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[Senate Hearing 107-946]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-946

                    BRINGING MORE UNBANKED AMERICANS
                     INTO THE FINANCIAL MAINSTREAM

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

    EXAMINING ISSUES RELATED TO IMPROVING ACCESS TO AFFORDABLE AND 
    CONVENIENT BANKING SERVICES AND PRODUCTS FOR THOSE INDIVIDUALS 
      CURRENTLY LACKING A RELATIONSHIP WITH AN INSURED DEPOSITORY 
 INSTITUTION. A REVIEW OF THE TREASURY DEPARTMENT'S EFFORTS TO IMPROVE 
  ACCESS TO BANKING ACCOUNTS THROUGH ITS IMPLEMENTATION OF THE FIRST 
                            ACCOUNTS PROGRAM

                               __________

                              MAY 2, 2002

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

88-055              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

                    Daris Meeks, Republican Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         THURSDAY, MAY 2, 2002

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     3
    Senator Stabenow.............................................    12

                               WITNESSES

Sheila C. Bair, Assistant Secretary for Financial Institutions, 
  U.S. Department of the Treasury................................     4
    Prepared statement...........................................    37
Michael S. Barr, Assistant Professor of Law, University of 
  Michigan Law School............................................    16
    Prepared statement...........................................    45
Fran Grossman, Executive Vice President, Shorebank Advisory 
  Services.......................................................    19
    Prepared statement...........................................    52
Jaye Morgan Williams, Senior Vice President and Managing Director 
  of Community Investment, Bank One Corporation..................    23
    Prepared statement...........................................    55
Marva E. Williams, Senior Vice President, Woodstock Institute....    26
    Prepared statement...........................................    57
Rufino Carbajal, Jr., Manager, West Texas Credit Union, on behalf 
  of Credit Union National Association (CUNA)....................    29
    Prepared statement...........................................    61

              Additional Material Supplied for the Record

Statement of Clifford N. Rosenthal, Executive Director, National 
  Federation of Community Development Credit Unions..............    66

                                 (iii)

 
                    BRINGING MORE UNBANKED AMERICANS
                     INTO THE FINANCIAL MAINSTREAM

                              ----------                              

                         THURSDAY, MAY 2, 2002

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:10 a.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. The hearing will come to order.
    I am very pleased to welcome before the Committee this 
morning the very able Assistant Treasury Secretary for 
Financial Institutions, Sheila Bair, who will testify about 
issues surrounding the unbanked and specifically discuss the 
Treasury's implementation of the First Accounts Program.
    She will be followed by an able panel of witnesses 
representing academic and financial institutions, and community 
groups, and we will get the benefit of their perspectives on 
this important issue of trying to bring more unbanked Americans 
into the Nation's financial mainstream.
    This morning's hearing will examine the challenges that the 
unbanked face and explore the roles that policymakers, 
financial institutions, nonprofits, community-based 
organizations, and others can and should play in bringing more 
Americans into the financial mainstream.
    Millions of families in the United States lack access to 
basic banking services that I think most of us would regard as 
essential for individuals seeking to fully participate in our 
financial and economic system.
    According to the Federal Reserve's 1998 survey of consumer 
finance, almost 10 percent of families do not have any form of 
an account with an insured depository institution. The number 
is even higher for families that have no checking account. 
Thirteen percent of all American families do not own a checking 
account, almost one out of every seven. These families are, as 
one would expect, disproportionately low income or minority.
    I think that these statistics should be of great concern to 
anyone who has any commitment to ensuring that all Americans 
have access to basic financial services. There is a growing 
recognition that the cost incurred by the unbanked greatly 
exceed the high fees paid to cash paychecks, send remittances, 
and pay bills. In fact, the lack of a relationship with a 
traditional bank or credit union has profound implications for 
the ability of an individual to acquire financial assets and to 
accumulate wealth.
    A recent survey by the Office of the Comptroller showed 
that only 30 percent of unbanked households held savings, 
compared to 80 percent of those with bank accounts. 
Furthermore, the Federal Reserve's data reveals that only 8 
percent of unbanked families have a retirement account.
    Without access to mainstream banks and credit unions, the 
unbanked end up using fringe financial service entities to 
conduct routine transactions. The fringe service providers 
offer no opportunity to build a credit history, which then 
becomes essential to accessing other affordable financial 
products, such as mortgages or low-interest lines of credit. 
Without traditional credit, individuals are vulnerable to 
exploitation by abusive lenders offering high-cost mortgages, 
high-interest short-term loans, and very expensive rent-to-own 
products.
    Also of considerable importance, but often overlooked are 
the public safety implications for the unbanked. These 
individuals are often the victims of crime because many operate 
on a cash-only basis, and end up carrying significant amounts 
of cash on their person or store cash in their homes.
    Surveys of the unbanked suggest that there are a variety of 
reasons why millions of families in the United States do not 
have accounts with insured depository institutions. These 
reasons range from the common complaints that barriers to entry 
exist for low-income individuals in the form of high costs and 
lack of convenient bank branches, to more complex issues 
involving distrust and negative attitudes about insured 
depository institutions borne of past experience. The lack of 
sufficient financial literacy or information about the 
availability of low-cost banking accounts are also seen as a 
significant obstacle.
    So it all poses, I think, a significant challenge to those 
of us who are trying to find a solution. Clearly, increasing 
the number of banked will not be an easy task and it will 
really require sustained commitment to eliminate this, in a 
sense, bifurcated financial services system that currently 
exists in the country.
    This morning, we will hear about the multifaceted 
approaches currently being undertaken by the Federal 
Government, by insured depository institutions, by community 
groups, and by others to address this issue.
    I am hopeful that today's hearing will lead to a broader 
understanding of the needs of the unbanked, as well as provide 
a forum for an exchange of ideas on improving access to basic 
financial services. A central focus of this hearing will be a 
review of the Treasury Department's efforts to improve access 
to affordable and convenient accounts through the 
implementation of the First Accounts Program, which was 
announced in January of 2000. The Treasury Department has 
played an important role in highlighting the problems of the 
unbanked and addressing their needs.
    I especially want to express my appreciation to Assistant 
Secretary Sheila Bair for her strong leadership and continuing 
commitment to the First Accounts Program, and we look forward 
this morning to hearing an update of Treasury's efforts.
    Before turning to the Assistant Secretary, I also want to 
commend those banks, credit unions, thrifts, community 
development financial institutions, and others that have worked 
together to create innovative programs that remove many of the 
obstacles that low-income, unbanked consumers face when they 
seek to establish checking or savings accounts.
    I strongly urge other insured depository institutions that 
have not yet taken up the challenge to work with the 
Government, the nonprofit organizations, community development 
financial institutions, and employers to design products that 
address the needs of the unbanked and increase their financial 
stability.
    I obviously feel very keenly that if we can bring the 
unbanked into the mainstream of the financial system, it will 
clearly be to their advantage. But beyond that, it will really 
be to the advantage of the workings of our economic system. It 
will give it greater legitimacy and credibility. It will 
strengthen it. I think mainline institutions will discover 
that, in fact, there is a market there to be developed and 
grown that will prove to be advantageous to them.
    And we will rid ourselves of this distressing problem of 
having part of our population not accessing the services that 
most of us consider as standard or routine, and therefore, in a 
sense, being alienated from the workings of the economic and 
financial system. I regard that as a highly undesirable thing 
and we have been working very hard, and we are very pleased 
with the work that Treasury has been doing.
    Before I turn to Ms. Bair, I will yield to my colleague, 
Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    I strongly appreciate your holding this hearing. And in 
fact, I will keep my remarks brief because you have essentially 
said it very well. With your permission, I would associate 
myself with your remarks and comments. I strongly agree with 
everything you have said.
    I too want to commend and thank Assistant Secretary Sheila 
Bair for all of the work that she has done on this important 
issue and the other important work that she has done over the 
years. I know that she comes with a lot of experience in the 
financial sector of our economy. I appreciate your willingness 
to be involved in public service.
    Ms. Bair. Thank you.
    Senator Crapo. In Idaho, when you look at the statistics 
that you have talked about, Mr. Chairman, that means that we 
have something like, if those statistics hold in Idaho, 
something like 47,000 households that are unbanked. Surveys 
have found, as you have indicated, Mr. Chairman, that the 
groups that are most likely to be unbanked are lower-income 
households, households headed by African-Americans and 
Hispanics, households headed by young adults, and households in 
which the home is rented.
    I see that as a significant and increasingly difficult 
problem in Idaho. And that is why I believe that this hearing 
and the efforts that are being undertaken by so many who are 
here today are so critical. We have looked particularly in 
Idaho at one of our growing and significant groups, the 
Hispanic population, and have found that not only are they 
squarely hit by these kinds of problems, but also with the 
types of problems that relate to access to affordable housing, 
either ownership or rental. These issues are connected.
    We have, because of that, started what we are calling an 
Hispanic Initiative in my office to try to identify the 
universe of issues that are faced by the Hispanic population in 
Idaho, not just the housing and the financial services issues, 
but the remainder of those issues, and to try to see what we 
can do from our position here to help increase the 
opportunities for the people who fall into these categories and 
face these difficult burdens. This hearing today is hitting 
squarely at one of those important issues.
    I do want to give my thanks not only to Assistant Secretary 
Bair and the Treasury Department for their effective work in 
this area, but also to the National Credit Union Foundation, in 
which one of these First Accounts awards made it to Idaho and 
is helping us to get ourselves very involved in financial 
literacy efforts in rural Idaho and developing that basic 
consumer financial education that is so critical, and helping 
our people to gain access to affordable international money 
transfer services at greatly reduced costs. So, there is a lot 
being done here and there is a lot of great thinking and a lot 
of innovative ideas and a lot of resources that can be brought 
to bear on this issue.
    One of the hopes that I have is that we can strengthen 
those opportunities through the things that we learn in these 
hearings, and also that we can identify what is there and bring 
them effectively into play across the Nation, but in 
particular, in Idaho.
    So thank you very much, Mr. Chairman, Assistant Secretary 
Bair, and for all of the witnesses who are here to help us work 
on this critical issue.
    Chairman Sarbanes. Senator Crapo, thank you very much for 
your strong support for what we are trying to do. And I look 
forward to continuing to work closely with you as we try to 
advance the goals that we have set out here.
    Senator Crapo. Thank you.
    Chairman Sarbanes. Sheila, we would be delighted to hear 
from you. We are pleased to welcome you back before the 
Committee.

