy Brief #96,

The Brookings Institution, March 2002. 31Orszag & Greenstein. 32 Id. 33M. 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. 36 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year

2003 Revenue Proposals, February 2002, pp. 37–38. 37The legislation could also be modified to provide for a similar tax credit to financial institutions 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. 38The Fleet/Doorways to Dreams test of Internet-based IDA programs will prove instructive

in this regard.

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.

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

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

52

39See 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.

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.

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 lowincome 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 Institutions, 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.

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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 concerns, 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

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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 electronicallyfiled 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.

55

1 Bank One Corporation is the Nation’s sixth largest bank holding company, with assets of

more than $265 billion.

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.

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

56

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.

57

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 secu- rity 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.

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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 lowerincome consumers. I am also pleased to join my fellow panelists, the Honorable

Sheila Bair, Michael Barr, Fran Grossman, and Jaye Morgan Williams.

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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:

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• 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

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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.

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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 apVerDate 11-MAY-2000 15:32 Jul 24, 2003 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 88055.TXT SBANK4 PsN: SBANK4
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proximately 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

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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 funding 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

institu-tion 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

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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

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‘‘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.

66

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 firsthand 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.