                  STATEMENT OF SHEILA C. BAIR

         ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS

                U.S. DEPARTMENT OF THE TREASURY

    Ms. Bair. Thank you, Chairman Sarbanes and Senator Crapo, I 
appreciate the opportunity to appear before you this morning to 
talk about First Accounts, a grant program administered by the 
Treasury Department, that is designed to help unbanked low- and 
moderate-income individuals establish banking relationships 
with insured depository institutions.
    Mr. Chairman, I commend you for focusing the national 
spotlight on this critical issue of expanding consumer access 
to mainstream financial services by convening today's hearing, 
as well as the hearings you held previously on the remittance 
industry and financial education. The policy objective of First 
Accounts is embraced by Members of both parties. Moreover, it 
is of great importance to me personally, to the Treasury 
Department, and to the Bush Administration.
    Secretary O'Neill recently noted that: ``We must work to 
ensure that all Americans have the knowledge and tools to build 
their own financial security. Ownership, independence, and 
access to wealth should not be the privilege of a few. They 
should be the hope of every American.'' Establishing a bank 
account at an insured depository institution is one of the 
basic tools necessary for individuals to build their own 
financial security. Expanding low- and moderate-income 
Americans' access to mainstream banking services is very much 
in line with the compassionate conservatism of President Bush 
to give all Americans the chance to fully participate in the 
benefits of our free economy. In a recent speech, President 
Bush defined this compassionate conservatism by saying: ``It is 
compassionate to actively help our fellow citizens in need. It 
is conservative to insist on responsibility and results.'' 
Consistent with this philosophy, we have strived to direct 
First Accounts funding to those initiatives which are 
replicable, self-sustaining, and, most importantly, promise to 
bring the greatest number of unbanked individuals into stable 
banking relationships.
    Who are the unbanked? Simply put, the unbanked are people 
who do not have a banking relationship with a traditional 
financial institution, such as a commercial bank, a savings 
association, or a credit union.
    Although there are few statistics available regarding the 
true size of the unbanked population in the United States, some 
estimates indicate that as many as one in ten families, or even 
one in seven, as Chairman Sarbanes noted, may not have bank 
accounts.
    In light of this, an obvious question is: Why do so many 
people remain outside of the mainstream banking system? Are 
they shut out of the system or do they make a conscious choice not 
to do business at traditional financial institutions? Surveys 
on this issue reveal varied responses to these questions, 
including: Bank fees or minimum balance requirements are too 
high; the types of accounts offered by traditional financial 
institutions do not meet the needs of the unbanked; a person 
may not write enough checks or have enough month-to-month 
savings to make it worthwhile to maintain an account; or the 
unbanked are simply not comfortable dealing with banks or 
letting them know their private financial 
information.
    We believe that an individual should have the right to 
choose where he or she will seek financial services. This right 
to choose, however, is an illusory right if people do not have 
accurate and complete information that will enable them to make 
educated decisions and access to a range of financial service 
providers.
    There are several advantages to being banked. The unbanked 
typically pay higher costs in the form of transaction fees for 
financial services than individuals with banking relationships.
    Individuals also face heightened safety and security risks 
as a result of having to conduct all financial transactions in 
cash. Carrying large amounts of cash is dangerous and keeping 
cash at home is obviously risky.
    Finally, establishing a banking relationship is taking a 
first step toward building a promising economic future. A 
traditional banking relationship offers the account holder an 
opportunity to become familiar with fundamental financial 
concepts that are critical in asset building and bank accounts 
provide a tool to help families fulfill their savings goals and 
manage their household money.
    Through the First Accounts Program, Treasury is funding 
initiatives to connect unbanked low- and moderate-income 
individuals to mainstream financial services. But the paramount 
goal of First Accounts is to move a maximum number of unbanked 
low- and moderate-income individuals to a stable banked status 
with an insured depository institution. We hope to accomplish 
this goal through the development of financial products and 
services, including education and counseling, that can serve as 
replicable models in meeting the financial services needs of 
unbanked individuals without the need for ongoing public 
subsidies.
    Under First Accounts, financial institutions are encouraged 
to create low-cost accounts for unbanked families and to help 
bring more ATM's to safe places in low-income communities. 
Treasury's First Accounts initiative was launched this past 
December 27 with a published notice of funds availability, a 
NOFA, in the Federal Register inviting applications for First 
Accounts grants.
    First Accounts applicants were required to propose, at a 
minimum, low-cost electronic, checking, or other types of 
accounts, either directly, if the applicant is an insured 
depository institution, or indirectly through a partnership 
with one or more insured depository institutions. Applications 
were due March 20 and a wide variety of eligible entities did, 
in fact, apply for grants. In total, Treasury received 231 
applications from 38 different States.
    During the last several weeks, a team of reviewers have 
been busy completing our review of the applications. This 
competitive review process involved evaluating the applications 
based on a number of different criteria including: the likelihood 
of success, the extent to which a project is replicable and can 
become self-sustaining, as well as the applicants' experience 
and track record, and management capability.
    After careful consideration, yesterday, we announced our 
selections for First Accounts. The 15 awards totaling $8.3 
million promise to directly assist over 35,000 unbanked low- 
and moderate-income individuals in opening bank accounts, and 
hopefully, hundreds of thousands more by becoming successful 
models which can be replicated in other communities. A complete 
list of grant awardees is attached to my testimony for inclusion 
in the record.
    Chairman Sarbanes. It will be included in the record.
    Ms. Bair. Thank you, Mr. Chairman.
    The First Accounts grant awards are going to nonprofits, 
insured depository institutions, insured credit unions, a 
community development financial institution, a faith-based 
organization, and a foundation. The projects are very 
innovative and focused on a wide variety of unbanked people, 
including youth, new entrants to the workforce, recent 
immigrants, Native Americans living on reservations, people 
living in public housing, and families using child care 
facilities.
    All involve a significant degree of financial education. 
For instance, providing unbanked individuals with free checking 
or savings accounts upon completion of a financial education 
course and/or providing ongoing counseling and education 
support services once the unbanked individual has established 
an account.
    Nine of the pilots involve partnerships with employers in 
the low-income areas as a means of reaching out to unbanked 
employees, as well as being able to provide lower-cost account 
services by building upon the employer's relationship with a 
financial institution. Eight would expand access by installing 
ATM's in low-income areas, and one promises to establish two new 
branches in underserved areas. Most feature electronic access 
to account services through ATM cards.
    Treasury's role in the First Accounts Program will not end 
with its selection of grant recipients. Treasury's ongoing 
involvement with First Accounts will include evaluating the 
programs for progress and success, deliverables, and 
effectiveness on a regular basis. In addition, Treasury will 
receive periodic reports from the grant recipients. Once we 
have data on the success of programs, the Administration will 
consider the cost-effectiveness of continuing First Accounts or 
other similar types of programs.
    Before concluding, let me also highlight a number of other 
initiatives that Treasury is working on related to the 
unbanked. We have a number of efforts underway aimed at 
improving financial education, including the establishment of a 
new Office of Financial Education that will develop and 
implement financial education policy initiatives and will 
coordinate Government programs.
    This Office will also be responsible for Bank on Your 
Schools, a partnership between schools and financial 
institutions that will involve providing students with their 
own free savings accounts and giving them hands-on experience 
working at a financial institution.
    Another topic that is often overlooked in the discussion of 
the unbanked is the remittance industry. The Inter-American 
Development Bank estimates that Latin American immigrants 
living in the United States send an average of $200 to their 
native countries about seven to eight times a year. These 
remittances have reached a level that surpassed $23 billion 
last year, about one-fifth of total worldwide remittances. Most 
immigrants send remittances through a small number of 
alternative financial services providers and lack of 
competition in the remittance industry has contributed to 
higher remittance costs.
    With our encouragement and support, however, more and more 
traditional financial institutions and credit unions are 
recognizing that there is a concrete opportunity to attract a 
diverse consumer base by offering low-cost remittance products. 
Major financial institutions that have recently approved new, 
lower-cost remittance products include Wells Fargo, Bank of 
America, and Citigroup.
    In closing, I would like to commend the efforts of the many 
banks, credit unions, and community- and consumer-based 
entities and groups, many of which are represented on the panel 
that will follow me this morning, who have been working for 
many, many years to address the problems faced by the unbanked 
segment of the population.
    Expanding access to financial services is a bipartisan 
issue that contributes to improved financial well-being among 
many low- and moderate-income individuals. Opening an account 
at an insured depository institution provides the account holder 
with a number of benefits: The opportunity for wealth building; 
lowering costs for financial services; security; knowledge of 
and familiarity with the fundamentals of personal finance; and 
the chance to build a credit history and qualify for credit on 
reasonable terms. Because of these benefits, Treasury is 
committed to promoting policies that will give unbanked 
individuals both access and choice in establishing traditional 
account relationships with insured banks and credit unions.
    That concludes my statement and again, I thank you very 
much for the opportunity to testify this morning and to let you 
know what we have been doing to implement this important 
program.
    Chairman Sarbanes. Well, thank you very much. We are 
pleased to have this update.
    I understand that, in the course of making the grants you 
just announced, that you received 231 applications from 38 
States requesting about $130 million in response to the 
December notice of funds. Is that right?
    Ms. Bair. That is correct.
    Chairman Sarbanes. Of course, you had limited money 
available. You were able to make 15 grants, totalling slightly 
more than $8 million. So there is obviously a tremendous 
potential out there, a lot of people seeking to participate in 
the program. I am very concerned about the amount of money that 
is being made available. I know the budget request this year 
was only for $2 million for the First Accounts initiative. What 
do you have left down there at the moment? About $2 million?
    Ms. Bair. We have about $1.5 million. There was also 
$300,000 earmarked for Alaska ATM's, and $100,000 earmarked for 
Metropolitan Family Services in Chicago. So subtracting that, I 
think, we have--plus the $8.3 million just awarded yesterday--
about a million and a half left.
    We need to hold some of that back for administrative costs. 
Obviously, there needs to be grant administration oversight of 
the grant-making process. We want to do research and evaluation 
of the pilots that we are funding because we think one of the 
great value-added benefits to this program is being able to 
highlight the success stories and publish them and bring 
attention to them, so that we can encourage other financial 
institutions and groups and others involved in this to 
replicate them.
    We are also considering with the money we have left over as 
to whether it would help to do a national survey specifically 
targeted on the unbanked population to further explore what 
types of products and services best meet their needs.
    The Fed's Survey of Consumer Finances, which you 
referenced, is the best existing survey on that subject. We 
have been talking with some in the community field and with 
academics to see whether there would be value-added for that 
survey.
    We could take some of that remaining money and use it for 
perhaps one more grant application. There was $2 million in the 
2002 appropriation, and as you say, another $2 million has now 
been requested in the 2003 appropriation. And certainly, we have a 
number of meritorious applications in the pipeline that remain 
unfunded right now because we gave out what we felt we had to 
give out right now.
    Chairman Sarbanes. Well, I know that the Administration 
marches in lockstep once the OMB makes its decisions. But I 
take it that if we worked hard here in the Congress to boost 
the money in the coming budget for this purpose, that would not 
distress or upset you.
    Ms. Bair. My sense is that I really cannot speak to that 
because I think resources are scarce. I think this is a policy 
objective that the Administration strongly shares. But there 
are a lot of competing policy resources right now, 
unfortunately. So, I would have to stand by the $2 million that 
has been requested in the Administration's budget.
    Chairman Sarbanes. I do not want to make things difficult 
for you this morning, but let me ask you this question. You had 
231 applications. You picked 15 of them.
    Ms. Bair. That is right.
    Chairman Sarbanes. If we were doing a curve of the quality 
of the applications, presumably, the 15 would be in the very 
top category.
    Ms. Bair. That is right.
    Chairman Sarbanes. How many more would have been in the top 
category if you had the money, of the 231? Or is this clearly 
the top category and then we go to the next category?
    Ms. Bair. No.
    Chairman Sarbanes. If so, how many are in the next 
category?
    Ms. Bair. Right. My sense is that there is a progression 
and that there are a number of--off the top of my head, I could 
not give you precise numbers. We used a rating system, a 
scoring process that was published in the NOFA last December. 
But there was a fairly steady gradation. There were a number of 
other grant applications that were very close to the point 
rating cut-off that we had based on the amount of money.
    Chairman Sarbanes. Would you say half of them? Maybe, a 
quarter of them?
    Ms. Bair. Jean Whaley is here, who was our principal staff 
person in charge of this. Jean, do you know off the top of your 
head?
    [Pause.]
    About a third, she said.
    Chairman Sarbanes. About a third of the total were in the 
quality category, so to speak.
    Ms. Bair. Yes.
    Chairman Sarbanes. So that would be about 75 or so of the 
231. Is that right?
    Yes. Okay. Now let me ask you this question. The CDFI fund, 
which is under your jurisdiction, has made a big difference, I 
think, in the ability of their members to reach out to the 
unbanked. It has enabled community development credit unions to 
open branches in, for instance, the farm worker community in 
California.
    Ms. Bair. Yes.
    Chairman Sarbanes. The South Bronx, the lower East Side of 
New York. It has enabled the credit union that serves the 
Navajo and other reservations to add electronic services. 
Actually, my colleague, Senator Johnson, in his Subcommittee, 
is planning a hearing on the needs of Native Americans next 
month to examine that particular question.
    So there are other ways you can encourage this objective. 
Here, I am suggesting working through the CDFI fund. Now, 
again, we have a problem there in terms of its budgetary 
allocations. But do you perceive that the CDFI's are an 
effective instrument for trying to achieve this objective of 
low-cost banking services?
    Ms. Bair. There was a CDFI among the award grantees. Yes.
    Chairman Sarbanes. I was thinking not so much there, but--
because you have a separate pot of money for the CDFI's.
    Ms. Bair. Just focused on expanding----
    Chairman Sarbanes. Whether there is a way you can use that 
to encourage the CDFI's to move into this area.
    Ms. Bair. It is an interesting idea. I think, certainly, 
there is a lot of high value-added in targeting some measure of 
CDFI award-making toward expanding access and creating 
sustainable ongoing community-based financial institutions in 
economically distressed regions. So, I think, yes, it is very 
consistent with the CDFI fund's overall mission and one we 
would certainly be open to exploring with you about whether we 
should have a more clarified focus of their award-making.
    Chairman Sarbanes. My time is up. I am going to yield to 
Senator Crapo. Let me ask this final question. How much time do 
you think you need before you can take a reading on whether 
this is cost-effective, whether the 15 grants you have put out 
are showing positive results?
    Ms. Bair. I would say at least 12 months. This is a hard 
population to reach. And the beginning effort will be marketing 
outreach and identifying unbanked individuals. And also, a lot 
of the awards require financial education in advance of 
actually opening the account, which I think is a good approach 
because a lot of the unbanked communities are previously 
banked. But because they did not have the adequate financial 
education and skills to know how to manage a bank account, they 
got in trouble with overdraft fees or what have you, and 
terminated their banking relationship.
    So, we want to give them adequate lead time to do the 
outreach, the marketing, the financial education, establish the 
accounts, before we evaluate whether they are successful or 
not. I would say that you want to give them at least 12 months.
    Chairman Sarbanes. Sheila, I wish we had enough money or 
could get enough money to have more than 15 trying this thing.
    Ms. Bair. I understand.
    Chairman Sarbanes. Particularly in light of what I 
understand, that you would put about a third of the 231 
applicants into the top category, quality category, because I 
am worried that when we do 
15, then everyone says, well, let's wait to get the results 
from the 15.
    I am not sure that is a broad enough effort or sample or 
pilot to give us a chance to really take a reading. Out of 15, 
if you have three or four that flop, so to speak, that is a 
fairly large number out of 15 and you would be judging the 
program in too narrow a focus.
    So, I think we need to give some thought to how we can 
engineer perhaps a second round so we broaden the number of 
pilot projects that are out there, both in terms of the kind of 
groups and also geographically, so you get a better spread. 
Let's try to think together about how we might do that.
    Ms. Bair. All right.
    Chairman Sarbanes. Senator Crapo.
    Senator Crapo. Thank you very much.
    I probably should know the answer to this question, but Ms. 
Bair, can you tell me what criteria are utilized to determine 
which grants are successful or are awarded, as opposed to those 
that do not qualify?
    Ms. Bair. We put a high focus on results and we really 
pushed the applicants to give us a number of how many unbanked 
individuals they thought they could get into stable banking 
relationships with their programs, and then also demonstrate 
with reasonable specificity how their program would lead to 
those results.
    I think probably the numbers that we have, the 34,000 or 
so, is probably a low estimate because we told them in advance, 
we want to know exactly how many unbanked individuals you are 
going to be able to put into sustainable banking relationships, 
and as part of the evaluation process, we will be holding you 
to that. So, I think they were probably conservative in their 
estimates. We are hoping that many more than the 34,445 that we 
have tallied up as part of the original round of grants will 
take place.
    We also put a high premium on whether the pilots that we 
were funding could be replicable in other cities, assuming its 
success. And also, whether they would be self-sustaining 
because I think there is general agreement that this is a good 
expenditure of Government resources to fund pilots, but some 
concern about having an ongoing, certainly a permanent subsidy 
program. So the more that we could encourage self-sustaining 
pilots, we think is in everybody's interest. We also scored 
high for those that demonstrated that type of promise.
    Chairman Sarbanes. How many extra points were given if your 
proposal encompassed the State of Idaho?
    [Laughter.]
    Senator Crapo. At this point, many, I am sure.
    [Laughter.]
    Ms. Bair. I would hasten to add that my review of the grant 
applications, the names of the entities, as well as the States, 
were redacted. So, I was operating blind with regard to both.
    Senator Crapo. Well, we will have to get you the code.
    Ms. Bair. I guess, yes.
    [Laughter.]
    Senator Crapo. The question I have in my mind actually 
relates to this, though, because I am guessing that there is 
probably a difference on the grant applications and on the 
issues between urban and rural areas.
    Ms. Bair. Yes.
    Senator Crapo. And I would also guess that if you were 
focusing on the ability to reach certain large numbers of 
people, that urban areas would have a distinct advantage in 
success in the grant application process. I do not know that. 
As I indicated, Idaho was successful in being part of at least 
a regional grant.
    But the question I have is, is there any focus on the 
urban/rural distinction? Is there any effort to try to make 
sure that rural areas do get adequate representation in the 
program?
    Ms. Bair. I think that was adequately factored in because 
six of the 15 are in urban areas, six are in rural areas. So, 
yes, you are right. The urban areas have a greater 
concentration of the community that we are trying to reach, it 
might be easier in terms of just from a numbers perspective. 
But there are other qualifying criteria that the proof is in 
the pudding, so to speak, because six of the pilots are in 
rural areas.
    Senator Crapo. I appreciate that and I would just encourage 
you to look further at it. It may be that we would want to 
expand and provide other alternatives or opportunities to try 
to reach rural areas because, frankly, a number of the rural 
areas might just be disqualified because they do not have an 
institution that would be able to participate in the grant 
application.
    Ms. Bair. Right.
    Senator Crapo. So there may be some further thinking that 
we need to apply to the question of how to get these services 
further out into the rural areas. I appreciate your attention 
to that.
    Ms. Bair. Absolutely.
    Senator Crapo. And again, that is all I have. But I just 
want to also thank you very much for the effective attention 
and work that you have been giving to this.
    Ms. Bair. Thank you.
    Chairman Sarbanes. Thank you very much.
    We have been joined by Senator Stabenow. Debbie, we are 
happy to yield to you.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I was speaking 
on the floor and unable to get here sooner. But I did want to 
come and thank you for having this hearing.
    Ms. Bair, we are very happy----
    Chairman Sarbanes. I did not realize you were speaking on 
the floor. Therefore, I wasn't put in the dilemma of whether we 
should recess the Committee hearing.
    [Laughter.]
    Senator Stabenow. It would have been very nice if the Chair 
had recessed so that people could watch with baited breath.
    [Laughter.]
    But understanding the conscientious nature of the Chair of 
this Committee and the numerous meetings he holds every day----
    [Laughter.]
    In all seriousness, it is wonderful to have you here. I 
also want to welcome on our second panel, Mr. Michael Barr, who 
is from the University of Michigan, Assistant Professor of Law. 
We are pleased and proud that the Chairman would have the 
wisdom of having the expertise of someone from Michigan. And 
since my son graduated from the University of Michigan--
although I have to say that I graduated from Michigan State----
    [Laughter.]
    So, we are a divided family. But it is wonderful to have 
you here as well.
    We have been, of course, looking at a variety of issues 
that deal with financial literacy, predatory lending, now with 
those who are unbanked, do not feel comfortable, whether it is 
racial, cultural, other kinds of issues that come into play for 
us in terms of barriers.
    But I am wondering if you have identified regulatory or 
legal barriers to reach out to those that we are talking about 
today that are considered unbanked. And if you have suggestions 
for legislative changes for the Committee in which we could 
address this question and, hopefully, help make our financial 
institutions, banking institutions, more accessible to those 
who need them.
    Ms. Bair. That is an interesting question, Senator, and I 
would like to give it some further thought. No specific legal 
or regulatory barriers come to mind, but I would like to give 
that some thought. I think our focus has been more to try to 
provide incentives and raise public awareness and awareness 
among financial institutions of the importance of reaching out 
to this community and thinking outside of the box, if you will, 
thinking innovatively about how to reach out to this community 
and how to redesign basic products and services so they are 
more conducive to the unbanked population of people coming into 
the banking system for the first time with little experience 
about how banks work, how a bank account works.
    So that has been the main thrust of our efforts. And I will 
say that I think, as evidenced by the applications that we 
received, as well as some of the innovations that some of the 
major banks in the remittance field have taken, which I mention 
in my testimony.
    I think banks and credit unions have been extremely 
responsive. They have been doing a lot of good work already and 
we want to partner with them and community groups to continue 
that.
    Senator Stabenow. I would agree that oftentimes, we are not 
talking about a legislative fix and we appreciate your 
leadership and much of what we talked about with the question 
of financial literacy is really the private sector that has 
been coming together through a variety of means, Jump$tart and 
a number of different coalitions that are really reaching out 
and working in our schools and so on.
    Ms. Bair. That is right.
    Senator Stabenow. Even predatory lending, this whole 
question of financial literacy and giving information to 
people, really involves a partnership.
    Ms. Bair. That is right. That is really true.
    Senator Stabenow. So, I know that we need to be doing that. 
I also know, though, that in both of those areas, there is a 
role in terms of setting some kind of standards or expectations 
or encouraging, and so on.
    Ms. Bair. Right. I agree.
    Senator Stabenow. You may have already addressed this, and 
I apologize if you did in your testimony. But I am wondering 
how the Department of the Treasury plans to track the success 
of the First Accounts, and if there are certain measurements in 
place to track the progress of the programs and if you are 
going to be reporting back in terms of what has worked and not 
worked, certainly that is very helpful to us.
    Ms. Bair. Yes. There are ongoing reporting requirements. We 
will be very hands-on in our monitoring of these grants.
    I think, again, we are very excited. We had a number of 
high-quality applications. I am very optimistic that the grant 
applications that we have currently funded, we may be able to 
fund a few more, are going to produce some significant 
progress, in terms of bringing unbanked individuals into the 
mainstream banking sector.
    So, we will be working with them, closely monitoring, as 
well as providing analysis of what has worked, what does not 
work, and publicizing that, so that other institutions and 
other communities can replicate the models that are successful.
    In more detail, in terms of the detailed requirements, it 
is addressed in my written testimony, the auditing requirements 
and the reports that they are required to file.
    Senator Stabenow. Thank you.
    I finally would just say, Mr. Chairman, that Michigan is a 
very large, very diverse State, large urban areas, many, many 
small communities, from the southern border up to the Upper 
Peninsula.
    I hear concerns everywhere in Michigan--I do not hear it 
only, although it is a very critical issue in our urban areas. 
But I have heard the same kinds of needs and concerns in small 
towns in Upper Peninsula, Michigan, or down in Benton Harbor 
St. Joe and southwestern Michigan.
    So, I appreciate and encourage you to look broadly at ways 
to deal with those who are unbanked, whether they live in a 
small rural community or they are in the city.
    Ms. Bair. Having grown up in a town in southeast Kansas of 
12,000 people, I am very sensitive to that. And thank you. That 
is good input to have. We will.
    Senator Stabenow. Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you very much. I had one other 
point I wanted to touch on. And that is, I was very pleased to 
see the reference in your statement about the question of 
remittances.
    Ms. Bair. Yes.
    Chairman Sarbanes. We certainly welcome the focus by the 
Treasury on this issue.
    We held a hearing on that issue in this Committee and had 
some very, very good testimony, which I am sure you reviewed. 
And I noticed that President Bush, when he met with President 
Vincente Fox in Monterey back in March, only 6 weeks ago, in the 
joint statement, United States-Mexico statement, which they 
issued, they talked about the Partnership for Prosperity. And 
they said: ``We welcome the partnership's action plan of concrete 
and innovative initiatives on housing, agriculture, infrastructure, 
remittances, communications, development, financing, and 
information technology.''
    Then they state: ``Lowering the cost to Mexicans and 
Mexican-Americans in the United States of sending money home so 
that their families get to keep more of their hard-earned 
wages.''
    We have a terrific opportunity here. I think there is a 
problem. We have a chance now, if we really work at it, and I 
commend you for the effort that you have taken, to really get 
these elements of the population that are kind of on the 
outside in, where they can participate like everybody else. 
Then they get the benefits of the competition that the rest of 
us enjoy, and also the various consumer protections that are 
written into that aspect of the financial industry.
    Ms. Bair. That is right.
    Chairman Sarbanes. I agree with you. I noticed in your 
statement: ``Offering remittance features as a part of basic 
bank accounts can be an important marketing tool in reaching 
out to unbanked migrant workers.''
    I think if we can get the industry over the transition 
period and, in a sense, the start-up costs, they may well find 
that this is a good market to develop. We certainly hope so, 
because that would sit on its own base in the economic terms.
    Ms. Bair. That is right. Three major banks have already 
stepped up to the plate on this and we are very pleased. Their 
remittance products are about half of what people typically pay 
at a money transmitter. We think the answer to this question is 
more competition, encouraging financial institutions to get in 
and provide products and try to service this market as well.
    As you noted, as I said in my testimony, we think another 
advantage--again, we want people to have choices. We do not 
want to tell them what to do. We just want to enhance their 
choices.
    But an advantage of choosing to use a mainstream financial 
institution is that you can also establish a bank account and 
start building up a credit history and establish a relationship 
that could go into later getting reasonably-rated car loans or 
home loans.
    Instead of using the fly-by-night operations for your 
lending needs, you have experience in stable relationships with 
a lending institution where you can go for your credit needs. 
So, in the long term, we think that is definitely an area of 
promise.
    Chairman Sarbanes. Of the grant awards--I did not count how 
many, but more than a few, at least--are working through the 
National Credit Union Foundation.
    Ms. Bair. That is right.
    Chairman Sarbanes. Which, in turn, is collaborating with--
well, in the instance that Senator Crapo was particularly 
interested in, the Washington Credit Union League. I also feel 
that this is an opportunity for the credit union movement--and 
we are going to have a credit union representative on the next 
panel--to deliver, in a sense, on what has been part of, at 
least historically, the credit union movement.
    Ms. Bair. Right.
    Chairman Sarbanes. So, we are greatly encouraged by that.
    Ms. Bair. I think credit unions have, and will continue to 
play a very important role in this.
    Chairman Sarbanes. Debbie, did you have anything else?
    Senator Stabenow. No, thank you, Mr. Chairman.
    Chairman Sarbanes. Ms. Bair is there a question we did not 
ask that you wish we would asked, because you had an answer you 
wanted to give?
    [Laughter.]
    Ms. Bair. Mr. Chairman, your questions have been very 
thorough. And again, I just appreciate the opportunity of 
coming and talking with you about what we have been doing at 
Treasury. We support the program. We are happy to get it up and 
running, and we are enthusiastic about the kinds of results 
that it will produce.
    Chairman Sarbanes. Terrific. We appreciate what you are 
doing.
    Ms. Bair. Thank you.
    Chairman Sarbanes. Thank you very much.
    If the next panel could come and take their places at the 
table.
    [Pause.]
    I think it is fair to say that our second panel here today 
brings a wealth of knowledge and experience to the issue of 
providing greater access for unbanked Americans and bringing 
them into the financial mainstream. We are very appreciative to 
the members of this panel for their willingness to participate 
in this hearing and to join with us in the effort.
    I am going to go straight across the panel and we will 
reserve the questions until we have heard from all five 
panelists. I think that is the most efficient and expeditious 
way to proceed. Instead of introducing everyone now, I will 
simply introduce each person as we come to their turn.
    So, Michael, we will start with you. Michael Barr is an 
Assistant Professor of Law at the University of Michigan Law 
School. Where he teaches banking and financial institutions 
law. From 1997 to 2001, he served as the Deputy Assistant 
Treasury Secretary for Community Development Policy, where he 
was active in a wide range of issues regarding access to 
capital and financial services, including the creation and 
implementation of Treasury's ETA accounts and the First 
Accounts concept, which we have been discussing earlier this 
morning with Sheila Bair.
    We have worked closely with Michael over the years and very 
much appreciate his abilities and his dedication. We are very 
pleased, Michael, you are here today. We would be happy to hear 
from you.

                  STATEMENT OF MICHAEL S. BARR

                   ASSISTANT PROFESSOR OF LAW

               UNIVERSITY OF MICHIGAN LAW SCHOOL

    Mr. Barr. Thank you very much, Chairman Sarbanes and 
Senator Stabenow. I appreciate the opportunity to be here today 
to discuss how to bring more Americans into the financial 
services mainstream.
    Access to basic financial services is critical to success 
in the modern American economy. Yet today, nearly 10 million 
households lack the most basic financial tool--a bank account. 
Twenty-two percent of low-income families, over 8.4 million 
families earning under $25,000 a year, do not have an account.
    The consequences of not having access to mainstream 
financial services can be severe.
    First, the unbanked face high costs for basic financial 
services. For example, a worker earning $12,000 a year, 
slightly more than the Federal minimum wage, would pay $250 
annually just to cash payroll checks at a check cashing outlet, 
in addition to fees for money orders and other common 
transactions. Nearly 80 percent of checks cashed at check 
cashing outlets are payroll checks, and another 16 percent are 
Government benefit checks. These checks could be directly 
deposited into bank accounts with significantly lower payment 
systems costs.
    The cost of these basic financial transactions can also 
undermine public initiatives to move families from welfare to 
work, and to make work pay through the Earned Income Tax 
Credit. For example, one survey found that 44 percent of EITC 
recipients in inner-city Chicago used check cashing services to 
cash their Government refund check.
    Second, low-income families need to save for injuries or 
for job losses, as well as for key life events, such as buying 
a home, saving for their children to go to college, or entering 
old age. Yet low-income families, particularly those without 
bank accounts, often lack any regular means to save. Bank 
accounts can be important entry points for the provision of 
regular savings plans for low-income workers, for example, 
through payroll deduction.
    Third, the unbanked are also largely cut off from 
mainstream sources of credit. Without a bank account, it is 
more difficult and more costly to establish credit to qualify 
for a loan.
    While the financial system works extraordinarily well for 
most Americans, many low- and moderate-income individuals face 
a number of barriers to account ownership.
    First, regular checking accounts may not make economic 
sense for many low-income families. Consumers who cannot meet 
account balance minimums pay high monthly fees, and most banks 
levy high charges for bounced checks. Banking institutions may 
also charge high fees for money orders or other instruments 
that typical consumers do not often use. Studies confirm, 
though, that many of the unbanked would become banked if they 
found a product that worked for them.
    Second, many unbanked persons may not qualify for 
conventional bank accounts. Nearly seven million people have 
had accounts closed for past problems, such as writing checks 
with insufficient funds or failing to pay overdraft charges. A 
private clearinghouse keeps records of these problems for 5 
years, during which time these individuals will be unable to 
open a conventional checking account at most institutions. 
While some persons undoubtedly do pose an undue risk for account 
ownership, many of these individuals could responsibly use bank 
accounts.
    Moving forward, banks could offer accounts contingent on 
completion of financial counseling and offer electronically-
based accounts with automatic money orders, and without check-
writing privileges, the kinds of accounts that pose little risk 
of overdraft.
    Third, while many communities contain adequate numbers of 
banking institutions, in some low-income communities, banks, 
thrifts, and credit unions are not as readily accessible to 
potential customers. Low-income central city neighborhoods have 
fewer bank offices per capita than higher-income ones and 
similar patterns persist for ATM's. For example, in New York 
and Los Angeles, there are nearly twice as many ATM's per 
capita in middle-income zip codes as there are in low-income 
zip codes.
    Fourth, the financial institutions may be reluctant to 
expend the resources for research, product development, bank 
personnel training, marketing and financial education, 
necessary to expand financial services to low-income 
individuals.
    Some progress has been made in recent years in expanding 
access to financial services. The period 1995 to 1998 marked a 
decline in the percentage of low-income families who are 
unbanked from 25 to 22 percent. This decline in the percentage 
of unbanked may reflect in part strong economic growth in the 
late 1990's.

    In addition, Treasury's EFT '99 Program has meant that 
direct deposit of Federal benefits into bank accounts has 
increased as a percentage of all Federal benefit payments from 
58 percent in 1996, before EFT '99, to 76 percent in 2001. This 
increase reflects an increase in direct deposit to existing 
accounts, as well as an increase in the number of Federal 
benefit recipients who have been able to obtain bank accounts.

    Moreover, Treasury has launched the Electronic Transfer 
Account, ETA, a low-cost electronic account for Federal benefit 
recipients. Nearly 600 banks, thrifts, and credit unions are 
offering ETA's at over 18,000 locations nationwide. Over 28,000 
benefit recipients have opened these ETA's thus far, and new 
ETA account holders are being signed up at a rate of over 1,000 
per month.

    More recently, a number of banks, thrifts, and credit 
unions have begun to experiment with a variety of products 
designed to serve the needs of low-income individuals, and you 
will be hearing more about those from other panelists this 
morning.

    Treasury's First Accounts initiative could play an 
important role in fostering innovation to reduce costs, lower 
risk, and democratize access to financial services for low-
income families.

    As Assistant Secretary Bair has testified, the results from 
the first round of funding are very impressive. But only a 
sustained commitment to the program will provide financial 
institutions with sufficient incentive to make the necessary 
investments to serve low-income households.

    Banks, thrifts, and credit unions could experiment under 
First Accounts with a wide variety of techniques. Transaction 
accounts with debit cards but no checks reduce risks by 
preventing accounts from being overdrawn, lower the cost of 
processing each transaction, expand availability more cheaply 
than branches, and decrease the risk to public safety, as the 
Chairman has noted.

    Banks could offer savings features including payment of 
interest or separate savings buckets within accounts. Banks can 
provide convenient and low-cost means to pay bills, for 
example, through automated money orders. And as the Chairman 
pointed out, recent efforts to reduce the cost of sending 
remittances abroad holds special promise for bringing immigrant 
communities into the banking system.

    The First Accounts initiative has the potential to spur 
``leap-frogging'' in technology for low-income families. To 
offer a few examples that could be subjected to the test of 
market feasibility: Providers of the network infrastructure for 
debit and credit cards might explore how low-income customers 
could be served on shared technological platforms. E-finance 
can increasingly be made available to the poor at Internet 
kiosks. And companies expanding the use of cellular telephones 
to transact financial services for high-income clientele could 
also focus attention on expanding banking products for the low-
income market currently utilizing prepaid cellular telephones.
    Finally, First Accounts can also help to spur employer-
driven strategies to move toward banking services. Employers 
can reap significant benefits from moving their workers to 
direct deposit, driving down payroll processing costs, 
increasing take home pay for workers, and reducing theft or 
fraud associated with checks. 

Employers can reach their employees with financial education 
relatively cheaply. And financial institutions can deploy 
debit-card-based payroll systems for their clients' employees, 
providing direct deposit into low-cost electronic banking 
accounts and systemic savings programs for low-income workers.
    In conclusion, First Accounts and related initiatives can 
help to transform financial services for low-income families. 
Such a transformation is a key to promoting greater economic 
opportunities for low-income communities.
    Thank you.
    Chairman Sarbanes. Thank you very much, Michael.
    Our next panelist, Fran Grossman, is Executive Vice 
President of Shorebank, the Nation's oldest and largest 
community development bank, a legend in its own time, if I may 
say so.
    Ms. Grossman. The older I get, we should be first, not 
oldest.
    [Laughter.]
    Chairman Sarbanes. Yes. Shorebank has been at the forefront 
of efforts to connect the unbanked to mainstream financial 
institutions and to facilitate ongoing savings and asset 
accumulation in low-income households.
    We are very pleased that you are here today, Ms. Grossman. 
We would be happy to hear from you.

                   STATEMENT OF FRAN GROSSMAN

                    EXECUTIVE VICE PRESIDENT

                  SHOREBANK ADVISORY SERVICES

    Ms. Grossman. I am very, pleased to be here. I thank you 
very much for this opportunity.
    Shorebank is a bit of a legend in its own time and 
sometimes people think we are much bigger than we are and we 
can accomplish much more than we actually can. In terms of this 
hearing, the critical issue is that Shorebank is the first and 
largest community development financial institution in America, 
which means it has $1.3 billion in assets. It is not that big.
    But the real issue for here, which I will get to when I 
talk about First Accounts, is that we have been using a 
financial institution as a catalyst for the community for 30 
years. We are still at it using slightly different ways, 
slightly different models, but the bottom line is 30 years 
later, we are still at it. To me, that is the secret of what we 
have to be doing as a Nation.
    Our belief is that we can help make changes in communities 
better by using a financial engine, a bank, as a means to make 
things happen. We use our financial resources, our smarts, our 
contacts. It is wonderful to be on this panel with two other 
people from Chicago, both of whom are from different parts of 
the spectrum, one from the Woodstock Institute and Bank One. We 
work closely with both. We do not always agree, but we agree on 
the goal, and we are going to get there, I hope, in my 
lifetime.
    Today, actually, I am speaking not only as a banker, but 
also as an inner-city school teacher, a preschool teacher, a 
social worker, a community worker in public housing, a 
neighbor, a friend, a member of a religious institution, a 
mother, a mother-in-law, and especially as a grandmother. All 
of this has made me a pragmatic optimist.
    I am actually very proud to be here with people like you 
who want to figure out how to make sure that more people have 
access to this country's financial industry.
    I want to thank you for having these hearings and I want to 
thank Sheila Bair and the Treasury Department for the creation, 
and Michael Barr's work on the development of the First 
Accounts initiative. I also want to thank Judy Kennedy and 
NAHHL for working with us on this. And mostly, I want to thank 
you, Senator Sarbanes, for holding this hearing and shining the 
spotlight on this issue.
    To me, it is very exciting that the Department of the 
Treasury is doing this. Clearly, we are all here because we 
want to figure it out. I am especially concerned with 
encouraging people in saving and I always want to be sure that 
there is an understanding between savings and transactions, 
because they are different issues, and sometimes we get them 
mixed up.
    It doesn't mean one doesn't lead to another, but I think 
the goal is to have savers, which is to say that the more 
people save, the richer our country becomes in many ways. The 
richer people are and the more they can do, the better their 
future is and, therefore, our future as a Nation will be.
    Michael pointed out that about the 10 million people who do 
not have bank accounts. He also noted seven million who were at 
one point banked and are no longer banked, 22 percent earn 
under $25,000. So, I will not go into that.
    But what we sometimes forget is all of those poor people 
who do save. My grandmother was a widow, a very young widow 
with three little kids. She had a job as a secretary many, many 
years ago, and she saved like mad. She was frugal. She kept the 
string, the wrapping paper, the like. She had money all over 
the house, whether it was in the flour bin or the 
refrigerator--actually, in those days, she did not have a 
refrigerator. The best one we liked was in the encyclopedia 
under M for money.
    [Laughter.]
    She did not go to a bank. Why didn't she go to a bank? 
First of all, she did not trust them. There were men there. She 
did not want anyone knowing what she had. And I often think 
that if she had put some of that money in the bank, what would 
have happened? We would have been rich with the compounding 
interest. And that is the message in a sense that we have to 
give people.
    So, I think that there are many, many reasons why people do 
not bank. Some of them are language. Some of them are 
ethnicity. Some of them are cultural. Some of them are race. 
Some of them are age.
    I was thinking when I flew in this morning. I arrived and 
asked where was the hearing and the woman said, go across the 
hall. I am sitting in this room behind you and all these nice 
little young men and women are walking through and I am just 
sitting there waiting. Like what is going on here?
    Here I am a well-educated woman, experienced with, high SAT 
scores. I did not go to the University of Michigan, but I did 
get in.
    [Laughter.]
    It never occurred to me to ask. I finally got up to go to 
the bathroom and I saw somebody and she said, you are supposed 
to be over here. And I thought what it must be like--I am so 
intimidated by being here. I am a grown-up and I am smart and I 
am educated, what is it like for those who have not had my 
opportunities?
    So, you begin to see what happens to people who, when they 
go into a new place, they are scared, maybe a little defensive 
and guarded. They think they are going to be disrespected and 
if somebody looks at them the wrong way or asks them the wrong 
question, they feel especially inadequate. We have a lot of 
work to do.
    My concerns actually with First Accounts are the ones that 
you raised. I think it is a fabulous program. I think the 
potential is marvelous. I am concerned that we are so result-
oriented on issues that are so, so hard, what we want--are fast 
solutions. We want to do it today. We want to have the problems 
solved. We want the most results.
    We have to be disciplined, and that is me as a mother and a 
teacher speaking. This takes time. We have to have standards. 
But we have to manage our expectations to the size of the 
problem. Some of the best applications on paper may not be the 
best. They may need to be reworded or need rethinking.
    We know how easy it is to hire somebody to write a good 
grant, to write things. We really have to think seriously about 
how are we going to dig deep and find the innovative and the 
creative programs and work on making them work. It is going to 
take time and we have to know that not all of our ideas are 
workable. And of course, I have gone way off.
    Let me just tell you a little bit about what Shorebank has 
done over the past 6 years.
    All of our branches in Chicago but one, which is in a small 
building downtown, are in poor neighborhoods, as are our 
branches in Detroit, as well as throughout Michigan.
    We focus significant energy on serving the unbanked. We 
have experimented with new products, delivery systems, and 
outreach strategies. One of our recent new products was 
introduced in 1998, that was something called the Individual 
Development Accounts. Those are known as IDA's. It is a savings 
account that is like a 401(k) in a shortened form. It is 
matched dollar-for-dollar for low-income families saving to buy 
a home, start a small business, or an education.
    To date, we have opened more than 600 of these accounts. We 
have trained hundreds in money management techniques and 
witnessed the marvelous effects of this program. But in a sad 
way, one of our best successes was our own employee who got 
into the program, saved enough for a downpayment for a house, 
and all of a sudden realized that she should have a 401(k).
    In some sense, we did not even look into our own house to 
see what we as employers, what each individual here can do to 
help other people to understand. We have to model, all of us, 
every day.
    Another one that we are very proud of is the Extra Credit 
Savings Program. This leverages the power of the Earned Income 
Tax Credit, which we think is possibly the largest antipoverty 
program in the country.
    Beginning 3 years ago, we opened our bank lobbies in the 
evening to volunteer tax preparers. Working families wanted to 
have their taxes done for free and personal bankers were on 
hand to open accounts. All they had to do was to have their 
money transferred electronically to the account. They did not 
have to keep it in there, but they had to have it transferred 
electronically.
    That year, more than 60 percent of the people who showed up 
had no bank accounts. After receiving their refund, more than 
half continued the account. But half did not and that is 
important. We have to acknowledge what works and what we have 
to work harder at. Some of them arranged to have their 
paychecks automatically deposited. Others kept savings and 
signed up. It was a small but significant growth and each year 
that we do it, it gets better. Over the past years, we have 
opened 350 accounts with tax refunds 
totalling more than $250,000. We have also helped others 
throughout the country replicate this program.
    We think we should fully leverage the power of the Earned 
Income Tax Credit to institutionalize the link between tax 
systems and financial services. Just like Motor Voter. You go 
in, you get your driver's license, you register to vote. If you 
go in and have somebody help you prepare your taxes, you should 
be able to open a bank account at the same time. So, I ask your 
support for these kinds of acts. IDA has been successful. It is 
not the answer. It is one answer to a hard question.
    Also, having been a CRA officer for a large bank, I can 
tell you CRA works, in some ways the same way. It is the 
strength and the importance that people like you give to CRA 
that make the banks say, ``Oh, this is important. They like 
that. We are going to do it.''
    As you know, things happen when the spotlight is shined on 
them.
    So, in conclusion, I guess my main message is it is 
important that we have reasonable expectations and that we do 
not get caught up in a numbers game of results. We have to give 
this time. We have to make commitments. It is like raising 
children. I do not think it is ever over.
    [Laughter.]
    But with all of our hard work and working together from 
different angles, we can succeed in broadening financial 
opportunities and making our country the kind of country we 
want to live in.
    Thank you.
    Chairman Sarbanes. Well, thank you very much. We can see 
from your testimony why Shorebank is such a dynamic 
institution.
    Since you mentioned the CRA, I would be remiss if I did not 
acknowledge the tremendous contribution that Michael Barr made 
when he was at the Treasury when we were working on that issue 
here in the Congress. I want to again express my appreciation 
to him for that.
    Our next panelist is Jaye Morgan Williams, who is the 
Senior Vice President and Managing Director of Community 
Investment for the Nation's sixth largest bank holding company, 
Bank One Corporation. Bank One Corporation, very much to its 
credit, is partnering with numerous nonprofit organizations, 
employers and others, to reach out to the unbanked with a 
number of innovative initiatives.
    Ms. Williams, we are very pleased to have you here today. 
We would be happy to hear from you.

               STATEMENT OF JAYE MORGAN WILLIAMS

                   SENIOR VICE PRESIDENT AND

           MANAGING DIRECTOR OF COMMUNITY INVESTMENT

                      BANK ONE CORPORATION

    Ms. Morgan Williams. And I am equally pleased to be here.
    Chairman Sarbanes, Senator Stabenow, I appreciate the 
opportunity to be here today on behalf of Bank One to discuss 
our commitment to helping American families gain access to the 
financial services mainstream and to share some of our 
experiences in doing so. We are particularly proud to share 
this panel with some of our Chicago colleagues, Marva Williams 
from the Woodstock Institute, and Fran Grossman from Shorebank. 
We have worked with both of those institutions over the years. 
They are very dedicated to this problem and they have actually 
been a source of inspiration to Bank One, as well as many other 
Chicago organizations and others in the banking system.
    Our commitment to the so-called unbanked stems from our 
core belief that helping families gain access to the banking 
system is good for these families. It is good for individual 
communities. It is good for the national economy. And it is 
actually good business for Bank One. We believe it is good 
business both in the near-term and the long-term.
    Before describing some of our programs, I would like to 
briefly summarize what we at Bank One have learned as we have 
pursued our commitment to helping families enter into the 
mainstream of financial services.
    First and foremost, the programs that you will hear about 
today are works in progress. As hard as we try, we are just 
beginning to understand the multitude of reasons that 10 
million American families are unbanked. Devising programs that 
succeed is often a matter of trial and error. We are proud of 
our efforts and we are actually humble about our errors, which 
often teach us the most.
    Second, financial literacy, as you have heard today, is 
essential for a successful banking relationship and credit 
relationship. We believe we can trace our biggest 
disappointments in these programs to instances when ``the cart 
was put before the horse,'' that is when low-income 
participants entered into banking or credit relationships with 
too little understanding of the fundamentals of consumer 
finance. We at Bank One believe that financial literacy 
training is absolutely critical to the success of programs 
servicing the unbanked.
    Third, partnerships are essential. Our partnerships with 
community groups, advocacy organizations, and community banks 
are essential to mounting programs that reach the unbanked 
population in a meaningful way. This is not a battle that can 
be won with a go-it-alone strategy.
    I would like to now briefly discuss four of our current 
programs for bringing more American families into the 
mainstream. I would like to first turn to Bank One's 
Alternative Banking Program, our ABP Program, which we are 
proud to participate in through the Chicago CRA Coalition, an 
organization represented by one of my co-panelists, the 
Woodstock Institute.
    The ABP offers checking accounts designed to appeal to the 
lowincome, unbanked customers. These accounts differ from our 
traditional accounts in that they are easier to qualify for and 
less expensive to maintain. Applicants may be approved with no 
credit history, or little credit history, or with borderline 
credit history. An account can be opened with a balance of only 
$10, as opposed to $250, which is generally what is expected for 
minimum account openings, and may be held with actually no 
balance at all.
    But as is true of all of our programs for the unbanked, 
customers must be educated in the basics of consumer finance in 
order to 
succeed. For this reason, we conduct workshops in the ``ABC's 
of Banking'' in neighborhoods around Chicago that surround the 
banking centers that offer the products.
    We are encouraged by the results we are seeing. Since we 
rolled out the program in March of 1999, every single ABP 
account holder would have been an individual who would not have 
been eligible for a traditional Bank One account, due to the 
lack of credit. Yet, the average checking account balance is 
$1,100 and the average savings account balance is $1,600. We 
are actually very proud of the results and we absolutely 
believe these accounts represent significant savings 
opportunities for low-income individuals.
    Many who are unbanked, as you have also heard today, have 
even a more basic concern, and that is personal safety. This is 
the concern underlying our Communities Banking for Safety 
Program. It is a program we offer in partnership with the 
Dallas City Police Department and the Mexican Consulate and 
other local banks. Bank One participates in ongoing community 
meetings to promote trust in the United States banking system 
among immigrants.
    In conjunction with this outreach effort, we have made it 
easier for Mexican immigrants to qualify for banking accounts. 
As with the Chicago ABP account, applicants with no or minimal 
credit history may qualify for deposit accounts. And in 
deference to the special needs of immigrants, Bank One expanded 
the list of acceptable forms of ID to include the Mexican Consulate 
ID, called the ``Matricula,'' instead of a driver's license or a 
Social Security card. The Matricula is accepted everywhere that 
Bank One does business.
    It might surprise some Members of the Committee to learn 
that many of the unbanked Americans actually work in regular 
paying jobs. We see the workplace as a very promising arena for 
financial education, as well as initiating banking 
relationships. Last fall, in Dallas, we initiated a pilot as 
part of an ongoing program to promote Bank on the Job. Through 
employers, we are offering low-income employees free checking 
accounts if they sign up for direct deposit of their paychecks. 
At the same time, representatives of Bank One's Community Investment Department provide on-site financial literacy training in many 
subjects including budgeting, managing accounts, savings, and 
homebuying.
    Our Paycard Program is another workplace initiative that we 
undertake in partnership with employers. The program allows 
companies to pay unbanked employees through a Bank One Visa 
stored value card. Bank One is currently marketing this product 
to the employees of some of our large corporate customers, and 
we are enthusiastic about the promise for the product.
    Before concluding, I would like to use this opportunity to 
recognize the leadership of the Treasury Department and this 
Committee in addressing the problem of the unbanked. Chairman 
Sarbanes, you have done so much to raise the profile of this 
issue and to support the efforts to resolve it. The Treasury 
Department has also demonstrated an ongoing commitment to 
bringing unbanked Americans into the mainstream.
    In conclusion, we emphasize Bank One's commitment to 
helping 10 million American households who are outside the 
financial mainstream become full participants in the American 
economy through banking relationships. We hope that the 
experiences we share with you today in terms of our product 
offerings will add to our collective understanding of what does 
work and what does not work, and that other institutions will take 
advantage of this knowledge.
    I think it is most important to share what we consider the 
most important lesson with this Committee, and that is 
addressing the needs of the unbanked population will require a 
sustained team 
effort involving mainstream financial institutions, community 
institutions, advocacy groups, as well as the Government. It 
will require diverse programs, trials and error, and constant 
monitoring, reevaluation, readjustment, and product redesign.
    We believe it will be hard work, but we believe that we can 
all be successful if we work together. We thank the Committee 
for inviting us to share our experiences and appreciate having 
the opportunity to listen to our panel members and some of 
their experiences as well.
    Thank you.
    Chairman Sarbanes. Thank you very much. It was extremely 
helpful to have had the benefit of the report of what Bank One 
Corporation is doing. You have been doing some very innovative 
programs and we appreciate that very much.
    We will now hear from Ms. Marva Williams, who is the Vice 
President of the Woodstock Institute, a renowned nonprofit 
organization formed in Chicago 29 years ago to promote 
community reinvestment and economic development in low-income 
and minority communities through both research, public 
education and technical assistance.
    Actually, Ms. Williams recently completed an analysis of 
the development of bank accounts and financial literacy 
training for lower-income, unbanked consumers. And so, we are 
very pleased you are here with us. We would be happy to hear 
from you.

                 STATEMENT OF MARVA E. WILLIAMS

                     SENIOR VICE PRESIDENT

                      WOODSTOCK INSTITUTE

    Ms. Williams. Thank you very much, Mr. Chairman. I want to 
thank you and the other Members of the Senate Banking Committee 
for inviting me here to talk about a topic that is very dear to 
me--providing opportunities for lower-income people to join the 
financial mainstream. And I am also very pleased to join my 
fellow Chicagoans, Fran Grossman and Jaye Morgan Williams, as 
well as Michael Barr and Rufino Carbajal on this panel today.
    The Woodstock Institute, in partnership with several 
Chicago area banks, is promoting the establishment of lifeline 
banking for lower-income people to establish deposit products, 
to improve their financial literacy, and to develop assets. The 
Woodstock Institute has a 29 year history of policy research, 
public education, and technical assistance to promote access to 
safe and sound credit. We also have a specialized knowledge of 
lower-income families' use of basic financial services.
    We believe that lifeline banking is crucial for consumers. 
It is the foundation for building and developing assets. And 
also, as Senator Sarbanes mentioned earlier, people who do not 
have a relationship with a mainstream financial institution 
also pay higher transaction costs to cash their checks, as 
well, as to pay their bills.
    However, as Michael Barr has said, there are many 
challenges that lower-income people face when developing a 
relationship with a mainstream financial institution. There is 
the problem of limited access. There has been a decline in the 
number of bank branches in lower-income communities per capita. 
Costs can also be prohibitively expensive for lower-income 
people. Credit status can also be a problem. Some banks conduct 
credit checks, as well as scoring for applicants, so that 
consumers with little or no credit or a slightly borderline 
credit rating can be disqualified from establishing a bank 
account.
    Trust is also a major issue. Some unbanked consumers may 
have attempted to access bank services in the past and been 
repelled for a variety of reasons. In addition, poor 
communication regarding 
account guidelines can lead to misunderstanding. Further, many 
recent immigrants distrust financial institutions or may have 
concerns about immigration issues.
    As Jaye Morgan Williams listed, financial literacy is also 
a major issue. Lifeline banking requires significant education. 
Without the skills to manage accounts, consumers may be faced 
with high fees for nonsufficient funds and other transactions. 
In addition, some consumers may need assistance when accessing 
electronic banking.
    The last challenge I would like to mention this morning is 
related to lack of information and poor marketing. Many banks 
have affordable accounts that are appropriate for lower-income 
consumers. However, those accounts are not well marketed.
    Based on these challenges, the Woodstock Institute has 
identified what we think are some of the key characteristics of 
a lifeline checking account product. They include flexible ID, 
such as utility bills or the Matricula card, which is an 
identification card that is issued by the Mexican Consulate. 
And I am very happy to hear that Bank One is accepting that. 
Also, flexible or no credit checks. We are also concerned about 
the cost of the accounts, so we would like to see no minimum 
balances, no monthly service fees, as well as no additional 
charges to see a teller.
    And the last characteristic is the promotion of direct 
deposit of paychecks and Government benefits. We think that 
this is a major entree for many lower-income people into the 
banking system.
    I would just like to say a word for a minute about what we 
call intermediate products. Checking account products may not 
be suitable for all consumers. They may instead prefer a 
savings account and an affordable way to pay their bills. 
However, very few financial institutions provide or market 
affordable ways to pay utility bills and other bills.
    There are two Chicago-based institutions--the North Side 
Community Federal Credit Union and First Bank of the Americas, 
which offer electronic bill payment services. Customers can pay 
their utility bills and other bills for as little as 30 cents.
    I would also like to mention that these financial 
institutions have affordable options to payday loans, which has 
become a major problem in many lower-income communities. And 
they also provide inexpensive ways for people to transfer money 
to their relatives in Mexico.
    Now, I would like to provide three examples of projects 
that the Woodstock Institute has worked on.
    First of all, I would like to talk about the alternative 
banking program which is offered by Bank One. We have been very 
pleased with that partnership and believe that the alternative 
banking program has made a major difference for many lower-
income people.
    However, the Alternative Banking Program is only available 
at eight branches in the city of Chicago, and we recommend that 
Bank One extend that program to reach more unbanked consumers 
in Chicago and other markets that Bank One operates in.
    Our second area is financial literacy partnerships. We have 
developed relationships with several Chicago-area banks. These 
efforts have resulted in the integration of financial literacy 
programs within each bank's retail banking division.
    Several bank-community partnerships have been established 
or strengthened through this work as well. And most 
importantly, the banks that we have been working with provide 
an opportunity for workshop participants to open accounts and 
to develop a relationship with customer service 
representatives.
    Third, the CDFI Fund has played an integral role in 
expanding lifeline banking opportunities by providing grants 
and investments to CDFI's. CDFI's have a track record of 
providing financial services in distressed urban and rural 
communities.
    One example is the Northeast Community Federal Credit Union 
which is located in San Francisco. Organized in 1981, this 
credit union is committed to meeting the unmet financial needs 
of lower-income community residents, many of whom are recent 
immigrants or refugees from societies where financial 
institutions are not trustworthy or accessible. Further, some 
people are concerned that maintaining a deposit account might 
violate citizenship or immigration regulations. Northeast 
Community works with local community organizations to provide 
information about U.S. financial institutions and it also 
allows consumers to establish accounts with flexible and 
alternative forms of identification.
    There are five lessons that I would like to share this 
morning that we have developed as a result of our relationships 
with banks and other organizations.
    The first lesson is the importance of program marketing. 
Marketing strategies should be developed by banks in 
relationships with community-based organizations and with other 
organizations that are involved in consumer issues.
    The second lesson is financial literacy. Banks should work 
in partnership with the community and other organizations to 
provide information on basic banking.
    The third lesson is the importance of bank staff. I think a 
major component of the success of these programs is the 
enthusiasm and expertise of bank staff and the value of 
courteous, front-line staff cannot be overstated.
    The fourth lesson is in account disclosures. Account 
disclosures should be translated from legalese into standard 
language so that they are understandable for consumers at all 
reading levels. In addition, many of these materials should be 
translated into Spanish and other languages as appropriate.
    Our fifth lesson is related to reducing costs for banks. It 
is important to consider how banks can cut costs and provide 
basic financial services. Most retail account products are not 
profitable. One banker told me that financial institutions make 
80 percent of their profit on retail products from 20 percent 
of their customers.
    Some ways we would like to suggest to reduce overhead and 
other service costs include promoting phone banking, which can 
cut costs for financial institutions, as well as consumers, and 
also to increase electronic access to banking. This option may 
require extensive financial literacy training, but we believe 
that in the long-term, that it is beneficial for the financial 
institution, as well as for the consumer.
    In closing, I would like to thank the Committee for 
inviting me here today to share my experiences on lifeline 
banking. This is a topic that is very near and dear to me.
    Expanding lifeline banking is essential to improving the 
financial personal health of millions of Americans. I am 
confident that with the sustained efforts of the Treasury 
Department, financial institutions, and community organizations 
we can shrink the number of unbanked consumers in this country.
    Thank you very much for this opportunity and I would be 
pleased to answer any questions you may have later.
    Chairman Sarbanes. Well, thank you very much. It is 
extremely helpful testimony.
    I want to say to all the panelists that the written 
statements that you have submitted will be included in full in 
the record. I had a chance to go through them, not in the 
detail that I hope to do subsequently to this hearing, but I do 
recognize the significant effort that was put into preparing 
these statements and they are going to be enormously helpful to 
us in terms of the ideas you have put forth and also the way 
you have outlined the existing situation. We do appreciate the 
effort that obviously went into them.
    Our concluding panelist is Mr. Rufino Carbajal, who is the 
Manager of the West Texas Credit Union--we are breaking out of 
the Chicago monopoly here.
    Ms. Grossman. We will count West Texas as the Midwest.
    [Laughter.]
    Chairman Sarbanes. The West Texas Credit Union, is a State-
chartered credit union with 11,000 members located in El Paso, 
Texas. They have made a special effort to reach out to minority 
populations by offering a range of products that meet their 
particular needs, including, as I understand it, lower-cost 
remittances.
    Mr. Carbajal. Correct.
    Chairman Sarbanes. Mr. Carbajal, we would be happy to hear 
from you.

               STATEMENT OF RUFINO CARBAJAL, JR.

                MANAGER, WEST TEXAS CREDIT UNION

                          ON BEHALF OF

            CREDIT UNION NATIONAL ASSOCIATION (CUNA)

    Mr. Carbajal. Thank you very much, Chairman Sarbanes. My 
regards to our Senator, Senator Gramm, who is not with us 
today.
    I am honored to be here this morning----
    Chairman Sarbanes. He was not able to make this hearing, 
but he particularly wanted to express his appreciation for the 
work that you are doing there in El Paso.
    Mr. Carbajal. Thank you.
    I am honored to be here this morning to present testimony 
on the plight of the unbanked and the underserved. I am Manager 
of the West Texas Credit Union, a $34 million credit union that 
serves about 11,000 members in El Paso, Texas. I am here on 
behalf of the Credit Union National Association.
    I am extremely pleased that the major focus of this 
morning's hearing is the implementation of the First Accounts 
Program, particularly in light of yesterday's announcements of 
the awards by the Treasury Department. We are gratified that 
Treasury has reached out to credit unions to apply for the 
First Accounts that many may be included as recipients of the 
grant awards.
    I am especially excited that West Texas Credit Union is a 
participant with CUNA National Credit Union Foundation and the 
El Paso Credit Union Affordable Housing Credit Union service 
organization is a grant recipient.
    Our grant of $92,504 will connect 4,000 unbanked low- and 
moderate-income individuals in El Paso and El Paso County to 
insured credit union accounts over a period of 2 years. Other 
grants to credit unions will provide over $2.85 million to 
credit unions in 
12 other States, reaching a potential of thousands of unbanked 
individuals. We are extremely grateful to have been chosen to 
receive these grants and look forward to making this program a 
huge success.
    Shifting to another important issue, I am proud to say that 
West Texas Credit Union has been offering its members the 
opportunity to wire money back to Mexico. We use the World 
Council of Credit Unions service called International 
Remittance Network, IRNet'. This service saves our 
users at least one-third the cost of using the high-cost money 
transfer agent.
    While many credit unions are leading the way in ensuring 
that immigrants have access to affordable remittance and 
financial services, these efforts would be significantly 
enhanced if Congress allows credit unions to provide their 
service to nonmembers within the field of membership. I am very 
excited that the House of Representatives has initiated 
legislation to do just that.
    I am equally proud that West Texas Credit Union is one of 
many credit unions that are among the leading providers of 
Individual Development Accounts. Chairman Sarbanes' 
announcement of this hearing referred to the inability of the 
unbanked to acquire financial assets and save for the future. 
If ever there was a product developed to serve exactly that 
purpose, it is the IDA. And if ever there was an institution 
developed to provide those accounts, it is the credit union, 
whose mission of ``People Helping People'' fits perfectly with 
the goals of the IDA. We look forward to the passage of the 
bill that will expand incentives for the IDA's.
    West Texas Credit Union, in partnership with the El Puente 
Community Development, began offering IDA's in October 2001. 
Once a participant reaches his or her goal, El Puente CDC will 
authorize the withdrawal of the funds. But before the funds are 

withdrawn the account holder must complete a course in 
financial literacy.
    Legislation currently before Congress would greatly enhance 
the number of IDA accounts in existence. The Savings For 
Working Families Act has been introduced both as a free-
standing bill and incorporated within other legislation. I urge 
the Senate to support this very important initiative.
    Credit unions recognize that it is necessary to offer some 
form of financial literacy training to successfully integrate 
the unbanked into the financial mainstream. That is why they 
have traditionally made financial education a part of their 
mission. Credit unions provide financial information and 
training to members on a one-to-one basis, and actively work in 
the schools to teach personal finance skills to children and 
teenagers. CUNA has formed a partnership with the National 
Endowment for Financial Education to teach the High School 
Financial Planning Program' to high school seniors 
across the Nation.
    Another exciting program offered by the West Texas Credit 
Union is our Affordable Housing Program. With the grant money 
from CUNA's National Credit Union Foundation and the Texas 
Credit Union League, the State Credit Union Foundation, eight 
credit unions located in El Paso, Texas, chartered and wholly-
own the El Paso Affordable Housing Credit Union Service 
Organization. The AHCUSO is an affordable mortgage and 
homeownership counseling agency whose mission is to provide 
financial literacy and homeownership counseling to thousands of 
low-income El Paso residents.
    The AHCUSO has partnered with the El Paso Housing Authority 
and has committed $1.8 million to the financing of affordable 
homes, of which approximately $500,000 has been closed. HUD 
provides downpayment assistance, and the financing and 
servicing is being done by the AHCUSO.
    Credit unions also recognize that consumers and their 
members must give viable options to avoid the traps of 
predatory lenders. Credit unions have stepped up their efforts 
to combat predatory lenders in neighborhoods by offering 
affordable alternatives for both payday loans and mortgage 
loans. Regrettably, however, the demand for these payday loans 
continues to increase and there are now more payday loans 
across the country than there are credit unions.
    Finally, CUNA applauds Chairman Sarbanes and other Members 
of the Committee for your commitment to eliminate predatory 
lending practices through the introduction of ``The Predatory 
Lending Consumer Protection Act of 2002.'' We look forward to 
reviewing the details of the bill and working with the 
Committee staff to support the passage of an effective 
antipredatory lending law.
    In conclusion, I have witnessed firsthand that poor people 
want to work and know that even with a little bit of savings, 
they can grow and thrive. Whether it is through the First 
Accounts Program, affordable housing programs, enhanced IDA's, 
expanded opportunities to serve their communities, or financial 
literacy, credit unions stand ready to meet this very important 
challenge.
    I thank you again for the opportunity to offer the views of 
credit unions on this very important topic.
    Chairman Sarbanes. Thank you very much, sir. We very much 
appreciate your being here with us today and the role that the 
credit union movement is playing in this field.
    I have just a few questions to put to the panel and then we 
will draw to a close.
    The Federal Reserve, in its 1998 survey of consumer 
finances, said that 48 percent of families--in other words, 
almost half, without a checking account, had previously owned a 
checking account at some time in the past. I was really brought 
up short by that figure. Here we are, talking about the 
unbanked. They do not have a checking account. And then we 
discover that half, at least according to this survey, 
previously had checking accounts. They were in the banking 
system. Now, what is behind this? Why did they drop out of the 
banking system and how much of a problem are they in terms of 
bringing them back in?
    It is one thing to say, well, these people have never been 
in the banking system for a lot of reasons, and you address 
that. It seems to me a somewhat different problem to say, well, 
these people were in the banking system and they got out of it. 
Does anyone want to address that? Michael?
    Mr. Barr. I am happy to start. That is quite a critical 
issue in terms of bringing low-income families into the banking 
system.
    The individuals who have been in the banking system and 
have come out might fall into, roughly speaking, two groups, 
those who have had problems with the system and voluntarily 
exited, and those who have exited because their accounts have 
been closed because of problems with not being able to manage 
their finances in a way that permits them to avoid writing 
checks with insufficient funds, primarily, but also because of 
not paying overdraft charges, or in some cases, fraud.
    I think it is important in looking at the unbanked not to 
think of them as an homogenous group, but as different segments 
of the market.
    Individuals who effectively have had credit problems with 
the system can still be brought back into the banking system. 
The question is, under what circumstances? And I think the 
tentative answer is that there are products and services that 
can be offered in a reasonably safe way, even to people who 
have had problems in managing finances in the past. Those are 
primarily accounts that do not have check-writing privileges, 
in which withdrawals can be done on an on-line debit basis. 
Automated money orders can be provided. And the risk of 
overdraft is negligible, with some technical exceptions for 
small institutions, those that use a different batching 
process. But for most institutions, accounts can be provided 
with very little risk of overdraft.
    So, I think those kinds of products could be quite 
attractive--both to people who have had problems and have 
involuntarily exited, and to people who have had problems and 
been effectively kicked out--and at lower cost and less risk to 
financial institutions.
    The second major component of the answer is financial 
education. And I think our panelists have all been uniform in 
believing that financial education is an important part of the 
answer.
    Chairman Sarbanes. Does anyone else want to answer that?
    Ms. Grossman. We have about 40,000 to 50,000 accounts. The 
vast majority of the accounts are people in low- and moderate-
income.
    And I realize I have to go back--I was writing down to do 
homework. One of our larger costs is the closing of accounts 
and the waiving of fees.
    For us, it is a big problem and I think Michael has hit it. 
It is not simple. The economy goes down. People need money. It 
is very easy to be mad at your bank and therefore, you are 
going to write a bad check because you have to be mad at 
somebody--why not a bank?
    But there are a variety of reasons and I think it is a real 
challenge to recognize that we have to have products and ways 
to deal with them that are not punitive, that do not demean 
people, and yet, still keep them so we do not lose money, so 
that it becomes a very unprofitable business.
    And I am going to talk to Michael later. I think we really 
need to look at just some of the data and see what happens to 
those 40,000, 50,000, what the costs are, what the fee waivers 
are, and begin to look at other institutions in the same way, 
because I think you have hit on a real hidden issue.
    Chairman Sarbanes. Let me ask this question, and I would 
like to get all the panelists to respond to this. Can the 
unbanked market be profitably served by financial institutions? 
In other words, can this all be done in a way that makes it 
economically self-sufficient? If we are really serious about 
getting the unbanked in, are we going to have to produce an 
underwriter from somewhere? What is the answer?
    Ms. Williams. Well, I am not a banker, but I do have an 
opinion about that question, of course, as you might expect I 
would.
    [Laughter.]
    According to experts that I have talked to, most retail 
products are not profitable. Retail products are offered to 
consumers to make them loyal customers of a bank and to enable 
the bank to cross-sell other products.
    Chairman Sarbanes. You mean as a general proposition.
    Ms. Williams. Right.
    Chairman Sarbanes. Yes, not just for the unbanked.
    Ms. Williams. That is right, in general. And one of the 
advantages that we found through the Alternative Banking 
Program at Bank One is that the bank has been able to cross-
sell products. They have sold Alternative Banking Program 
customers car loans, installment loans, home mortgages, 
certificates of deposits, and other products. And so, that is 
the first thing to consider in terms of profitability.
    I think it is also important to consider electronic banking 
alternatives. There are a number of new technologies that are 
being evolved. There are smart ATM's that can do all kinds of 
financial functions. There are ways to pay bills 
electronically. There are automatic money order machines that 
can also cut costs.
    Mr. Carbajal. Excuse me. Speaking from the credit union 
side of it. Our credit union has been a low-income designated 
credit union for many, many years. We deal with the low income, 
which, El Paso is, unfortunately, one of the poorest 
metropolitan areas in the Nation.
    I feel that our credit union has been successful. I believe 
that there is a niche out there. We just need to understand 
these types of people. You have to understand that it is a 
high-volume, labor-intensive type of operation. But the 
benefits are there. If you know how to deal with the under-
served, I think there is some financial benefits for the 
institution in the long run. So, I feel that there is. There is 
a lot that we can do out there for those people, and I think it 
can be profitable.
    Chairman Sarbanes. Ms. Morgan Williams.
    Ms. Morgan Williams. I guess I would like to start off by 
suggesting that I think that they have to be profitable. I 
think it is a very important question and it is an important 
aspect of this issue that we have to stay focused on.
    The reason we have to stay focused on it is that, in order 
for this to work, it needs to be sustainable. We have to make 
sure that both the product design and the product offerings are 
offered in a way that allows us to do well while we are doing 
good. It is important that they are profitable because you will 
increase the level of interest and the level of participation 
in the financial services industry, if we can keep an eye 
toward profitability.
    What is important, though, is that the R&D efforts are 
fairly significant. So when we look at supplemental support or 
subsidy support, it should really be in the early stages of 
product development and product design.
    Our objective with the ABP is to transition those accounts 
to mainstream accounts. We do a once-a-year look at the end of 
12 months, how many of these accounts would be appropriate to 
transition to mainstream accounts? We would expect those to 
move into our traditional banking products.
    Chairman Sarbanes. Does anyone else want to add anything?
    Ms. Grossman. Yes. I think there are segments of the market 
that are profitable. But I also, having been experienced in 
private banking, some of it is accommodation. We accommodate 
private bank customers. We make loans to them. We do weird 
things for them. We do not lose money, but we do not make money 
in the large private banks, in the major banks.
    So when you make a loan to a son-in-law or a cousin or you 
open an account for somebody's housekeeper, those are 
accommodations, and you look at the whole relationship and you 
say, well, we are really making money.
    The question becomes, I think it is the R&D. It is also 
beginning to think about them differently. Who are we 
accommodating? Will the State government put more money into an 
institution where they can make money on fees and services if 
they offer certain kinds of things? Are there ways of being 
creative and saying, we want it done, but we know that it is 
not going to serve the same kind of profit?
    It is not going to lose money, but it may not have the same 
return on equity as the other parts of the bank, and that means 
that the people who are doing that do not necessarily get the 
same kind of importance within the bank. So, I think we have to 
think about it very clearly and be honest that it is not as 
profitable as other businesses, but it does not lose money.
    Mr. Barr. Treasury research suggests that banks can serve 
the unbanked profitably on an ongoing basis. Electronic bank 
accounts offering debit card transactions can be profitably 
offered for fees of under $3.00 per month. Savings features, 
automated money orders or bill payment, and other 
electronically-based products can also be offered profitably at 
low fees that would be affordable and desirable for the 
unbanked. At least initially, Governmental support will be 
needed for financial institutions to make the necessary 
investments in research and development, expanded distribution, 
and training and marketing. Account opening costs will likely 
also need to be supported in the short-term as an incentive, in 
order to reduce the time it will take banks to recoup initial 
account opening costs. 
Financial education is not a function that banks will fund over 
the long-term, and will continue to need Governmental support 
for some time.
    Chairman Sarbanes. Can employers impact on this and are any 
of them doing it?
    Suppose you had an employer who said to a bank that was his 
bank, I really want all my employees to have an account. And I 
am setting out to try to accomplish that as their employer.
    Now, first of all, I do not know whether under State law, I 
guess, I would have to look into this. I should know the 
answer, I guess, whether an employer can say to all his 
employees, you are going to get your payment by an electronic 
transfer into a bank account, which everyone tells me is the 
cheapest--the Government now is doing that, in order to save 
money. And presumably, employers could save money.
    Now whether they can do that under existing law--how does a 
very large employer have to pay his employees? Does he actually 
have to give them a check or a payment under State law, or can 
he put it directly into a bank? I presume he can do that if the 
employee wants him to do that. But suppose the employee does 
not want to do that. Does anyone know the answer to that? You 
are the professor of law.
    Mr. Barr. Yes. But, unfortunately, not of State employment 
law. There is no Federal rule and I do not know any State 
banking rule that would touch on that issue. A lot of employers 
are in fact using direct deposit today. Employers, I think you 
rightly point out, are a critical part of how we can move 
forward to reach the unbanked.
    Direct deposit of payroll is an important way in which low-
income workers can have access to the banking system. And as 
you point out, it is less expensive for employers in terms of 
their 
payroll.
    I know within the Federal Government, we saved 42 cents a 
payment to move electronically from checks. It is certainly a 
greater efficiency for the payment system. It increases take-
home pay for their workers if their workers are not having to 
go to a check cashers. A lot of check cashers have mobile vans 
that go to large work sites and charge quite large sums to cash 
what could be easily converted into a payroll check. So, I 
think that it is an extraordinary opportunity to reach quite a 
large number of unbanked individuals at scale quickly.
    Ms. Morgan Williams. Most large companies offer electronic 
banking or direct deposit to their employees. And I would say, 
by and large, 80 percent of their employees partake in that. 
The challenge for employers is to the financial services 
options that an employee might choose because, generally, the 
direct deposit is with that corporation's bank. But most 
corporations participate in it. Our Bank at Work Program is one 
where we encourage employers, actually smaller employers, to 
encourage their employees to pursue banking relationships and 
direct deposits. Then the Paycard, the Value Card, is the other 
option that employers can offer to a community of employees 
that might not otherwise use banks.
    Chairman Sarbanes. Right. Now one of the things we are 
interested in which relates to this is financial literacy. And 
the Committee has held hearings on financial literacy. I am 
very pleased, of course, that the Treasury is now establishing 
a new office the Office of Financial Education.
    I did not get to ask Sheila Bair about that, but she has 
been 
active in that as well. It will be under the Assistant 
Secretary for 
Financial Institutions. It will be headed by a new Deputy 
Assistant Secretary. They have this Financial Education 
Initiative on Bank on Your Schools, a partnership with the 
schools.
    We think this is all extremely important. And it also 
becomes relevant as we address predatory lending, although I do 
not think that education can take the place of appropriate 
legislation or regulation. I think it has to be part of a 
package to try to do that.
    Now, Ms. Morgan Williams, as I understand it, you all have 
a very active educational program. Is that correct?
    Ms. Morgan Williams. Yes, that is correct.
    Chairman Sarbanes. Could you just again kind of outline 
that very quickly for us?
    Ms. Morgan Williams. Sure. In all the markets we operate 
in, and we are in 15 States across the country, we have 
approximately 50 individuals who are specifically focused on 
understanding both the product needs and the program needs of 
the communities we operate in. And those tend to be low- and 
moderate-income community focus. In each of those markets, we 
offer either paper-based or electronic-based financial literacy 
programs. They teach basic financial management, credit repair, 
homebuying counseling, a full stream of financial services 
options.
    In some markets, we offer financial literacy in high 
schools, where we are teaching high school students the 
appropriate thoughts around budgeting and planning as they 
prepare to leave high school and think about adult 
responsibilities around literacy.
    I also am responsible for the bank's community development 
activities in affordable housing. We offer financial literacy 
programs with faith-based organizations and in senior projects, 
where we have been a project participant. But we have a broad 
array of products and programs and services and a number of 
individuals who participate in delivering those.
    Chairman Sarbanes. Good.
    Mr. Carbajal, what do you all do?
    Mr. Carbajal. Yes. As a matter of fact, we have the same 
basic programs that they have in the city of El Paso. We work 
with the El Paso high schools.
    Very encouraging, though, is that this grant that we just 
received is going to be used for this purpose, to go out there 
to the unbanked, the under-served, and try to educate them.
    What we have done is we have partnered up with nonprofit 
institutions in El Paso, such as Project Bravo, YMCA, and those 
agencies or those nonprofit organizations, to help us educate 
our people in El Paso.
    I guess we have become a community-chartered credit union 
last year and I think that is going to give us the ability to 
be able to go out and reach more into the community, whereas, 
before, we were only limited to the members that we were 
serving. So, we are looking forward to that and with the 
program that we have put into place, we got it going at the 
beginning of the year. We have already put some homes out there 
for the low income and we are doing a lot of educating, or 
adding education to our community.
    Chairman Sarbanes. Good.
    Well, this has been a very good panel and we are extremely 
appreciative to you. We look forward to staying in touch. I 
hope we can call on each of you in the future for further 
counsel as we continue to try to address this issue.
    As I indicated in my opening statement, I think that it is 
an extremely important issue. It is very rewarding to see 
people who have kind of been on the outside, not all of a 
sudden, but slowly transition into becoming part of the system.
    I know you encounter that in the course of your daily work 
and I really commend all of you for what you are doing, and we 
thank you very much for coming today.
    Ms. Grossman. Thank you.
    Mr. Barr. Thank you.
    Chairman Sarbanes. The hearing stands adjourned.
    [Whereupon, at 12:08 p.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]

                  PREPARED STATEMENT OF SHEILA C. BAIR
             Assistant Secretary for Financial Institutions
                    U.S. Department of the Treasury
                              May 2, 2002

Introduction
    Chairman Sarbanes, Senator Gramm, and distinguished Members of the 
Committee, I appreciate the opportunity to appear before you this 
morning to talk about the unbanked and to bring you up to date with 
respect to First Accounts, a grant program administered by the Treasury 
Department, which is designed to help ``unbanked'' low- and moderate-
income individuals establish banking relationships with Federally 
regulated and insured financial institutions. Mr. Chairman, I commend 
you for focusing a national spotlight on this critical issue of 
expanding consumer access to mainstream financial services by convening 
today's hearing, as well as the hearings you held earlier this year on 
the remittance industry and financial education. The policy objective 
of First Accounts is embraced by Members of both parties. It is of 
great importance to me personally, to the Treasury Department, and to 
the Bush Administration.
    Secretary O'Neill recently noted that: ``We must work to ensure 
that all Americans have the knowledge and tools to build their own 
financial security. Ownership, independence, and access to wealth 
should not be the privilege of a few. They should be the hope of every 
American.'' Establishing a bank account at an insured depository 
institution is one of the basic tools necessary for individuals to 
build their own financial security. Expanding low- and moderate-income 
Americans' access to mainstream banking services is very much in line 
with the compassionate conservatism of President Bush to give all 
Americans the chance to fully participate in the benefits of our free 
economy. In a recent speech, President Bush defined this compassionate 
conservatism, by saying ``It is compassionate to actively help our 
fellow citizens in need. It is conservative to insist on responsibility 
and results.'' Consistent with this philosophy, we have strived to 
direct First Accounts funding to those initiatives which can be 
replicable, self-sustaining, and most importantly, promise to bring the 
greatest number of ``unbanked'' individuals into bank accounts.

Background
    Who are the unbanked? While most Americans have the comfort of 
keeping their money at insured depository institutions, other Americans 
use financial services of a different sort. They cash checks at a 
neighborhood storefront and pay bills in cash or with money orders. 
Easy and convenient perhaps, but often expensive, dangerous, and not 
economically productive. Simply put, the unbanked are people who do not 
have a banking relationship with a traditional financial institution, 
such as a commercial bank, a savings and loan association, or a credit 
union.
    Although there are few statistics available regarding the true size 
of the unbanked population in the United States, some estimates 
indicate that as many as 1 in 10 families, or approximately 10 million 
households, may not have bank accounts.\1\ According to a January 2002 
report, surveys have found that the groups most likely to be unbanked 
are lower-income households, households headed by 
African-Americans and Hispanics, households headed by young adults, and 
households that rent their homes.\2\
---------------------------------------------------------------------------
    \1\ Michael H. Moskow, Fostering Mainstream Financial Access: 
www.chicagofed.org/unbanked, Chicago Fed Letter, Number 162 (Feb. 
2001)(http://www.chicagofed.org/publications/fedletter/2001/
cflfed2001__162.pdf).
    \2\ John P. Caskey, Bringing Unbanked Households Into the Banking 
System, Capital Xchange (Jan. 2002) (http://www.brook.edu/dybdocroot/
es/urban/capitalxchange/article10.htm).
---------------------------------------------------------------------------
    Given the estimated size of the unbanked population in the United 
States, an obvious question is why do so many people remain outside of 
the mainstream banking system? Are they shut out of the system or have 
they made a conscious choice to not do business at traditional 
financial institutions? Surveys on this issue reveal varied responses 
to these questions.\3\ Some individuals who are unbanked cite financial 
reasons; they say that bank fees or minimum balance requirements are 
too high. Other unbanked individuals suggest that they choose to remain 
unbanked because the types of accounts offered by traditional financial 
institutions do not meet their needs. For example, a person may not 
write enough checks or have enough month-to-month savings to make it 
worthwhile to maintain an account. Attitudes toward banks also appear 
to be a factor as a large number of people surveyed indicated that they 
are not comfortable dealing with banks or letting them know their 
private financial information.
---------------------------------------------------------------------------
    \3\ Id.
---------------------------------------------------------------------------
Advantages to Being ``Banked''
    An individual should have the right to choose where he or she will 
seek financial services. The right to choose, however, is an illusory 
right if people do not have accurate and complete information that will 
enable them to make educated decisions and access to a range of 
financial service providers.
    The unbanked typically pay higher costs in the form of transaction 
fees for financial services than individuals with banking 
relationships. Recent Treasury research indicates that a minimum wage 
worker can pay an average of $18 per month for cashing paychecks at a 
check casher.\4\ A Social Security recipient would pay an 
average of $9-$16 a month to cash his or her risk-free Government 
check. Relying on alternative service providers as a source of credit 
is equally or more expensive. Annualized interest rates for loans from 
pawnshops, car-title lenders, payday lenders, and small loan companies 
can be as high as 100 to 500 percent.\5\
---------------------------------------------------------------------------
    \4\ Moser, supra note 1.
    \5\ Caskey, supra note 2.
---------------------------------------------------------------------------
    Individuals also face heightened safety and security risks as a 
result of having to conduct all financial transactions in cash. 
Carrying large amounts of cash is dangerous and keeping cash at home is 
risky. There have been a number of recent news stories describing how 
criminals have specifically targeted unbanked immigrants for robbery as 
they leave check cashing outlets because of the likelihood that these 
individuals are carrying a significant amount of cash.\6\ Other 
articles cite cases of people losing their life savings in fires 
because they kept it hidden in their homes in the form of cash.\7\ 
Unlike traditional depository institutions, alternative financial 
services providers cannot offer their customers deposit account 
products. Deposit accounts at insured financial institutions offer a 
safe place to keep money until the depositor is ready to spend it.
---------------------------------------------------------------------------
    \6\ CU's Testify Provisions of the Patriot Act Could Harm 
Immigrants, Credit Union Journal (Feb. 25, 2002).
    \7\ Angela Shah, Money in the Bank: Accounts Helping Wary 
Immigrants Park Cash Safely, Send It Home, The Dallas Morning News 
(Aug. 19, 2001).
---------------------------------------------------------------------------
    Let me emphasize that we do not question the validity of products 
offered by 
alternative service providers. They can offer the advantages of 
immediacy and con-
venience, for which the providers charge a premium. We do believe, 
however, that low- and moderate-income Americans should have choices, 
and those choices should include the ability to establish an account at 
a mainstream financial institution such as a bank, thrift, or credit 
union.
    Finally, establishing a banking relationship is taking a first step 
toward building a promising future. Individuals lacking basic financial 
services may have a reduced ability to manage their finances, and may 
be limited in planning and saving for 
the future. Without a banking account, it is nearly impossible to 
establish a sound 
credit record, which in turn is necessary to qualify for a car loan, 
home mortgage, or small business loan at reasonable rates. A 
traditional banking relationship offers the account holder an 
opportunity to become familiar with fundamental financial concepts that 
are critical in asset building and bank accounts provide a tool to help 
families fulfill their savings goals and manage their money.

Treasury Initiatives
    Through the First Accounts Program, Treasury is funding initiatives 
to connect unbanked low- and moderate-income individuals to mainstream 
financial services. The paramount goal of First Accounts is to move a 
maximum number of unbanked low- and moderate-income individuals to a 
banked status with an insured depository institution. We hope to 
accomplish this goal through the development of financial products and 
services that can serve as replicable models in meeting the financial 
services needs of unbanked individuals without the need for on-going 
public subsidies. Under First Accounts, financial institutions are 
encouraged to create low-cost accounts for unbanked families and to 
help bring more ATM's to safe places in low-income communities.
    Additional goals of the program include the provision of financial 
education to unbanked low- and moderate-income individuals to enhance 
the sustainability of the new financial relationships. We will also 
undertake research to evaluate the success of the funded projects and 
to understand what products, services, educational initiatives, 
marketing techniques, or incentives are needed to achieve the goals of 
the First Accounts Program. Treasury has great hope that the pilot 
programs funded through First Accounts will serve as replicable, self-
sustaining models for achieving the goal of moving a significant number 
of unbanked individuals into banking relationships with insured 
depository institutions.
    There are a number of reasons that individuals remain unbanked, 
including a lack of low-cost account products; a lack of convenient 
access; a perception of unprofitability; an individual's prior account 
problems; and a lack of customer financial literacy. First Accounts 
provides an opportunity and an incentive for entities to offer real 
solutions regarding the supply of and demand for traditional banking 
products and services in unbanked segments of the population. For 
example, nonprofit organizations may provide consumer financial 
education. Employers may provide convenient access. Financial 
institutions may demonstrate the profitability of serving previously 
unbanked customers through the development of new products designed to 
meet the needs of low- and moderate-income Americans.
    Treasury's First Accounts initiative was launched this past 
December 27 with a published notice of funds availability, a NOFA, in 
the Federal Register inviting applications for First Accounts 
grants.\8\ The amount currently available is approximately $8 million 
to fund projects that can serve as models to connect unbanked low- and 
moderate-income individuals to mainstream financial services.
---------------------------------------------------------------------------
    \8\ 66 Fed. Reg. 66,975 (Dec. 27, 2001).
---------------------------------------------------------------------------
    First Accounts applicants were required to propose, at a minimum, 
low-cost electronic checking, or other types of accounts either 
directly (if the applicant is an insured depository) or indirectly 
through one or more insured depository institutions. The NOFA put 
particular emphasis on trying to reach unbanked employees through their 
employers, as well as encouraging arrangements whereby employees can 
obtain account services building from services already provided by 
their employers' financial institutions. Applications were due March 20 
and a wide variety of entities were eligible, and in fact did, apply 
for the grants. The applicants included nonprofit organizations, 
insured credit unions and banking institutions, community development 
financial institutions, for-profit businesses, State agencies, Indian 
tribal governments, local governments, financial services electronic 
networks, and others. In total, Treasury received 231 applications from 
38 States. Eighty-nine percent of the proposed projects proposed to 
expand access of affordable financial services, 58 percent proposed to 
develop new financial products and services, and 88 percent proposed to 
educate unbanked individuals, employers, and institutions.
    During the last few weeks, we have been busy completing our review 
of the applications. The competitive review process involved evaluating 
the applications based on a number of different criteria including: 
likelihood of success, reasonableness of approach, extent to which a 
project becomes self-sustaining, extent to which projects are 
replicable, timeliness of rollout and estimated timeframe to achieve 
objectives, performance goal setting, applicant's experience and track 
record, and management capability. The application reviewers dedicated 
many hours to assessing the applications and preparing their 
recommendations, considering not only those factors listed above, but 
also geographical and institution diversity.
    After careful consideration, the Treasury Department is announcing 
its selections for First Accounts grants. The 15 awards totaling 
$8,357,234 promise to assist 35,445 ``unbanked'' low- and moderate-
income individuals in opening accounts at insured depository 
institutions. A complete list of grant awardees is attached to my 
testimony for inclusion in the record.
    The First Accounts grant awards are going to nonprofit 
organizations, insured depository institutions, insured credit unions, a community development financial institution, a faith-based organization, 
and a foundation. The awardees will carry out projects that provide 
financial literacy training, connect individuals to insured 
accounts, develop low- or no-cost products and services, and increase 
access to financial services through installation of automated teller 
machines. The projects are focused on a wide variety of unbanked people, 
including youth, new entrants to the workforce, recent immigrants, 
residents of low-income communities, residents in rural areas, native Americans living on reservations, people living in public housing, and families using child care facilities. Awardees pledge that the funded 
projects will cause 35,445 unbanked people to move to a banked status 
with an insured depository institution.
    Grant recipients will be targeting unbanked people in 25 States: 
California, Colorado, District of Columbia, Georgia, Idaho, Iowa, 
Illinois, Kentucky, Maryland, Michigan, Montana, New Jersey, New York, 
Nevada, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, 
Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
    Information on the 15 projects awarded grants and on First Accounts 
can be found at www.treas.gov/firstaccounts.
    Treasury's role in the First Accounts Program will not end with its 
selection of grant recipients. Treasury's on-going involvement with 
First Accounts will include evaluating the programs for progress, 
deliverables, and effectiveness on a regular basis. In addition, 
Treasury will receive periodic reports from the grant recipients. Once 
we have data on the success of programs, the Administration will 
consider the cost-effectiveness of continuing First Accounts or other 
similar types of programs.
    Another Federal program that is supported by the Administration and 
shares First Account's goal of encouraging the unbanked to move into 
the mainstream 
financial services sector is the Electronic Transfer Account (ETA) 
Program. The ETA Program, which is administered by Treasury's Financial 
Management Service, provides low-cost electronic bank accounts to 
Federal benefits recipients. To date, the ETA is offered in every 
State, the District of Columbia, and Puerto Rico through appoximately 
600 banks with more than 16,000 branch locations. Treasury plans to 
continue to examine the benefits of the ETA Programs and, if necessary, 
make recommendations to the Administration and Congress on how to 
coordinate its ETA efforts with First Accounts to ensure that the unbanked receive valuable services in the most cost-effective manner.
    Let me also highlight a number of other initiatives that Treasury 
is working on related to the unbanked. First, we have a number of 
efforts underway that are aimed at improving financial education. As 
part of our long-term commitment to improve financial education for all 
Americans, we are establishing a new office at Treasury. The Office of 
Financial Education (OFE) will be under the leadership of the Assistant 
Secretary for Financial Institutions and will be headed by a new Deputy 
Assistant Secretary. OFE will develop and implement financial education 
policy initiatives, and will oversee and coordinate our outreach 
efforts.
    One of Treasury's financial education initiatives is ``Bank on Your 
Schools,'' a partnership between schools and financial institutions 
that will promote financial education in low- and moderate-income 
areas. This initiative will encourage financial institutions to open 
student-run branches in high schools. Students will get hands-on 
experience running a bank or credit union, and they will learn about 
financial issues. We have been meeting with the major financial 
institution trade groups and gathering information to develop ways to 
expand these programs into low- and moderate-income communities. 
Through ``Bank on Your Schools'' programs, young people gain actual 
experience in opening and managing a bank account that can be carried 
over into their adult lives.
    Another topic that is often overlooked in the discussion of the 
unbanked is the remittance industry. The Inter-American Development 
Bank estimates that Latin American immigrants living in the United 
States send an average of $200 to their native countries an average of 
seven to eight times per year.\9\ These remittances have reached a 
level that surpassed $23 billion last year--about one fifth of total 
worldwide remittances.\10\ If current growth rates are maintained, 
cumulative remittances could reach $300 billion by 2010. Most 
immigrants send remittances through a small number of alternative 
financial services providers. Lack of competition in the remittance 
industry has contributed to high remittances costs. Although remittance 
charges have declined in the past 2 years, they still range from $15 to 
$26 for a typical $200 remittances. The cost varies depending on the 
type of institution used to send the money and the country where the 
money is being sent, but can often exceed 20 percent, when transmission 
fees and losses on the exchange rate are both factored in.
---------------------------------------------------------------------------
    \9\ Remittances to Latin America and the Caribbean, Multilateral 
Investment Fund/Inter-American Investment Bank (Feb. 2002) (http://
www.iadb.org/mif/website/static/en/study3.doc).
    \10\ Id.
---------------------------------------------------------------------------
    But this is changing. With our encouragement and support, more and 
more traditional financial institutions and credit unions are 
recognizing that there is a concrete opportunity to attract a diverse 
consumer base by offering low-cost remittance products. Offering 
remittance features as part of basic bank accounts can be an 
important marketing tool in reaching out to unbanked migrant workers. 
One important product that banks and credit unions can offer that money 
transmitters cannot is a Federally insured checking or savings account. 
This can lay the foundation for new customers to save and build assets, 
establish a banking relationship, and learn about important tools in 
personal finance. At the same time, the increased competition should 
result in lower remittance costs. We support any efforts made to make 
the process of sending remittances more affordable for the people who 
use it--most of whom are low-wage earners according to available data.

Conclusion
    In closing, I would like to commend the efforts of the many banks, 
credit unions, and community- and consumer-based entities and groups--
some of whom are represented on the panel that follows me this 
morning--who have recognized the problems faced by the unbanked segment 
of the population and undertaken initiatives to bring these individuals 
into the financial mainstream.
    Expanding access to financial services is a bipartisan issue that 
contributes to improved financial well-being among many low- and moderate-income individuals. Opening an account at an insured depository 
institutions provides the account holder with a number of benefits: the opportunity for wealth building; lower costs for financial services; 
security; knowledge of and familiarity with the fundamentals of personal finance; and the chance to build a credit history and qualify for credit 
on better terms. Because of these benefits, Treasury is committed to 
promoting policies that will encourage unbanked individuals to 
establish traditional account relationships with insured banks and 
credit unions.
    To accomplish this goal, Treasury has focused on both educating 
individuals about the benefits of being banked and persuading 
depository institutions to expand and tailor services for this 
underserved segment of the population. First Accounts addresses both of 
these goals. In addition, by developing replicable and sustainable 
models, the achievements of the First Accounts grant recipients do not 
have to be limited by the parameters of the original proposals. Other 
entities hopefully will see the success stories, and establish similar 
types of programs to serve the needs of a segment of the unbanked 
population that they may be uniquely qualified to reach. As a result, 
Treasury hopes that the effects of the First Accounts Program will 
reach far beyond the initial group of pilot programs.
    Thank you for the opportunity to appear here today. I look forward 
to working with the Committee on these issues in the future.

                         *    *    *    *    *

                             FIRST ACCOUNTS

Last Updated January 27, 2003

                    Summary of May 2002 Grant Awards

    The Treasury Department announced its selections for First Accounts 
grants on May 1, 2002. The 15 awards totaling $8,357,234 will assist 
35,445 ``unbanked'' low- and moderate-income individuals in opening 
accounts at insured depository institutions. The awardees were selected 
from among 231 applications from 38 States. Those applicants requested 
$129,895,034.
    The funds for First Accounts grants result from appropriations in 
the Consolidated Appropriations Act, 2001 and the Department of 
Transportation and Related Agencies Appropriations Act, 2001. The 
purpose of the appropriations is to develop and implement programs to 
expand access to financial services for low- and moderate-income 
individuals. Treasury published a notice of funding availability on 
December 27, 2001, inviting applications for projects that would move a 
maximum number of ``unbanked'' low- and moderate-income individuals to 
a ``banked'' status with an insured depository institution. The 
deadline for application submissions was March 20, 2002. In just over 1 
month, a team of reviewers scored the 231 applications on eight 
criteria: reasonableness of approach; likelihood of success; self-
sustainability; model qualities; timeliness; performance goal setting; 
experience of participating entities; and management capability.
    The First Accounts grant awards are going to nonprofit 
organizations, insured depository institutions, insured credit unions, a community development financial institution, a faith-based organization, a local government, and a credit union foundation. The awardees will carry out projects that provide financial literacy training, connect individuals to insured accounts, develop low- or no-cost products and services, and 
increase access to financial services through installation of automated 
teller machines. The projects are focused on a wide variety of unbanked people, that is, youth, new entrants to the workforce, recent immigrants, residents of low-income communities, residents in rural areas, native Americans living on reservations, people living in public housing, 
families using child care facilities.
    Grant recipients will be targeting unbanked people in 25 States: 
California, Colorado, District of Columbia, Georgia, Idaho, Iowa, 
Illinois, Kentucky, Maryland, Michigan, Montana, New Jersey, New York, 
Nevada, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, 
Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
    The paramount goal of First Accounts is to move a maximum number of 
unbanked low- and moderate-income individuals to a banked status with 
an insured depository institution through the development of financial 
products and services that can serve as replicable models in other 
communities without the need for on-
going public subsidies.
    Information on the 15 projects awarded grants follows.

                 FIRST ACCOUNTS GRANT AWARDS--May 2002

California
    Juma Ventures in San Francisco, California, has been selected to 
receive a First Accounts grant in the amount of $250,000. The grant 
funds will be used to connect 505 unbanked low- and moderate-income 
youth in San Francisco to accounts at 
insured depository institutions over 2 years. Juma Ventures is 
collaborating with Citibank to expand an Independent Development 
Account Program, offer banking and literacy training to youth employed 
in its six for-profit social enterprises and connect them to accounts, 
and begin a pilot in a high school. The pilot will use media-based 
banking literacy training to give unbanked high school students a 
practical knowledge of banking. The students will have the opportunity 
to open a low-cost checking or savings accounts with electronic access. 
The program will be expanded to additional schools in future years. 
Additional funding and in-kind contributions are coming from the 
Friedman Foundation, Hewlett Foundation, Merrill Lynch Foundation, 
private donations, and Citibank.

Colorado
    Mile High United Way in Denver, Colorado, has been selected to 
receive a First Accounts grant in the amount of $1,267,500. The grant 
funds will be used to connect 2,375 unbanked low- and moderate-income 
individuals in the Denver metropolitan area to insured accounts at 
insured depository institutions over 2 years. Mile High United Way is 
collaborating with Wells Fargo-West to provide low- and no-cost bank 
products including Individual Development Accounts and financial 
management and economic literacy training. The project will reach out 
to the unbanked population through employers and through community-
based organizations that include labor unions, faith-based and 
immigrant-serving organizations, and workforce development public 
agencies. Four area employers have committed to be involved in 
promoting the low- or no-cost bank products to employees. The project 
takes advantage of existing relationships between individuals and their 
employers and community-based organizations. If successful, the 
initiative will be expanded to five metropolitan areas in the State. 
Additional funding and in-kind contributions are coming from Wells 
Fargo-West, Mile High United Way, Rocky Mountain Mutual Housing 
Association, and Del Norte Neighborhood Development Corporation.

Georgia
    DeKalb County Extension Service in Decatur, Georgia, has been 
selected to receive a First Accounts grant in the amount of $271,000. 
The grant funds will be used to connect 330 unbanked low- and moderate-
income individuals in Decatur, Atlanta, and south central DeKalb County 
to insured accounts at insured depository institutions over 2 years. To 
implement the project, the Extension Service has formed The DeKalb 
Collaborative consisting of DeKalb County Workforce Development 
Department, Decatur High School, Decatur/DeKalb Housing Authority, 
Columbia Village Residential Properties, New Leaf, Women's Bureau, 
Stakeholder Partnerships Education and Communication, Decatur First 
National Bank, Wachovia Bank, Bond Community Federal Credit Union, and 
Branch Banking & Trust. The project will provide consumer education 
workshops in English and Spanish and issue certificates to those 
completing the curriculum. The certificates are taken to one of the 
four banking partners to open a low-cost banking account. ``Lunch and 
Learn'' sessions will be held with local employers; the DeKalb County 
government is committed to participate. The project focuses on 
education in small groups over an extended period of time, working 
through the partnering agencies and it focuses on choice of banking 
establishments. The DeKalb County Extension Service and the DeKalb 
Workforce Department are making in-kind contributions.

Iowa
    The Institute for Social and Economic Development in Coralville, 
Iowa, has been selected to receive a First Accounts grant in the amount 
of $301,000. The grant funds will be used to connect 265 unbanked low- 
and moderate-income individuals in 16 census tracts in Des Moines to 
insured accounts at insured depository institutions over 2 years. 
Called ``Bank On It!'', the project will provide 8 hours of financial 
literacy training, assistance to identify and resolve obstacles to 
opening a bank or credit union account, and links to other asset-
building programs to help meet family economic goals. Graduates will 
receive a certificate they can take to a partnering institution--
Bankers Trust, Wells Fargo, Iowa State, Financial Plus Credit Union--or 
another institution. Graduates can receive assistance for 6 months to 
assure keeping their account in good standing. The focus is on 
partnerships forged between social organizations and banks to overcome 
obstacles to accounts. Banking partners will present the last training 
session of the financial literacy training. The emphasis is on 
resolving problems, on building a firm financial knowledge, and 
maintaining the accounts. Additional funding is coming from the Annie 
E. Casey Foundation, Milbank Memorial Fund, and American Express 
Foundation.

Illinois
    The Center for Law & Human Services in Chicago, Illinois, has been 
selected to receive a First Accounts grant in the amount of $686,566. 
The grant funds will be used to connect 1,000 unbanked low- and 
moderate-income individuals in Chicago and Detroit to insured accounts 
at insured depository institutions over 2 years. The project is a 
partnership of The Center for Law & Human Services, Accounting Aid 
Society, Shorebank, National Consumer Law Center, and Consumer 
Federation of America. The project will attract individuals who will 
have their tax returns prepared free-of-charge and allow them to open 
bank accounts into which their income tax refund can be deposited. 
First, individuals open a savings account, followed by financial 
education and an opportunity to open a checking account. Year-round 
financial literacy classes are offered to provide the necessary skills 
to maintain and manage the new accounts. The project focuses on using 
the earned income tax credit and free tax preparation to encourage 
opening accounts. Each of the partners is making in-kind contributions 
to the project.

Kentucky
    Members First Federal Credit Union in Louisville, Kentucky, has 
been selected to receive a First Accounts grant in the amount of 
$130,000. The grant funds will be used to connect 600 unbanked low- and 
moderate-income individuals in 64 census tracts in Jefferson County, 
Kentucky, and Belle, West Virginia, to insured accounts at insured 
depository institutions over 1 year. The project will provide accounts 
with no minimum balance and no monthly fee. An automated teller machine 
will increase access in the West Virginia location. The project focuses 
on educating consumers about regular savings, working with limited 
resources, and understanding the true costs and benefits of financial 
services. Additional funding is contributed by the credit union and by 
foundations.

Michigan
    The Mission of Peach Housing Counseling Agency in Flint, Michigan, 
has been 
selected to receive a First Accounts grant in the amount of $592,654. 
The grant funds will be used to connect 660 unbanked low- and moderate-
income individuals in Genesee, Oakland, Saginaw, Lapeer, and Shiawasee 
Counties to insured accounts at insured depository institutions over 2 
years. The project will be implemented by a partnership of Mission, 
Fifth Third Bank, Genesee County Family Independence Agency, and local 
small businesses. Individuals will receive education, banking access, 
and counseling support during their transition to using banking 
services. The project will install three ATM's within the five counties 
to increase access to financial services. The focus of the project is 
on unmarried, under-employed, and unemployed persons. Additional 
funding and in-kind contributions are coming from Fifth Third Bank, 
Michigan State University Interns, and Michigan State University 
Community and Economic Development Program.

Montana
    Native American Development Corporation, a community development 
financial institution in Billings, Montana, has been selected to 
receive a First Accounts grant in the amount of $425,812. The grant 
funds will be used to connect 290 unbanked low- and moderate-income 
individuals on Wind River, Crow, Northern Cheyenne, and Flathead 
Reservations to insured accounts at insured depository institutions 
over 2 years. The project will promote financial literacy, giving 20 
hours of college credit or TANF credit, award certificates accepted by 
the CDFI, and provide free checking and savings accounts. Three 
automated teller machines will be installed to increase access to 
financial services. The project focuses on employers' involvement at 
three levels: employed participants will seek direct deposit with their 
employers; employers with five or more employees participating in the 
project will join the Coordinating Team; and the Coordinating Team will 
serve as advisors to the project. Additional funding will come from 
First Interstate Bank and J.M. Cozzens.

New York
    National Credit Union Foundation in Washington, DC, in 
collaboration with the New York Credit Union Foundation has been 
selected to receive a First Accounts grant in the amount of $765,806. 
The grant funds will be used to connect 2,100 unbanked low- and 
moderate-income individuals in rural and metropolitan counties of New 
York State--Albany area; New York City; Buffalo/Niagara area; and 
Tompkins, Washington, Warren, and Saratoga Counties--to insured 
accounts at insured depository institutions over 2 years. The New York 
Credit Union League, working with five credit unions, Cornell 
University, and Cornell Cooperative Extension will provide low-cost 
accounts to individuals new to the workforce at urban, metropolitan, 
and rural credit unions. This is an employer-based project in which 
employers will identify employees and provide training space for an 
educational component--the WorkForce Development Initiative--delivered 
by Cornell Cooperative Extension. Four portable automated teller 
machines will be used for education. The project 
focuses on new workforce entrants.
    Additional funding and in-kind contributions will be coming from 
the New York Credit Union Foundation and the New York State Credit 
Union League.

North Carolina
    Latino Community Credit Union in Durham, North Carolina, has been 
selected to receive a First Accounts grant in the amount of $1,334,000. 
The grant funds will be used to connect 6,600 unbanked low- and 
moderate-income individuals in two North Carolina regions to insured 
accounts at insured depository institutions over 2 years. The project 
will open two branches of the Latino Community Credit Union to provide 
low-cost electronic accounts, on-site financial education, an employer 
outreach program, and special deposit products to meet the needs of 
Latino immigrants. The project focuses on Latino immigrants in nonurban 
areas of the State. The State Employees' Credit Union is making an in-
kind contribution to the project.

Ohio
    Fifth Third Bank in Columbus, Ohio, has been selected to receive a 
First Accounts grant in the amount of $760,863. The grant funds will be 
used to connect 1,000 unbanked low- and moderate-income individuals in 
south, near east, near north, and west sides and the north east 
quadrant of Columbus to insured accounts at insured depository 
institutions over 2 years. The Bank is collaborating with the Ohio CDC 
Association, The Ohio State University Extension Center, Homes on The 
Hill, Columbus Neighborhood Housing Services, MiraCit Development 
Corporation, South Side CAN, and Northside Development Corporation in 
``Community Partners Banking on the Unbanked.'' The project will 
provide financial and economic literacy training, install three 
automated teller machines, and connect individuals to Totally Free 
Checking accounts. Four public-sector employers--City of Columbus, 
Central Ohio Transit Authority, Columbus Metropolitan Housing 
Authority, and Columbus Public Schools--are committed to market the 
program to their employees. The project is a collaborative, city-wide 
model to reach unbanked persons throughout the community. Additional 
funding and in-kind contributions are coming from Fifth Third Bank.

Texas
    National Credit Union Foundation in Washington, DC, in 
collaboration with El Paso Credit Union Affordable Housing, a credit 
union service organization, has been selected to receive a First 
Accounts grant in the amount of $92,504. The grant funds will be used 
to connect 4,000 unbanked low- and moderate-income individuals in El 
Paso and El Paso County to insured accounts at insured depository 
institutions over 2 years. The service organization will work with 
eight credit unions to reach out and engage unbanked persons in their 
areas to low-cost electronic checking and savings accounts. In 
addition, a homeownership counselor located at each credit union will 
explain how to take advantage of account features. Additional funding 
and in-kind contributions are coming from National Credit Union 
Foundation, Texas Credit Union Foundation, and the eight participating 
credit unions--El Paso Area Teachers Federal Credit Union, El Paso Bell 
Federal Credit Union, Fort Bliss Federal Credit Union, Golden Key 
Federal Credit Union, Government Employees Credit Union of El Paso, 
Mountain Star Federal Credit Union, and West Texas Credit Union.

Wisconsin
    Legacy Bank in Milwaukee, Wisconsin, has been selected to receive a 
First Accounts grant in the amount of $342,467. The grant funds will be 
used to connect 500 unbanked low- and moderate-income individuals in 
Milwaukee to insured accounts at insured depository institutions over 1 
year. The bank has established an alliance with the Child Care 
Directors' Group and the Early Childhood Council of Milwaukee to bank 
child care providers, providers' employees, and the parents served by 
the providers and to give on-going support and services to ensure the 
sustainability of the banking relationship. Three automated teller 
machines will be installed, including one at a child care facility used 
by 1,500 adults weekly. The project focuses on the child care industry 
and on maintaining accounts that are established. In addition to 
conducting seminars on how to use bank products, Legacy Bank will 
monitor accounts weekly. Problematic customers will be invited for 
additional education and counseling with Family Services of Milwaukee 
and the University of Milwaukee-Wisconsin Extension. Additional funding 
is coming from Legacy Bank.

Mid-Atlantic Region
    Boat People S.O.S. in Falls Church, Virginia, has been selected to 
receive a First Accounts grant in the amount of $604,492. The grant 
funds will be used to connect 1,120 unbanked low- and moderate-income 
individuals in the District of Columbia; Northern Virginia; Suburban 
Maryland; Camden, New Jersey; Philadelphia, Pennsylvania; and Hampton 
Roads, Virginia to insured accounts at insured depository institutions 
over 2 years. The project will target Vietnamese refugees and 
immigrants in the United States for less than 10 years and individuals 
60 years of age and over to open bank accounts with its partner 
Citibank, which is offering no-charge or low-charge checking accounts 
and workshops on financial literacy. Individuals will receive free tax 
counseling and tax return preparation and individual development 
account enrollment, if eligible. Beginning in the mid-Atlantic States, 
the project will spread to 12 locations across the United States. Local 
partnerships of community-based organizations will continue the 
activities. Citibank and volunteers from the community-based 
organizations are making in-kind contributions to the project.

Northwestern Region
    National Credit Union Foundation in Washington, DC, in 
collaboration with Washington Credit Union League has been selected to 
receive a First Accounts grant in the amount of $532,570. The grant 
funds will be used to connect 14,100 unbanked low- and moderate-income 
individuals in California, Nevada, Washington, Oregon, Idaho, Montana, 
North Dakota, and Utah to insured accounts at insured depository 
institutions over 18 months. The project will provide basic consumer 
financial education and the individuals will develop responsible, low-
cost, trusting relationships with mainstream financial institutions. 
Participants will also gain access to affordable international money 
transfer services at greatly reduced costs through the credit unions 
using IRNet'. The project will be implemented through a 
network of experienced financial specialists in each of the eight 
States. Twenty-seven credit unions are participating. The project 
focuses on financial literacy in rural areas as a means of connecting 
individuals to insured accounts.
                               ----------
                 PREPARED STATEMENT OF MICHAEL S. BARR
                       Assistant Professor of Law
                   University of Michigan Law School
                              May 2, 2002

    Chairman Sarbanes, Ranking Member Gramm, and distinguished Members 
of the Committee, I appreciate the opportunity to be here today to 
discuss how to bring more Americans into the financial services 
mainstream.
    My testimony today is based on my experience serving as Deputy 
Assistant Secretary of the Treasury for Community Development Policy, 
and research undertaken with the assistance of the Ford Foundation as a 
nonresident Senior Fellow at the Brookings Institution and now an 
Assistant Professor at the University of Michigan Law School.\1\
---------------------------------------------------------------------------
    \1\ See generally, M. Barr, Access to Capital and Financial 
Services in the 21st Century: Five Challenges for the Bush 
Administration and the 107th Congress, http://www.brook.edu/urban/
capitalxchange/article4.htm, reprinted in 16 Notre Dame Journal of Law, 
Ethics & Public Policy 101 (2002). I am exploring the issues raised in 
this testimony in greater detail in an academic article in progress, 
``Banking the Unbanked,'' the research for which is being funded by the 
Ford Foundation and supported by the Brookings Institution.
---------------------------------------------------------------------------

The Unbanked
    Access to basic financial services--owning a bank account, having 
the tools to manage household finances, and being able to save for the 
future--is critical to success in the modern American economy. Yet 
today, nearly 10 million U.S. households--9.5 percent of U.S. 
households--lack the most basic financial tool, a bank account. Twenty-
two percent of low-income families--over 8.4 million families earning 
under $25,000 per year--do not have either a checking or savings 
account.\2\
---------------------------------------------------------------------------
    \2\ A. Kennickell et al., Recent Changes in Family Finances: 
Results from the 1998 Survey of Consumer Finances, Federal Reserve 
Bulletin, January 2000.
---------------------------------------------------------------------------
    The consequences of not having access to mainstream financial 
services can be 
severe.
    First, the ``unbanked'' face high costs for basic financial 
services. For example, a 2000 Treasury study found that a worker 
earning $12,000 a year would pay approximately $250 annually just to 
cash payroll checks at a check cashing outlet,\3\ in addition to fees 
for money orders, wire transfers, bill payments, and other common 
transactions. Regular payments with low credit risk that could be 
directly deposited into bank accounts, with significantly lower payment 
systems costs, form the bulk of checks cashed at these check cashing 
outlets: nearly 80 percent of checks cashed at check cashing outlets 
are regular payroll checks, and another 16 percent are Government 
benefit checks.\4\
---------------------------------------------------------------------------
    \3\ Survey of Non-Bank Financial Institutions, U.S. Department of 
the Treasury, April 4, 2000.
    \4\ Check cashers focus on these checks to reduce credit risk. 
These operations often require extensive efforts to reduce risk of 
fraud, and credit risk from checks from unknown and/or small employers.
---------------------------------------------------------------------------
    The costs of these basic financial transactions can undermine 
public initiatives to move families from welfare to work, as former 
welfare recipients often lack access to the banking system, and pay 
high fees to cash their checks. High cost financial services can also 
diminish the effectiveness of the Earned Income Tax Credit (EITC), a 
tax incentive that rewards work and helps bring families out of 
poverty. One survey found that 44 percent of a sample of EITC 
recipients in inner-city Chicago used a check cashing service to cash 
their Government refund check. EITC recipients, lacking savings or 
access to other forms of short-term credit, are also likely to use 
high-cost refund anticipation loans.
    Second, low-income families need to save to cushion themselves 
against personal economic crises, such as injury or loss of a job, and 
to save for key life events, such as buying a home, sending their 
children to college, or entering old age. Yet low-income families, 
particularly those without bank accounts, often lack any regular means 
to save.\5\ Bill Gale of the Brookings Institution has shown that, 
after controlling for key factors, low-income households with bank 
accounts were 43 percent more likely to have financial assets than 
households without bank accounts.\6\ Moreover, the tax system, through 
which the bulk of Government savings benefits are provided, largely 
subsidizes savings for higher-income households. The Treasury 
Department estimates that more than two-thirds of tax expenditures for 
pensions go to households in the top 20 percent of the income 
distribution, while the bottom 40 percent get only 2 percent of the tax 
benefit.\7\ Most low-income workers work for firms without savings 
plans or are themselves not covered by such plans.\8\ Bank 
accounts can be important entry points for the provision of regular 
savings plans 
for low-income workers, for example, through payroll deduction.
---------------------------------------------------------------------------
    \5\ See generally, S. Beverly & M. Sherraden, Institutional 
Determinants of Saving: Implications for Low-Income Households and 
Public Policy, Journal of Socio-Economics.
    \6\ W. Gale & S. Carney, Asset Accumulation Among Lower-Income 
Households, prepared for Benefits and Mechanisms for Spreading Asset 
Ownership in the United States, Ford Foundation Conference, December 
1998.
    \7\ P. Orszag & R. Greenstein, Toward Progressive Pensions: A 
Summary of the U.S. Pension System and Proposals for Reform,'' 
background paper for ``conversation on Coverage,'' Pension Rights 
Center, Washington, DC, July 24-25, 2001. Hereinafter, Orszag & 
Greenstein.
    \8\ Id.
---------------------------------------------------------------------------
    Third, the unbanked are also largely cut off from mainstream 
sources of credit necessary to leverage their hard work into financial 
stability. Without a bank account, it is more difficult and more costly 
to establish credit or qualify for a loan. A Federal Reserve study 
found that a bank account was a significant factor--more so than 
household net worth, income, or education level--in predicting whether 
an individual holds mortgage loans, automobile loans, and certificates 
of deposit.\9\ Account ownership in and of itself is no panacea, 
however; even low-income individuals with bank accounts often lack 
savings, and turn repeatedly during the year to payday lenders, who 
charge on average 474 percent APR.\10\ Thus, strategies to bring the 
unbanked into the financial services mainstream need to include 
initiatives designed to increase savings for short-term financial 
stability and improve access to less expensive forms of credit where 
appropriate, as, for example, with overdraft protection or account-
secured loans.
---------------------------------------------------------------------------
    \9\ J. Hogarth and K. O'Donnell, Banking Relationships of Lower-
Income Families and the Governmental Trend Toward Electronic Payment, 
Federal Reserve Bulletin, July 1999.
    \10\ See Consumer Federation of America Payday Lender Survey 2000. 
This APR is the equivalent of a $36 fee for a 2 week, $200 loan. 
Indiana's Department of Financial Institutions found that consumers 
took an average of 13 loans per year, 10 of which were rollovers of 
earlier loans. An Illinois Department of Financial Institutions survey 
found an average of 10 loan contracts over 18 months.
---------------------------------------------------------------------------
Barriers to Banking
    While the financial system works extraordinarily well for most 
Americans, many of the low- and moderate-income individuals face a 
number of barriers to account ownership.
    First, regular checking accounts may not make economic sense for 
many lower-income families.\11\ Consumers who cannot meet account 
balance minimums for a checking account at a bank pay high monthly 
fees, and most banks also levy high charges for bounced checks that 
low-income families with little or no savings face a high risk of 
paying and can ill-afford. Financial institutions may also charge high 
fees for their money orders or other products that their typical 
customers do not often use.
---------------------------------------------------------------------------
    \11\ The 1998 Survey of Consumer Finances asked unbanked 
individuals why they did not own a checking account. The most cited 
reasons were not writing enough checks to make an account worthwhile, 
minimum balances and services charges were too high, not having enough 
money, and not wanting to deal with banks. The last factor may or may 
not have solely economic motivations. Id.
---------------------------------------------------------------------------
    Studies have confirmed that many of the unbanked would become 
``banked'' if they found a product that worked for them.\12\ In fact, 
the unbanked have responded to account products tailored to their 
needs. For example, Banco Popular of Puerto Rico introduced Accesso 24, 
an electronic account, with no minimum monthly balance, free direct 
deposit, unlimited ATM access, and a low monthly fee. The bank has 
enrolled tens of thousands of customers in the product since 1995.
---------------------------------------------------------------------------
    \12\ ETA Conjoint Research, Dove Associates, May 1999, 
www.fms.treas.gov/eta/conjoint.pdf.
---------------------------------------------------------------------------
    Cultural issues and reluctance to use banks may matter, but many of 
the unbanked already use, or have used, the banking system. Nearly half 
the unbanked, according to one study, use banks, thrifts, or credit 
unions to cash checks,\13\ 
although the figure may be significantly lower in some inner-city 
communities.\14\ 
Between 48 and 70 percent of the unbanked have had an account at a 
financial institution at some time in the past.\15\
---------------------------------------------------------------------------
    \13\ J. Caskey, Lower Income Americans, Higher Cost Financial 
Services, Filene Research Institute and Center for Credit Union 
Research, University of Wisconsin-Madison, 1997.
    \14\ S. Rhine et al., The Role of Alternative Financial Services 
Providers in Serving LMI Neighborhoods, Changing Financial Markets and 
Community Development, Federal Reserve Conference, April 5-6, 2001 
(only 15 percent of surveyed unbanked households used financial 
institutions to cash checks in Chicago).
    \15\ Compare Kennickell (2000) (48 percent) with Caskey (1997) (70 
percent).
---------------------------------------------------------------------------
    Second, many unbanked persons may not qualify for conventional bank 
accounts because of past problems that these persons have had with the 
banking system. Nearly seven million individuals are currently recorded 
as having had their accounts closed for prior problems, such as writing 
checks with insufficient funds or failing to pay overdraft charges, in 
the ChexSystem, a private clearinghouse used by most banks to decide 
whether to open bank accounts for potential customers.\16\ Records of 
prior problems are kept in the system for 5 years, during which time 
these individuals will be unable to open a conventional bank account at 
most banks, thrifts, and credit unions. While some individuals 
undoubtedly pose undue risk for account ownership, many potential 
customers could readily and responsibly use bank accounts. Banks could 
obviate this concern by working with the private clearinghouses to 
better distinguish among types of past problems; by offering accounts 
contingent on completion of financial counseling; and by offering 
electronically-based accounts with on-line bill payment or automatic 
money orders, and without check-writing privileges, that pose little 
risk of overdraft.
---------------------------------------------------------------------------
    \16\ P. Beckett, Banks Are Using a National Database to Blacklist 
Customers for Slip-Ups, Wall Street Journal, Aug. 1, 2000.
---------------------------------------------------------------------------
    Third, while many urban communities contain adequate numbers of 
both banking institutions and alternative financial services providers, 
in some low-income urban and rural communities, banks, thrifts, and 
credit unions are not as readily accessible to potential customers as 
such institutions are in higher-income areas. A 1997 Federal Reserve 
Board study found that low-income central city neighborhoods have fewer 
bank offices per capita than higher-income areas and those outside the 
central city.\17\ Similar patterns may persist in the distribution of 
ATM's: In New York and Los Angeles, there are nearly twice as many 
ATM's per resident in middle-income zip codes as there are in low-
income zip codes, according to 2000 Treasury Department research.
---------------------------------------------------------------------------
    \17\ R. Avery et al., Changes in the Distribution of Banking 
Offices, 83 Federal Reserve Bulletin 723 (September 1997).
---------------------------------------------------------------------------
    Fourth, financial institutions may be reluctant to expend the 
resources for research, product development, training, marketing, and 
education, necessary to expand financial services to lower-income 
clientele. Financial institutions may need incentives to pursue 
research and product development with respect to accounts for low-
income customers. Further market research would help to define the 
product needs of low-income families and existing products will likely 
need to be modified to serve this clientele.
    Marketing of new products to low-income persons, and training of 
local banking personnel, are both critical to the success of any new 
product development, yet given the expense and the expected low 
returns, are often not fully pursued even when financial institutions 
decide to become involved with offering financial services to low-
income customers. If the unbanked do not know about the availability of 
new products and services, they are not likely to seek out financial 
services at banking institutions. If local banking personnel are not 
informed about new offerings, the unbanked will find it difficult to 
open accounts even where local branches are convenient and accessible.
    Moreover, at least for a segment of the low-income population, lack 
of financial education with respect to account ownership, budgeting, 
saving, and credit management is a significant barrier to personal 
financial stability. The benefits of financial education are not likely 
to be fully captured by the financial institution, so such education at 
any scale will likely need to be funded from sources in addition to the 
financial institution.

Expanding Access to the Financial Services Mainstream
    While important challenges are still largely in front of us, some 
progress has been made in recent years in expanding access to financial 
services. The period 1995 to 1998 marked a decline in the percentage of 
low-income families who are unbanked from 25 to 22 percent.\18\ This 
decline in the percentage of unbanked may reflect in part strong 
economic growth in the late 1990's that improved the incomes of 
households at the bottom of the income distribution for the first time 
in decades.
---------------------------------------------------------------------------
    \18\ See Kennickell (2000).
---------------------------------------------------------------------------
    The Treasury Department's efforts to increase electronic payment of 
Federal benefits, pursuant to the Debt Collection Improvement Act of 
1996,\19\ has also helped to spur innovation in this area. Under 
Treasury's Electronic Funds Transfer (EFT '99) program, direct deposit 
into bank accounts has increased as a portion of all Federal benefit 
payments from 58 percent in 1996 to 76 percent in 2001. This increase 
in benefit payments reflects in part an increase in direct deposit to 
existing accounts, and in part an increase in the percentage of benefit 
recipients who have obtained bank accounts.
---------------------------------------------------------------------------
    \19\ Public Law 104-134 (1996).
---------------------------------------------------------------------------
    Moreover, Treasury launched the Electronic Transfer Account (ETA), 
a low-cost electronically-based bank account for Federal benefit 
recipients.\20\ Under the program, Treasury provides financial 
institutions offering ETA's with a one-time payment of $12.60 per 
account to offset the costs of opening the accounts.\21\ As of spring 
2002, nearly 600 banks, thrifts, and credit unions were offering ETA's 
at over 18,000 locations nationwide.\22\ Over 28,000 benefit recipients 
have opened these ETA's thus far, and new ETA account holders are being 
signed up at a rate of over 1,000 per month. The ETA could make faster 
progress were additional funds made available for marketing and 
training.\23\ Anecdotally, banks are reporting that they are also 
signing up more than three direct deposit relationships into regular 
banking accounts for every ETA opened.
---------------------------------------------------------------------------
    \20\ ETA's are individually owned bank accounts that accept 
electronic Federal benefit, wage, salary, and retirement payments, and 
other deposits as permitted by the offering financial institution. 
Banks may charge up to $3 per month for these accounts. The accounts 
permit at least four cash withdrawals per month, require no minimum 
balance, and provide the same consumer protections as other accounts.
    \21\ Research conducted for the Treasury Department by Dove 
Associates concluded that the average cost of opening an ETA account is 
$12.60. Actual costs vary significantly by institution. The $12.60 does 
not include costs for marketing, training, of education, technology 
platform changes, or research. Treasury estimates from other account 
products suggest that marketing ETA's would cost $9 to $11 per account.
    \22\ The largest banks offering ETA's include Bank One, Bank of 
America, Fleet Bank, J.P. Morgan Chase Bank, U.S. Bank, and Wells 
Fargo. The top five ETA providers are Banco Popular de Puerto Rico, 
Bank of America, Wells Fargo, Union Bank, and U.S. Bank. EFT Exchange, 
Spring 2002.
    \23\ Funding for the Treasury Department's EFT '99 public education 
campaign ended in September 2001.
---------------------------------------------------------------------------
    More recently, a number of banks, thrifts, and credit unions have 
begun to experiment with a variety of products designed to serve the 
needs of low-income individuals. As I mentioned, Banco Popular has made 
great strides in reaching the unbanked of Puerto Rico. In the States, 
Bank One, as you will hear today, is experimenting with using a broader 
range of credit criteria for opening accounts. Shorebank has focused on 
bringing EITC recipients into the banking system.\24\ Fleet is working 
with a nonprofit organization, Doorways to Dreams, to create an 
Internet platform for low-income savers.
---------------------------------------------------------------------------
    \24\ Shorebank is a premier example of a Community Development 
Financial Institution (CDFI), a specialized financial intermediary 
serving low-income communities. Of the 553 CDFI's certified to date by 
the Treasury Department's CDFI Fund, 159 are banks, thrifts, or credit 
unions offering depository services. In a 2000 survey, 21 CDFI's 
provided 141,440 checking and saving accounts to low-income customers. 
These accounts had balances averaging $1,815. These depository CDFI's 
also offered 985 Individual Development Accounts (IDA's) with an 
average balance of $395 per account. Testimony of Tony T. Brown, 
Director, CDFI Fund, Before the Senate Appropriations Subcommittee on 
VA, HUD, and Independent Agencies, Hearing on fiscal year 2003 
Appropriations, April 24, 2002, www.treas.gov/press/releases/
po3037.htm.
---------------------------------------------------------------------------
    A number of banking institutions, including Wells Fargo, have 
recently begun to work with the Mexican government to accept Mexican 
consular identification documents for Mexican immigrants in the United 
States seeking to open bank accounts. Similarly, recent efforts to 
reduce the costs of sending remittances abroad, such as Bank of 
America's dual-ATM card, hold promise for bringing immigrant 
communities into the banking system. President Bush and Mexican 
President Vicente Fox have made progress on reducing the costs and 
increasing the benefits of the nearly $10 billion in annual United 
States-initiated remittances to Mexico issue an important part of their 
mutual agenda.\25\
---------------------------------------------------------------------------
    \25\ See Partnership for Prosperity, Report to President Vicente 
Fox and President George W. Bush, Monterrey, Mexico, March 22, 2002, 
pp. 3-4, 9; See also, Inter-American Development Bank's Multilateral 
Investment Fund, www.iadb.org/mif/website/static/en/remit.asp 
(describing remittance patterns). The World Council of Credit Unions 
has developed a project to provide for lower-cost remittances initiated 
at U.S.-based credit unions. A major barrier is the development of ATM 
infrastructure in recipient countries.
---------------------------------------------------------------------------
First Accounts
    In this regard, Treasury's First Accounts initiative could play an 
important role in fostering innovation by the financial services 
sector. With the Government helping to serve as a catalyst, banks can 
harness technology to reduce costs, lower risk, and democratize access 
to financial services for low-income families. Transaction accounts 
with debit cards but no checks can reduce risk to banks and account 
holders by preventing accounts from being overdrawn; lower the cost of 
processing each transaction and increase the efficiency of the payments 
system by reducing paper checks; expand availability much more cheaply 
than branches; and decrease the safety risk to low-income customers who 
cash their regular payroll or benefit checks and carry large sums of 
cash.
    The First Accounts initiative grew out of Treasury's research on 
the financial services needs of the unbanked for EFT '99. Treasury 
estimated that at least half of the 10 million unbanked households do 
not receive Federal benefit payments and thus would be ineligible to 
open ETA's. In addition, banks participating in the ETA program 
reported that significant numbers of unbanked persons who were not 
Federal benefit recipients had sought to open ETA's; these persons are 
part of the likely target market for First Accounts. Treasury research 
suggests that unbanked persons who do not receive Federal benefit 
payments are, on average, younger, more urban, more likely to be from a 
minority community, have larger families, and are more likely to be 
receptive to signing up for electronically-based accounts than the 
unbanked Federal-benefit-recipient population.
    As initially conceived, the First Accounts initiative had four main 
components:
    First Accounts. Treasury would help to offset the costs financial 
institutions incurred in offering low-cost, electronic banking accounts 
to low-income individuals.
    Access. Treasury would help to defray the costs of expanding access 
to ATM's, POS, Internet, or other distribution points in low-income 
neighborhoods with low 
access.
    Financial Education. Treasury would support financial institution 
and nonprofit initiatives to provide financial education and counseling 
to low-income households.
    Research. Treasury would fund research into the financial services 
needs of low-income individuals and development of financial products 
designed to meet these needs.
    The First Accounts initiative properly focuses on the need for 
incentives to get financial institutions started in serving low-income households. As discussed above, the costs of research and development, 
new account opening, expanded distribution, and financial education are serious barriers today to expansion of account ownership. The First 
Accounts initiative can help to accelerate improvements in this market.
    As Assistant Secretary Bair has explained, Treasury has issued a 
request for proposals under the First Accounts Program in December 
2001. The Department received 231 responses from a wide variety of 
organizations: banks, thrifts, and credit unions; employers and labor 
and employer organizations; community-based organizations; State and 
local governments; and others. As reported by the Department, the 
results of the first round of funding are impressive. The challenge 
going forward is to continue funding the First Accounts initiative at 
sufficient levels and for a sufficient time to help transform the 
market for low-income financial services. Only a sustained commitment 
to the First Accounts initiative will provide financial institutions 
with sufficient incentive to make the necessary investments in 
research, technology platform changes, training, marketing, and 
education necessary to serve low-income unbanked and underbanked 
households. Over time, as financial institutions become expert at 
serving the low-income customer segment, the need for Governmental 
incentives may become less important.
    Banks, thrifts, and credit unions could, under the First Accounts 
initiative, experiment with a wide variety of techniques to expand 
access to the unbanked, and to provide an increasing range of services 
to the underbanked.\26\ Low-cost electronic transaction accounts can be 
attractive to the unbanked and can be offered at reasonable cost.\27\ 
Banks may wish to experiment with accounts with savings features, 
including payment of interest or separate savings ``buckets'' within 
accounts; these features are also likely to be attractive to the 
unbanked and low-cost.\28\ Similarly, low-income individuals need a 
convenient and low-cost means to pay bills; automated money orders,\29\ 
on-line bill payment, alternative means of foreign country remittance, 
and other low-cost payment methods can help to reduce the cost of basic 
transactional services for the poor.
---------------------------------------------------------------------------
    \26\ Treasury's Notice of Funds Availability (NOFA) issued in 
December 2001 barred using First Accounts funds for IDA matches or to 
increase services to those with bank accounts. In my view, neither 
prohibition is required by the Congressional appropriations, and 
neither serves an important program interest.
    \27\ See ETA Conjoint Research, Dove Associates, May 1999, 
www.treas.gov/eta/conjoint.pdf (research summary) and 
www.fms.treas.gov/eta/etamodel.xls (market model); ETA Initiative: 
Optional Account Features, Dove Associates, June 1998, 
www.fms.treas.gov/eta/features.pdf (waterfall analysis).
    \28\ Id. Savings features boosted take up rates by up to one-third 
and accounted for one-quarter of the reason why an individual might 
sign up for electronically-based accounts.
    \29\ Caskey (1997) found that 69 percent of surveyed unbanked 
persons used 10 money orders per year, and 39 percent used more than 30 
money orders per year to pay bills.
---------------------------------------------------------------------------
    In addition, the First Accounts initiative has the potential to 
help spur ``leapfrogging'' in technology for low-income financial 
services, in analogous ways to how the Internet and cellular telephone 
technology have permitted developing countries to leapfrog in 
telecommunications infrastructure. To offer a few examples that could 
be subjected to the test of market feasibility: With sufficient 
incentives, providers of the network infrastructure for debit and 
credit cards, or providers of back-office data and information 
processing functions for banks and mutual funds, may be induced to 
explore ways that low-income customers could be served by financial 
institutions on shared technological platforms. As access to the 
Internet expands in low-income communities, e-finance can increasingly 
be made available to the poor at Internet kiosks. Or companies that are 
exploring ways to expand the use of cellular phones to transact 
financial services for high-income clientele could be encouraged also 
to focus attention on expanding banking account access for the low-
income market that currently utilizes prepaid cellular phones.
    The First Accounts initiative can also help to spur employer-driven 
(or union-
driven) strategies to expand access to banking services. Large 
employers can reap 
significant benefits from moving more of their workers to direct 
deposit of payroll, driving down their payroll processing costs, 
increasing the effective take home pay for their workers, and reducing 
problems from theft or fraud associated with checks. Employers can help 
to reduce costs for reaching their unbanked employees with financial 
education and marketing of new products. Moreover, many employers have 
already become active in educating their workers about advanced 
payments under the EITC. At the same time, financial institutions 
already provide important payroll and other banking services for 
employers, and some have been experimenting with employer-focused, 
debit card-based payroll systems for their clients' employees. These 
employment relationships may provide a solid foundation for encouraging 
direct deposit into low-cost electronic banking accounts and systematic 
savings programs for low-income workers.

Other Initiatives
The Community Reinvestment Act
    The Community Reinvestment Act (CRA) also has an important role to 
play. CRA has helped to expand access to credit for homeownership in 
low-income communities. The CRA service test, however, which evaluates 
bank and thrift performance in meeting transaction, savings, and other 
community needs, has received inadequate attention from bank regulators 
in CRA examinations.\30\ Examiners should focus on the extent to which 
banks and thrifts are actually attracting low-income customers with 
innovative retail products and services. Given the importance of 
technology in serving low-income clients in a cost-effective manner, 
service examinations should move away from an overwhelming focus on 
bank branches toward a more qualitative assessment of the extent to 
which technology-based products are expanding access for low-income 
persons.
---------------------------------------------------------------------------
    \30\ See M. Stegman, et al., Creating a Scorecard for the CRA 
Service Test, Policy Brief #96, The Brookings Institution, March 2002.
---------------------------------------------------------------------------
Individual Development Accounts
    Bank account ownership can be an important step for low-income 
families to begin to save, for both shorter-term financial stability 
and longer-term savings goals. In addition, for intermediate-term 
saving needs, such as homeownership, college education, or 
entrepreneurial ventures, Individual Development Accounts (IDA's) are 
providing a new means for low-income households to save.
    Evidence to date suggests that low-income individuals can save if 
given the opportunity to do so. For example, 44 percent of low- and 
moderate-income workers participate in 401(k) plans if offered the 
chance to participate.\31\ Some 73 percent of Federal employees earning 
$10,000 to $20,000 annually participated in the Federal Government's 
Thrift Saving Plan, and over half of those earning under $10,000 also 
participated.\32\ Similarly, the American Dream Demonstration has been 
piloting IDA's for low-income individuals. The demonstration has found 
that low-income individuals in the program were able to save an average 
of $25 per month (2.2 percent of average income).\33\ The demonstration 
also suggests that financial education, a regular saving program, and 
matching funds can increase participation and improve retention.\34\ 
Nationwide, there are some 10,000 IDA holders in the American Dream 
Demonstration and other IDA demonstration programs.\35\
---------------------------------------------------------------------------
    \31\ Orszag & Greenstein.
    \32\ Id.
    \33\ M. Sherradan, et al., Savings and Asset Accumulation in 
Individual Development Accounts, Center for Social Development, 
Washington University in St. Louis, 2002.
    \34\ Id.
    \35\ Assets, A Quarterly Update for Innovators, Corporation for 
Enterprise Development, Winter 2002, p. 1.
---------------------------------------------------------------------------
    The challenge is to bring these IDA programs to scale. The Savings 
for Working Families Act, introduced by Senators Lieberman and 
Santorum, is a promising approach. Under the Act, financial 
institutions offering IDA's would receive tax credits annually 
offsetting up to $500 in matching funds and $50 in account 
administration costs. The current legislation, drafted with an overall 
cap on accounts, would provide for 900,000 new IDA's at a cost of $1.7 
billion.\36\ This legislation could help to transform financial 
services for the poor, by moving from small-scale, nonprofit 
focused efforts to a large-scale, financial-institution driven 
financial product that meets the longer-term savings needs of low-
income families.\37\ As with bank accounts for low-income persons, 
technology will need to play a central role in driving down the costs 
of IDA provision.\38\
---------------------------------------------------------------------------
    \36\ U.S. Department of the Treasury, General Explanations of the 
Administration's Fiscal Year 2003 Revenue Proposals, February 2002, pp. 
37-38.
    \37\ The legislation could also be modified to provide for a 
similar tax credit to financial insti-
tutions for providing low-cost electronic banking accounts for low-
income persons. Such a tax 
credit would be the easiest way to bring the First Accounts pilot to 
scale if the demonstration proves successful.
    \38\ The Fleet/Doorways to Dreams test of Internet-based IDA 
programs will prove instructive in this regard.
---------------------------------------------------------------------------
Financial Education
    Studies find that financial education does matter in changing the 
financial behavior of individuals, particularly low-income persons. 
Financial education can increase participation in saving plans and 
increase the level of saving. Financial education, however, can be 
costly, and education focused on low-income persons is unlikely to be 
undertaken in a significant way absent Governmental and nonprofit 
support. The First Accounts pilot currently includes financial 
education as an eligible use, and it is my understanding that Treasury 
has recently created a new Office of Financial Education to promote 
financial literacy.\39\ Presumably, a portion of First Accounts funding 
could be made available to this office to support community-based 
financial education initiatives focused on account ownership and 
savings. Experience to date suggests that education initiatives are 
most successful when they focus on life decisions that the individual 
is currently facing: for example, how to improve credit standing to 
purchase a home, whether and how to begin saving for college. The 
Cleveland Saves initiative sponsored by the Consumer Federation of 
America can serve as a model for other such programs.
---------------------------------------------------------------------------
    \39\ See Treasury Secretary Paul H. O'Neill, Keynote Address to 
Jump$tart Coalition for Personal Financial Literacy, April 23, 2002, 
www.treas.gov/press/release/po2035.htm.
---------------------------------------------------------------------------
Conclusion
    Financial and technological innovation has been a hallmark of U.S. 
financial markets. Financial institutions can harness that innovation 
to meet the needs of low-income Americans. The First Accounts 
initiative is an important part of catalyzing private sector efforts to 
use financial and technological progress to expand access to financial 
services for low- and moderate-income families. By helping these 
families to enter the financial services mainstream, First Accounts and 
related 
initiatives can help to transform financial services for low-income 
persons. Such a 
transformation is a key to promoting greater economic opportunities for 
low-income communities in the 21st Century.
                               ----------
                  PREPARED STATEMENT OF FRAN GROSSMAN
                        Executive Vice President
                      Shorebank Advisory Services
                              May 2, 2002

    Good morning. My name is Fran Grossman, and I am the Executive Vice 
President of Shorebank Advisory Services. SAS is the consulting arm of 
Shorebank Corporation, the Nation's first and largest community development bank holding company with $1.3 billion in assets and operations in Chicago, 
Cleveland, Detroit, Washington State and the Upper Peninsula of 
Michigan. In addition, Shorebank assists other development organizations across the United States and around the world. At the heart of our business operations is the belief that we can change communities for the better by matching residents' determination and vision with our financial resources 
and market knowledge. Over our 30 year history, we have 
provided more than $1 billion in financing to homeowners and landlords, 
small business owners and churches, nonprofit organizations and community 
residents.
    I have been involved in community development banking and finance 
for 20 years. Prior to joining Shorebank in 1999, I was President of 
Bank of America, Illinois Community Development Corporation, and I 
initiated and led the community development finance group at 
Continental Bank and Bank of America, Illinois. Currently I am a board 
member of the Coalition of Community Development Financial Insti-
tutions, the Community Development Bankers Association, and the 
National Association of Affordable Housing Lenders. I especially want to 
thank NAAHL for its commitment to working with us to make banking more responsive to low- and moderate-income families.
    I also want to thank the Members of the Banking Committee, Sheila 
Bair and the Treasury Department for your support of the First Accounts 
initiative and other efforts to bring the unbanked into the financial 
mainstream. We all are here today because we want to develop 
initiatives to provide wealth-building opportunities for more 
Americans. This is no easy task. The First Accounts initiative is a 
strong first step in recognizing that solutions will be born in large 
part out of private-sector innovation. But it is only one step along a continuum of initiatives and policies that are needed.
    Assets are a crucial ingredient in the recipe for financial 
stability and wealth accumulation. Assets link individuals to 
mainstream financial institutions and capital markets. This in turn 
increases access to networks that connect people with jobs and other 
resources. Many low-income families are already savers, whether or 
not they have a bank account. But without the connection to a formal 
financial institution, these families will face more obstacles along 
the path to longer-term prosperity.
    Low-income people with bank accounts are more likely than the 
unbanked to save regularly, to have a car loan, and to have a home 
mortgage. Yet at least 10 percent of American families--including 25 
percent of African-American and Hispanics--have no bank account. The 
majority of these unbanked consumers have incomes below $25,000. They 
say they are uncomfortable in banks, don't trust banks or think that 
they don't have enough money to open an account. Some have privacy con-
cerns, while others are shut out of the system because of lack of 
identification or poor credit. As a result, most of them have no assets.
    Yet, they are generating positive economic activity. They receive 
paychecks and tax refunds. Some own cars and homes. Often, they have 
accumulated significant amounts of consumer debt. Clearly some are 
saving. They just need an institutional mechanism to facilitate the 
growth of their assets over the long-term. The rapid growth of the 
fringe financial services sector suggests that the unbanked have a 
demand for financial services that is not adequately met by the 
existing supply. Traditional checking accounts are predicated on 
consumer liquidity, a luxury poor people do not generally have. Even 
banks that have one or two products appropriate for modest-income 
consumers generally lack a full line of products that would enable 
consumers to build on their initial successes. The location and feel of 
typical bank branches often are not convenient or comfortable for the 
poor. And while the financial services industry is quite sophisticated 
about segmenting upper-income consumers and crafting appropriate 
marketing messages, little attention has been paid to outreach efforts 
at the lower end of the income scale.
    Over the past 6 years, Shorebank has focused significant energy on 
serving the unbanked. We have experimented with new products, delivery 
systems and outreach strategies. One of the first new products we 
introduced, in 1998, was an Individual Development Account. An IDA is a 
savings account that is matched dollar for dollar for low-income 
families saving to buy a home, start a small business or go to college. 
As one program participant put it, IDA's are ``an IRA for the rest of 
us.'' To date, we have opened nearly 600 accounts, trained hundreds in 
money management techniques and witnessed the transformational effects 
of the program. One participant, a 20 year Shorebank employee, began 
contributing to the company's 401(k) program after she successfully 
saved for a downpayment on a house and literally began to see her money 
grow.
    In an effort to increase customer convenience and decrease delivery 
costs, we have worked with customers who are unfamiliar or 
uncomfortable with technology to learn how to use ATM cards, point-of-
sale machines, and Internet banking. In one of our lobbies, we have 
installed a freestanding computer with Internet access that customers 
can use free of charge to check their account online, sign up for an 
e-mail account, or simply surf the Web.
    This morning, I would like to focus on one very promising outreach 
strategy for bringing the unbanked into the financial mainstream--
linking tax refunds with bank accounts. As you know, the Earned Income 
Tax Credit is the largest Federal antipoverty program, both in terms of 
dollars and participation levels. In 2001, more than $30 billion was 
paid out to some 18 million households. The average credit was about 
$1,600.
    The EITC has incredible reach in low-income communities, and 
Shorebank has sought to harness the power of this popular incentive. 
Three years ago, we opened our bank lobbies in Chicago to volunteer tax 
preparers from the Center for Law and Human Services, one of the 
largest and most successful VITA programs in the country. As working 
families waited to have their taxes prepared, personal bankers were on 
hand to open free savings accounts for those who wanted one. No initial 
deposit was required as long as the customer agreed to have her tax 
refund electronically deposited into the account. An ATM card was made 
available, and the account earned interest. We called it the Extra 
Credit Savings Program.
    Through a formal evaluation of the initiative, we interviewed those 
who opened accounts and we tracked their account usage over time. A 
copy of the full evaluation will be included in the official record. 
Let me share some of the key results.

 Twenty percent of all the individuals who had their taxes 
    prepared at the bank agreed to open an account. More than 60 
    percent were previously unbanked. This was a very disadvantaged 
    group of mostly single mothers. Their average income was about 
    $9,000. Nearly one-third were TANF recipients, and 50 percent were 
    Food Stamp recipients.
 When asked why they decided to open an account, nearly half 
    mentioned a desire to save. Six months later, 62 percent said the 
    account had helped them change spending patterns or helped them to 
    save.
 Over time, half of the unbanked used their accounts for 
    something other than short-term storage of their tax refund. Some 
    of them arranged to have their paychecks directly deposited to the 
    account each month. Others saved additional funds or signed up for 
    other bank products.
 The following year, approximately one-third of all 
    participants again used their account to deposit their tax refund.

    These positive results encouraged us to continue. Over the past 3 
years, we have opened 350 accounts with tax refunds totaling more than 
$250,000. We also have helped others replicate the initiative across 
the country. Several of the bank regulatory agencies have embraced the 
concept and are working to spread the word. Last year, for instance, 
the IRS partnered with the FDIC to encourage links between tax 
preparation programs and financial institutions.
    Why did the Extra Credit Savings Program work? We found three 
primary keys to success:
    First, the timing of the outreach was critical. People said yes to 
a bank account because they anticipated having money available.
    Second, the size of the refund was important. The larger the 
anticipated refund, the more likely people were more likely to say yes 
to a bank account.
    Third, technology was crucial for both the consumer and the bank. 
The combination of an electronically filed tax return and a directly 
deposited tax refund meant that customers could receive their refund in 
as few as 8 days. This shortened waiting period comes closer to being 
competitive with refund anticipation loan providers. Meanwhile, direct 
deposit and ATM usage reduced transaction costs for the bank.
    These lessons, along with our other experiences in this arena, 
demonstrate the complexity of the issue. Universal access to financial 
services and wealth-building opportunities is a multifaceted challenge 
that requires multiple initiatives by both the public and private 
sectors.
    First, we should fully leverage the power of the Earned Income Tax 
Credit by institutionalizing the link between the tax system and 
financial services. Just like the Motor Voter law that allows Americans 
to register to vote while applying for a driver's license, tax refund 
recipients should be able to sign up for a bank account while having 
their tax returns prepared. The technology to open accounts 
electronically already exists and further bolsters the Treasury's goal 
of increasing electronically-filed returns. Now, we need another line 
on the 1040 that asks the question, ``Do you want a bank account?'' and 
a system to facilitate the transaction.
    Second, I ask for your support for the Savings for Working Families 
Act. Title II of S. 1924 would expand IDA's to 900,000 working families 
over the next decade, and I hope it will be included in the Finance 
Committee Chairman's mark on the charity bill. IDA's have been piloted 
successfully across the country, proving that the poor can and will 
save when offered an appropriate financial product, a meaningful 
incentive and adequate information. For many, IDA's are an entry point 
into the banking system that can lead to full participation in the 
financial mainstream. By linking financial services to real 
opportunities for wealth creation, IDA's demonstrate to the uninitiated 
that a banking relationship is vital to their long-term prosperity.
    Third, we must strengthen the CRA service test. CRA has the power 
to spur financial innovation. Recent studies have confirmed CRA's 
effectiveness as a catalyst in broadening homeownership and small 
business opportunities for low- and moderate-income families. But while 
the lending and investment tests both require quantifiable results, the 
service test can be met simply by demonstrating that a retail product 
or service is available to low-income consumers. Rather, financial 
institutions should be held accountable for the level of retail 
services being provided, and deposit accounts should be subject to a 
similar spatial distribution analysis as loans.
    In conclusion, I hope I have successfully demonstrated that the 
issue of access to financial services for modest-income families is 
important, complicated, and solvable. It is important that we have 
reasonable expectations and see the First Accounts initiative as a step 
in the right direction. There are no easy answers, but with all of our 
hard work, we can succeed in broadening financial opportunities for 
everyone. Thank you for the opportunity to be here today.

               PREPARED STATEMENT OF JAYE MORGAN WILLIAMS
                       Senior Vice President and
               Managing Director of Community Investment
                          Bank One Corporation

                              May 2, 2002

    Chairman Sarbanes, Ranking Member Gramm, and Members of the 
Committee, I appreciate the opportunity to be here today on behalf of 
Bank One \1\ to discuss our commitment to helping American families 
gain access to the financial services mainstream and to share some of 
our experiences in doing so. We are particularly proud to share this 
panel with our colleagues and partners from Shorebank and the Woodstock 
Institute, whose dedication to this problem has been a source of 
inspiration and encouragement to us and to others in the banking 
system. We are also pleased to share the panel with Professor Barr, 
whose leadership we admired so much at the Department of the Treasury, 
and with Mr. Rufino Carbajal, Jr., President of the West Texas Credit 
Union and Member of the Texas Credit Union Commission, whose 
initiatives in underserved communities in Texas set an example for us 
all.
---------------------------------------------------------------------------
    \1\ Bank One Corporation is the Nation's sixth largest bank holding 
company, with assets of more than $265 billion.

    Our commitment to the so-called ``unbanked'' stems from our core 
belief that helping families gain access to the banking system is good 
for these families, good for individual communities, good for the 
national economy, and good business for Bank One, both near and long-
---------------------------------------------------------------------------
term.

    But as the other witnesses at this hearing have so eloquently 
testified, the reasons that more than 10 million American families do 
not have an insured bank account are complex and varied. So logically 
enough, there is no ``one size fits all'' solution for the unbanked population. To devise appropriate programs to help the unbanked population find footing in the banking system requires creativity, adaptability, and above all patience.

    Before describing some of our programs, I would like to briefly 
summarize what we at Bank One have learned as we have pursued our 
commitment to help bring families into the mainstream financial system:

 Our Programs are Works in Progress. As hard as we try, we are 
    just beginning to understand the multitude of reasons that 10 
    million American families are unbanked. Devising programs that 
    succeed is often a matter of trial and error. We are proud of our 
    efforts and humble about our errors, which often teach us the most.

 Financial Literacy is Essential for a Successful Banking and 
    Credit Relationship. We believe we can trace our biggest 
    disappointments in these programs to instances when ``the cart was 
    put before the horse,'' that is when low-income participants 
    entered into banking or credit relationships with too little 
    understanding of the fundamentals of consumer finance. We at Bank 
    One believe that financial literacy training is absolutely critical 
    to the success of programs serving the unbanked.

 Partnerships are Essential. Our partnerships with community 
    groups, advocacy organizations, and community banks are essential 
    to mounting programs that reach the unbanked population in 
    meaningful ways. This is not a battle that can be won with a ``go 
    it alone strategy.''

    I would like to now briefly discuss four of our current programs 
for bringing more American families into the financial mainstream.

The Alternative Banking Program

    I would like to turn first to Bank One's Alternative Banking 
Program, or ABP, which we are proud to participate in through the 
Chicago CRA Coalition, an organization represented by one of my 
copanelists today.

    The ABP offers checking accounts designed to appeal to low-income, 
unbanked consumers. These accounts differ from our traditional accounts 
in that they are easier to qualify for and less expensive to maintain. Applicants may be approved with no credit history, or with a borderline 
credit history. An account can be opened with a balance of only $10, as opposed to $250 for a traditional account, and may be held with no balance 
at all.

    In exchange for the more flexible credit criteria, ABP accounts do 
have some modest restrictions. For example, the limit on daily ATM 
withdrawals is $50 a day, as opposed to $300 for a traditional account, 
and the funds aren't available until 3 days after deposit, as opposed 
to 2. The ABP program is intended to be a transitional ``starter'' 
account; the goal of the program is to bridge account holders into 
mainstream financial services. After 1 year of successful account 
management, an account holder may apply to upgrade to a traditional 
account.
    But, as is true of all of our programs for the unbanked, customers 
must be educated in the basics of consumer finance in order to succeed. 
For this reason, we conduct workshops in the ``ABC's of Banking'' in 
the neighborhoods surrounding each banking center where the program is 
offered. These workshops, staged with the help of community groups, 
offer training in basic skills such as check writing, balancing a 
checkbook, and family budgeting.
    We are encouraged by the results we are seeing. Since we rolled out 
the program in March 1999, every single new ABP account holder would 
have been ineligible for a traditional Bank One account, mostly due to 
lack of credit. Yet, the average checking balance is approximately 
$1,100 and savings $1,600. We are very proud of this result as it 
represents significant savings for low-income individuals.
    Although the majority of the ABP accounts perform very well, we 
have learned that applicants with preexisting credit problems are the 
least likely to succeed. These are the applicants who ``put the cart 
before the horse.'' We are pursuing better ways to work with applicants 
who must not only learn the basics of consumer finance, but also must 
``unlearn'' bad habits and attitudes about financial institutions. For 
example, credit impaired applicants might do better with a more limited 
account without check writing, and thus without the risk of overdraft.

Communities Banking for Safety
    Many who are unbanked have an even more basic concern than 
financial security--and that is personal safety. A bank account 
promotes both. Sadly, people who deal only in cash, rather than keeping 
their money in a bank, put themselves at risk of violent crime. This is 
the concern underlying our Communities Banking for Safety Program. In 
partnership with the Dallas City Police Department, the Mexican 
Consulate, and other local banks, Bank One participates in ongoing 
community meetings to promote trust in the United States banking system 
among immigrants. They often have no comparable system in their home 
countries, and we help them understand the personal risk they take in 
carrying cash.
    In conjunction with this outreach effort, we have made it easier 
for Mexican immigrants to qualify for accounts. As with the Chicago ABP 
pilot, applicants with no or minimal credit history may qualify, and, 
in deference to the special needs of immigrants, Bank One expanded the 
list of acceptable forms of ID to include the Mexican Consular ID, 
commonly called the ``Matricula,'' instead of a driver's license or 
Social Security card. The Matricula is accepted everywhere Bank One 
does business, not only in Dallas. And another form of ID, the Mexican 
Voter Registration card, is accepted as a secondary form of ID. We have 
sought to reassure undocumented immigrants that we are interested in 
their safety, not their immigration status. Finally, although financial 
literacy is not formally a part of the police initiative, Bank One 
offers bilingual training in that subject.
    Although the program began just 2 months ago, several hundred 
accounts have been opened already as a result of these outreach efforts 
and the more flexible qualification requirements. This means that 
several hundred individuals and families now have more personal safety 
and financial security.

Bank on the Job
    It might surprise some Members of the Committee to learn that many 
unbanked Americans work in regular paying jobs in the mainstream 
economy. We see the workplace as a very promising arena for both 
financial education and initiating banking relationships. Last fall in 
Dallas we initiated a pilot as part of an ongoing program known as Bank 
on the Job. Through employers, we are offering low-income workers free 
checking accounts if they sign up for direct deposit of their 
paychecks. At the same time, representatives from Bank One's Community 
Investment Department provide onsite training in a variety of subjects 
including budgeting, managing accounts, saving, and homebuying.
    One Dallas employer reported to us that a check cashing truck 
showed up outside his building every Friday, charging his employees as 
much as 5 percent of their hard-earned paychecks. The employer was only 
too happy to partner with Bank One and boost his employees' take home 
pay. We are finding that with proper guidance many employers are 
beginning to realize that there are benefits for them, too. A 
financially secure employee is less distracted on the job and more 
productive.
    Although this began as a Dallas initiative, Bank One now provides 
financial literacy training in Houston, Tulsa, Fort Worth, and several 
other cities. We hope to expand this program eventually to all of the 
markets we serve.

Paycard
    Our Paycard Program is another workplace initiative that we 
undertake in partnership with employers. The program allows companies 
to pay unbanked employees through credit to a Bank One Visa stored 
value card. Bank One is currently marketing this product to the 
employees of some of our large corporate customers, including 
McDonald's and Lowe's. In early summer, we hope to expand this program 
to middle market companies.
    The Paycard has many advantages for the unbanked. First, it allows 
employees to circumvent the check cashers. Second, the Paycard is safer 
than carrying cash because it can be replaced if lost or stolen, 
enjoying the full protection of Visa's security policy. Third, since 
the Paycard can be used to make online payments, its use helps to 
bridge the digital divide. Finally, while a Paycard is not the 
equivalent of a checking account--its holder is still ``unbanked''--we 
believe that it may alleviate distrust in mainstream financial services 
and lead card holders to seek out a broader relationship with the issuing bank.

The Role of the Federal Government
    Before concluding, I would like to use this opportunity to 
recognize the leadership of the Treasury Department and this Committee 
in addressing the problem of the unbanked. Chairman Sarbanes has done 
so much to raise the profile of this issue and to support efforts to 
resolve it. The Treasury Department has also demonstrated an ongoing 
commitment to bringing unbanked Americans into the financial 
mainstream. In 1999, Treasury introduced the Electronic Transfer 
Account, or ETA. This program, in which Bank One is proud to be an 
early participant, provides a basic, all electronic account for the 
receipt of Federal payments, including salaries and retirement 
benefits. Now, the Treasury Department is building on that earlier 
effort with its First Accounts Program. As Assistant Secretary Bair has 
testified, this program awards grants to organizations--not only 
financial institutions but community groups, employers, labor 
organizations, and others--that contribute to the goal of bringing 
basic financial services to the unbanked.
    As I said at the outset, partnership is essential to the success of 
programs that reach the unbanked in meaningful ways. The First Accounts 
grants will support partners for future Bank One initiatives and will 
encourage other financial institutions to undertake programs similar to 
those I have described here today. Involving more institutions and 
experimenting with different strategies will help all of us bring more 
American families into the financial mainstream.

Conclusion
    In conclusion, we emphasize Bank One's commitment to helping the 10 
million American households who are outside the financial mainstream 
become full participants in the American economy through a banking 
relationship. We hope that the experiences we have shared with you 
today will add to our collective understanding of what works and what 
does not, and that other institutions will take advantage of this 
knowledge. Perhaps the most important lesson we can share with the 
Committee is this: Addressing the needs of the unbanked population will 
require a sustained team effort involving mainstream financial 
institutions, community institutions, advocacy groups, and Government. 
It will require diverse programs, trials and errors, and constant 
monitoring, reevaluation, readjustment, and redesign. It will be hard 
work. But we believe it can succeed.
    We thank the Committee for inviting us to share our experiences.

                               ----------

                PREPARED STATEMENT OF MARVA E. WILLIAMS
                         Senior Vice President
                          Woodstock Institute

                              May 2, 2002

    My name is Marva Williams. I am the Senior Vice President of the 
Woodstock Institute. I am grateful to Chairman Sarbanes, Ranking Member 
Gramm, and other Members of the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs for this opportunity to discuss expanding 
opportunities for lifeline banking for lower-income consumers. I am 
also pleased to join my fellow panelists, the Honorable Sheila Bair, 
Michael Barr, Fran Grossman, and Jaye Morgan Williams.
    The Woodstock Institute, in partnership with Chicago-area banks, is 
expanding opportunities for lower-income consumers to establish deposit 
accounts, improve their financial literacy, and develop assets. The 
Woodstock Institute has a 29 year record of policy research, public 
education, and technical assistance to promote access to safe and sound capital and credit in lower-income and minority neighborhoods. The 
Institute has a specialized knowledge of lower-income families' use 
of financial services and has expertise on the quality and quantity of 
basic retail services that financial institutions provide to lower-
income consumers.

Importance of Lifeline Banking
    Limited access to the financial mainstream and poor financial 
literacy skills are major barriers to asset development. Poor financial 
literacy has a detrimental impact on personal financial management--
affecting the consumer's ability to own a home, find employment, buy a 
car to get to work, purchase life insurance, rent an apartment, or pay 
tuition. Consumers without a relationship with a mainstream financial 
institution also pay high transaction fees at check cashers. According 
to a Woodstock Institute study, check cashers charge up to three times 
as much as financial institutions for basic financial services but do 
not provide key services like savings accounts and financial advice. In 
addition, some check cashers offer predatory services with exorbitant 
fees, including payday loans.
    Lifeline banking is also the foundation of asset development. 
Consumers need affordable means to cash checks and pay bills. In 
addition, retail products enable and encourage savings habits and can 
help build credit.

Challenges to Lifeline Banking
    Prior to developing remedies, we conducted research to identify the 
reasons that lower-income consumers remain ``unbanked'' or dissatisfied 
with mainstream financial institutions. These barriers include:
    Limited Access: Bank branches have abandoned many inner-city 
communities. Bank mergers involving institutions with overlapping 
branch locations have caused a decline in the number of bank branches 
per capita in lower-income communities as the newly merged institutions 
close branches to reduce costs. Further, banks often have inconvenient 
hours and are not accessible on evenings and weekends. Finally, 
residents of lower-income communities may also have problems accessing 
automated teller machines (ATM's). Community Reinvestment Act 
regulations provide an opportunity to promote increased access. The 
Service Test, which assesses the market penetration of a bank's retail 
products, record of opening and closing branches, and other factors. 
The Service Test examination should be strengthened to include an 
assessment of the income and other characteristics of a bank's account 
holders to determine if they are meeting the service needs of their 
assessment area.
    Costs: It can be prohibitively expensive for lower-income people to 
maintain bank accounts. They may face high minimum balances, initial 
deposits, or even monthly service fees.
    Credit status: Some banks conduct credit checks and scoring for 
their applicants. Consumers with little or no credit or a slightly 
blemished credit record can be disqualified from opening a bank 
account.
    Trust: Some ``unbanked'' consumers may have attempted to access 
bank services in the past and been repelled for a variety of reasons. 
Some may worry that financial institutions share account information 
with others, including creditors. In addition, poor communication 
regarding account guidelines can also lead to misunderstandings for 
account holders. Some consumers may feel uncomfortable continuing a 
relationship with a bank that has denied them a loan.
    Financial literacy: Lifeline banking requires significant person-
to-person training and education on balancing checkbooks, planning 
monthly finances, using an ATM, etc. Without the skills to manage 
accounts, consumers may be faced with high fees for nonsufficient funds 
and other transactions. They might become frustrated and close their 
accounts. In addition, some consumers are uncomfortable using 
electronic technologies that are associated with many lower-cost 
accounts, including ATM's, Point of Sale terminals (POS), and Internet 
banking.
    Lack of information or poor marketing: Many banks have affordable 
accounts that are directed to lower-income consumers. However, the 
account features are not well marketed to lower-income communities and 
to people are not aware of affordable 
options.
Lifeline Account Features
    Establishing checking and savings accounts with traditional 
financial institutions can be a major challenge for lower-income 
consumers. The following features of a model lifeline checking account 
mitigate the barriers that many unbanked consumers face:

 No credit check
 Flexible ID requirements
 Ten dollars or less opening requirement
 No minimum balance
 No monthly service fee
 No teller charges
 Unlimited check writing
 Free withdrawals from bank-owned ATM's
 Promotion of direct deposit of paychecks and Government 
    benefits

    Intermediate Products: Checking account products may not be 
suitable for all consumers. In fact, one of the reasons that people 
frequent check cashers is that they serve as one-stop-shops for cashing 
checks and paying bills. However very few financial institutions 
provide inexpensive electronic bill payment services. The North Side 
Community Federal Credit Union, a Chicago community development credit 
union, and First Bank of the Americas allows owners of savings accounts 
to pay utilities and other bills electronically.

Woodstock Institute Experiences with Lifeline Banking
    Bank One Alternative Banking Program: The Woodstock Institute and 
the Chicago CRA Coalition negotiated a CRA agreement with Bank One when 
it purchased First Chicago Bank in 1998. In addition to increasing 
small business and residential lending and community development grants 
and investments, Bank One agreed to increase services to unbanked 
consumers. Working with members of the Chicago CRA Coalition, the bank 
developed the Alternative Banking Program (ABP). ABP is a safe, 
convenient, and inexpensive alternative to using check cashing 
services. Customers who do not meet Bank One's traditional credit 
scoring criteria, due to borderline credit or no credit history, may be 
eligible to establish an ABP account due to its more flexible credit 
scoring criteria.
    ABP is not a separate banking product--customers have access to 
Bank One checking and savings accounts that have features similar to a 
model lifeline account:

 $10 opening deposit
 Low or no minimum balance
 Low or no service fee
 Unlimited check writing
 Unlimited use of Bank One ATM's
 Some free teller transactions, depending on account
 Free financial literacy training

    The account features were designed to address many concerns that 
lower-income unbanked consumers express. It is low-cost, accessible at 
all Bank One branches and ATM's, and includes the availability of 
financial literacy classes for account holders. Further, although 
applicants with a credit history must have suitable credit scores, 
people with no or borderline credit may open accounts. In exchange for 
a more flexible credit scoring criteria, the Bank did establish some 
modest restrictions on the ABP. However, after 1 year, account holders 
can apply to upgrade their accounts to traditional account products.
    The ABP is not only an innovation for Bank One--it is also a means 
for bank staff to learn more about providing services to lower-income 
consumers. Therefore, community reinvestment staff held two focus group 
meetings with account holders to learn how the program was faring. 
Focus group participants identified several 
important concerns, including the need for access to telephone banking 
to obtain 
information on account balances and withdrawals, and the importance of 
providing alternative bill payment mechanisms for savings account 
holders.
    ABP has allowed thousands of consumers, many with no credit record, 
to establish checking and savings accounts. In addition, the Bank has 
cross-sold other products to ABP customers, including consumer loans, 
certificates of deposit, and installment loans. ABP has also influenced 
the establishment of more flexible criteria for other Bank One retail 
accounts. However, ABP is only available at eight branches in the city 
of Chicago, and should be expanded to reach more unbanked consumers.
    Financial Literacy and Lifeline Banking Partnerships: The Coalition 
has also developed relationships with Fifth Third Bank, Charter One 
Bank FSB, and LaSalle Bank. Unlike Bank One, these banks have accounts 
that meet many of the criteria for lifeline checking accounts. In these 
cases, the Chicago CRA Coalition helped the banks to (1) develop 
financial literacy curricula suitable for lower-income consumers, and 
(2) establish relationships with community partners to identify 
workshop topics and market and cosponsor workshops.
    These efforts have resulted in the integration of financial 
literacy programs within each bank's retail banking divisions. Fifth 
Third retail management staff have joined with community reinvestment 
staff to offer financial literacy programs and have developed several 
creative marketing and program partnerships with community 
organizations. Charter One retail and community reinvestment staff have 
participated in ``train the trainer'' financial literacy workshops 
offered by a local cooperative extension office and are currently 
developing a financial literacy curriculum.
    LaSalle and the Coalition developed an exemplary financial literacy 
curriculum that addresses the financial management concerns of lower-
income consumers. The Chicago CRA Coalition also helped LaSalle 
establish a very fruitful partnership with Chicago Commons. Chicago 
Commons is a multiservice settlement house that provides job-training 
services through its Employment and Training Service Center (ETC) to 
lower-income people moving from welfare to work. The Bank teaches its 
financial literacy curriculum in eight classes over a period of about 2 
weeks. Approximately 32 students participate in each course, which 
culminates in a trip to a local LaSalle branch where accounts can be 
opened. The partnership is ongoing.
    Community Development Credit Unions: Community development credit 
unions (CDCU's) focus on providing financial services and loans in 
lower-income communities. The Woodstock Institute has documented 
several innovative financial service partnerships developed by CDCU's.
    Central Appalachian Peoples Federal Credit Union operates in 23 
rural counties that are among the poorest and least educated in the 
Nation (see Figure 4). Isolated from larger cities, the community is 
poorly served by traditional financial institutions and unemployment is 
high. The credit union leverages deposits with Government and private 
funding to provide much needed access to home mortgages, small business 
and consumer loans, and deposit services.
    Northeast Community Federal Credit Union (Northeast Community FCU) 
provides a safe place to save for lower-income San Franciscans. 
Organized in 1981, the credit union is committed to serving the unmet 
financial needs of low-income community residents, many of who are 
recent immigrants or refugees from cultures where financial 
institutions are not accessible or trustworthy. Further, some members 
are concerned that maintaining a deposit account will violate 
citizenship or immigration regulations. Northeast Community FCU works 
with local community organizations to provide financial literacy regarding 
the practices of U.S. financial institutions. It also educates members 
about the disadvantages of taking out high cost loans that are heavily marketed in this community.
    Since its founding in 1981, Quitman County Federal Credit Union 
(Quitman County FCU) has focused on reaching its African-American, low-
income community base. The membership is largely made up of single 
women, minorities, and public aid recipients. Quitman County FCU also 
manages a youth credit union program that not only helps young people 
save but also encourages them to serve their poverty-stricken community 
in rural Mississippi. Its members run the Youth Credit Union. They 
elect their own Board, hold monthly meetings, and operate various 
committees to manage the credit union's affairs. The Youth Credit Union 
Program offers financial workshops that explain the hazards of using 
subprime lenders, manual and computer bookkeeping and accounting 
techniques, and checkbook balancing among other financial topics.

Lessons in Lifeline Account Programs
    Financial Literacy: Barriers related to trust, low financial 
literacy, and marketing can be addressed through effective financial 
literacy training. Banks should work in partnership with the community 
and other nonprofit organizations to provide financial literacy workshops 
and counseling. The workshops should include the following topics:

 Budgeting and personal finance management skills.
 Tools to make informed decisions when choosing accounts, 
    applying for loans, or credit cards, etc.
 Skills needed to manage accounts, such as balancing 
    checkbooks, managing funds availability timetables, and using 
    electronic banking services.
 Information on investment and savings options.

    Program Marketing: Financial institutions' marketing of these new 
products should include not only information on account features and 
advantages, but should also include outreach and information on how the 
products are preferable to check cashers and the other benefits of a 
mainstream banking relationship. In addition, marketing strategies 
should be developed with community-based organizations and in 
cooperation with organizations involved in consumer credit issues. 
Targeted marketing efforts, such as community newspapers and radio ads, 
should be considered as well.
    Program Diversity: It is also important to understand that there is 
a diversity of ``unbanked'' consumers. For instance, minority consumers 
are more likely than other consumers to be dissatisfied with the 
quality of their financial services are. When asked by a 1999 survey 
(conducted by the Metro Chicago Information Center) how well their 
banking needs were being met, 16 percent of African-Americans and 25 
percent of Latinos responded ``not too well'' or ``not at all,'' 
compared to only 7 percent of whites. Recent immigrants often 
experience great difficulty developing savings. Many have poor literacy 
skills, distrust financial institutions or may have concerns about 
their legal status that keep them isolated.
    Bank Staff: A major component of the success of the program hinges 
on the enthusiasm of bank staff to work with lower-income consumers. 
For instance, one of the recruitment techniques is for tellers to 
encourage people who cash checks at the bank to apply for checking or 
savings accounts. Banks should use their in-house communication 
mechanisms to inform staff of new programs and branch managers should 
hold short orientation meetings with customer service staff explaining 
the importance of the bank's efforts to address the financial service 
needs of its community. Management should also set performance goals 
and incentives.
    Reducing Consumer and Bank Expenses: Inexperienced account holders 
should have accounts that allow some protections from NSF fees. 
Further, many retail account products are not profitable. According to 
one expert on financial services, financial institutions make 80 percent 
of their profit on retail products from only 20 percent of their customers. Therefore, it is also important to consider how banks can cut costs:

 Phone banking: Banks should provide information on account 
    balances and other account activity by phone so that account 
    holders can avoid NSF fees. This will also reduce teller expenses.
 Electronic access: Banks can also improve services and 
    decrease costs by enabling low-income consumers to conduct 
    financial transactions electronically. Services may include 
    Internet banking, smart ATM's, electronic bill payment and money 
    order machines and debit cards.
 No overdrafts: All checks that will cause a negative balance 
    should be returned.
 Limit withdrawals: ATM withdrawals should be limited to $50/
    day.
 Funds availability: Account holders may not be able to access 
    funds deposited by check for up to 2 business days. However, 
    immediate access should be allowed for cash and direct or 
    electronic deposits.
 Second-day approval for new accounts: To reduce criminal 
    exploitation of lifeline accounts, banks should impose a waiting 
    period of 24 hours to establish new accounts. This will allow the 
    bank to more fully investigate applicants and deter fraud activity.

    Account Disclosures: It is important that consumers understand 
account provisions. Therefore, they should be translated from 
``legalese'' into standard language, making it understandable for 
readers of all levels. In addition, many of the materials should also 
be translated into Spanish or other languages as appropriate.
    CRA Service Test: In 1995, the Community Reinvestment Act (CRA) was 
amended to concentrate on bank performance in three areas: lending, 
investment, and services. Creative and innovative bank products and 
services, such as the establishment of lifeline accounts and financial 
literacy workshops, can help a bank achieve a satisfactory rating under 
the Service Test. Further, the Woodstock Institute encourages the 
strengthening of the Service Test by requiring banks to collect and 
report information on the income and race of deposit account holders.

                               ----------

               PREPARED STATEMENT OF RUFINO CARBAJAL, JR.
                    Manager, West Texas Credit Union
                              On Behalf of
                Credit Union National Association (CUNA)

                              May 2, 2002

    Good morning, Chairman Sarbanes, Senator Gramm, and Members of the 
Committee. I am honored to appear before you this morning to present 
testimony on the plight of the ``unbanked'' and ``underserved.'' I am 
Rufino Carbajal, Jr., Manager of the West Texas Credit Union, a $34 
million credit union serving over 11,000 members in El Paso, Texas. I 
appear before you today on behalf of the Credit Union National 
Association (CUNA), which represents over 90 percent of the Nation's 
approximately 10,400 State and Federally chartered credit unions and 
their 82 million members.
    In announcing this hearing, Chairman Sarbanes indicated that 
approximately 10 percent of households in the United States are 
`unbanked,' and that most of these individuals ``predominantly come 
from low-income households and often must utilize high-cost services 
offered by fringe financial service providers in order to conduct 
routine transactions such as check cashing and bill payment. In 
addition, the `unbanked' have had a difficult time establishing 
traditional forms of credit, receiving bank loans, acquiring financial 
assets, and saving for the future.''
    I am uniquely positioned to address these concerns. As manager of 
my credit union for 26 years, I have been a pioneer in and become an 
authority in serving the underserved. Even when I was the only employee 
of the credit union, I realized that there was a need to serve the 
underserved community of El Paso, which is one of the poorest 
Metropolitan Statistical Areas in the Nation. I originally served the 
membership of the Tri-State Wholesale Associated Grocers, but after the 
association ceased operations, Tri-State merged with West Texas Credit 
Union. Our field of membership now serves many blue-collar workers, 
such as those in the garment industry and the Ysleta Del Sur Pueblo 
reservation. Over the years, I have served as a mentor for many credit 
unions even smaller than ours, and I have been a consultant for credit 
unions in Guatemala and for the World Council of Credit Unions (WOCCU).
    My testimony this morning will focus not only on the efforts of 
West Texas Credit Union to serve the underserved, but on those of 
credit unions across the Nation as well. I will describe several 
programs designed to attract and retain the unbanked, including efforts 
to help credit unions get involved in the First Accounts Program.

First Accounts
    I am pleased that a major focus of this morning's hearing is the 
implementation of the First Accounts Program.
    CUNA is strongly committed to the principle of access to financial 
services by consumers, including those of modest means, and supports 
the First Accounts Program, which is designed to make basic financial 
institution accounts available to low- and moderate-income consumers.
    According to the Federal Reserve Board's 1998 Survey of Consumer 
Finances and the Treasury Department's Notice of Funds Availability 
regarding First Accounts, almost 1 family in 10 in this country does 
not have a share draft/checking account or a savings account. These 
families generally have annual incomes of less than $25,000.
    There are many reasons why an individual may not have an account 
with a financial institution. These include lack of awareness about the 
importance of efficient management of their financial resources--
however meager--and how institutions, like credit unions, will provide 
financial counseling, education, and guidance to help individuals 
develop financial plans to maximize their funds and plan for the 
future. Financial education is a hallmark of the credit union system 
and credit unions offer such education through a variety of programs 
that are described throughout my 
testimony.
    Individuals, such as immigrants, may also be reluctant to approach 
a financial institution because they fear they lack proper 
documentation. This may become even more problematic as the Treasury 
Department implements the ``Know Your Customer (Member)'' rules under 
the USA PATRIOT Act. We urge Congress and Treasury to ensure these 
rules will not have a chilling effect on the ability of immigrants to 
fully participate in our society, including through the use of 
financial institutions. We further urge Congress and Treasury to allow 
institutions to rely on documents such as Matricula issued by the 
Mexican Embassy's local offices in this country to verify an 
individual's identity.
    Without access to these very basic services, such individuals are 
severely limited in the choices they have to conduct the business of 
their daily lives. They are likewise disadvantaged in preparing for the 
future. Recognizing there is a role for the Federal Government to play 
in helping to address this situation, Congress has appropriated $8 
million for the First Accounts Program implemented by the Treasury 
Department.
    Under the program, Treasury will provide grants to eligible 
entities, such as insured credit unions, to offer low-cost savings and 
share draft/checking accounts to low- and moderate-income consumers. 
Such accounts could be offered electronically, such as through an ATM, 
and ideally would also be accompanied by financial education to 
encourage the use of the account and highlight its advantages.
    We are gratified that Treasury has reached out to credit unions to 
apply for the First Accounts. CUNA President & CEO Dan Mica and the 
senior staff met with Assistant Secretary for Financial Institutions 
Sheila Bair in March, and she strongly encouraged credit unions, as 
well as other financial institutions, to seek grants through First 
Accounts.
    In fact, West Texas Credit Union is one of 39 credit unions in 13 
States included in the application of CUNA's National Credit Union 
Foundation. Over 2 million unbanked consumers reside in communities 
served by this application. The Foundation has requested $3.7 million 
to fund a program that will provide banking services to over 28,000 
unbanked consumers over a period of 24 months. Participating credit 
unions have pledged to invest $1 million into our First Accounts 
Program.
    The Foundation's First Accounts Program covers a vast array of 
approaches. Some credit unions, notably those in New York and Michigan, 
have formed strategic partnerships with universities (Cornell 
University and the University of Michigan) to provide the financial 
literacy components of the program. The credit unions will provide the 
financial services.
    The Foundation's First Accounts Program has several themes: (a) 
there is a strong orientation toward serving the unbanked African-
American and Latino consumer; (b) the application covers urban 
communities of Los Angeles, Seattle, Portland, and New York to rural 
communities located in South Dakota, Iowa, and Idaho.
    The Foundation's application also attempts to reach out to several 
distinctive audiences. For example, in Iowa an applicant will seek to 
use first accounts funds to provide financial services to the large 
influx of Bosnians and Hispanics through community partnerships. In 
Michigan, the applicant will use first accounts fund-
ing to provide financial services to persons with disabilities and 
other low-income individuals.
    In short, the Foundation program model is rich in creativity, 
diverse in categories of persons who will be served, and national in 
scope.

Remittances
    You may recall this Committee's hearing on February 28 regarding 
the status of international remittances. CUNA and WOCCU submitted a 
statement for that hearing's record which provided details about the 
desperate need for affordable remittance services, the difficulties in 
providing these services, and the industry-leading efforts of credit 
unions in this area.
    As you learned from that hearing, there is a growing population of 
Hispanic and other individuals in this country who for one reason or 
another are not able to utilize traditional financial institution 
services. These individuals frequently send their hard-earned pay to 
their parents, children, brothers, and sisters in Mexico or other 
homelands. Those who do not have access to a credit union or other 
financial institution must use wire services that charge outrageously 
high fees to execute the transaction.
    I am proud to say that West Texas Credit Union has been offering 
its members the opportunity to wire money back to Mexico and uses the 
WOCCU service called International Remittance Network 
(IRNet'). This service saves our users at least one-third 
the cost of using a high-cost money transfer agent. Our credit union 
has many individuals in our field of membership with familial ties to 
Mexico, and we know they send funds to relatives in Mexico using wire 
transfer services that charge as much as 28 percent of the amount 
transferred. By providing IRNet' services, we offer members 
an inexpensive way to wire money to family in Mexico, or in 42 other 
countries, at an affordable price. For peace of mind, members also 
receive a free 3 minute phone call to inform the recipient of the 
transfer. The program has shown moderate success.
    CUNA's February 28 statement noted that while many credit unions 
are leading the way in ensuring that immigrants have access to 
affordable remittance and financial services, these efforts could be 
significantly enhanced if Congress would amend the Federal Credit Union 
Act to allow credit unions to provide these services to nonmembers 
within the field of membership. I am very excited that the House of 
Representatives has initiated legislation to do just that. H.R. 3951, 
``The Financial Services Regulatory Relief Act of 2002'' provides 
credit unions the authority to sell travelers checks and cash checks 
for nonmembers within their field of membership. And H.R. 4612, ``The 
Expanded Access to Financial Services Act,'' would allow the same 
authority, as well as provide credit unions the opportunity to provide 
wire transfer and money order services to nonmembers within the field 
of membership.
    Having the authority to cash checks and provide wire transfer 
services to nonmembers within the field of membership would further 
enhance the ability of credit unions to reach the ``unbanked'' and 
``underserved'' and provide an affordable and financially sound 
alternative to high-cost payday lenders. It would allow credit unions 
to play an even more important role in combating predatory lending 
practices. And by getting the ``unbanked'' in the door with these 
services, we would hope to gain their trust, respect, and loyalty so 
that they would join the credit union as full-fledged members.

Individual Development Accounts (IDA's)
    I am proud that West Texas Credit Union is one of many credit 
unions that are among the leading providers of Individual Development 
Accounts (IDA's). Referring again to Chairman Sarbanes' announcement of 
the purpose of this hearing, one of the issues referred to was the 
inability of the ``unbanked'' to acquire financial assets and save for 
the future. If ever there was a product developed to serve exactly that 
purpose, it is the IDA. And if ever there was an institution developed 
to provide these accounts, it is the credit union, whose mission of 
``People Helping People'' fits perfectly with the goal of IDA's.
    IDA's are savings accounts with the added benefit of matching funds 
by Government and private organizations. Participants must meet certain 
requirements such as, income qualification (usually 200 percent below 
the poverty level), and attendance at educational sessions. Each 
participant sets a savings goal for a specific purpose. The funds can 
only be used for the purposes of buying a first home, education, and/or 
to start a small business.
    West Texas Credit Union, in partnership with El Puente Community 
Development Corporation (CDC), began offering IDA's in October 2001. El 
Puente CDC is a nonprofit organization. It provides new sources of 
social, educational, and economic opportunity such as enterprise 
development, bilingual on-the-job training and access to technology, 
and promotes community revitalization through building the capacity of 
individuals and families to decide and design their futures. Once a 
participant reaches his or her goal, El Puente CDC will authorize the 
withdrawal of the funds for the above-stated reasons. But before the 
funds are withdrawn the 
account holder must complete a course in financial literacy.
    Legislation currently before Congress would greatly enhance the 
number of IDA's in existence within credit unions and other financial 
institutions. The Savings For Working Families Act (SWFA) has been 
introduced both as a free-standing bill and incorporated within other 
legislation. The House has passed its charitable giving bill, which 
includes the SWFA, while S. 1924, the CARE Act, includes it in the 
Senate. The CARE Act is currently pending before the Finance Committee. 
Essentially, the SWFA would provide tax credits for matching funds to 
IDA's, dramatically increasing the market for IDA's. I urge the Senate 
to support this very important initiative.

Financial Literacy
    Credit unions recognize that it is necessary to offer some form of 
financial literacy training to successfully integrate the ``unbanked'' 
into the financial mainstream. We also believe that similar to a 
``continuing education'' requirement for many professionals such as 
doctors and lawyers, consumers require similar continuing financial 
education to help them navigate the many pitfalls and opportunities 
available to them. As detailed in CUNA's statement for the record of 
this Committee's February 6 hearing on Financial Illiteracy, that is 
why credit unions have traditionally made financial education a part of 
their mission. Credit unions, including West Texas, provide financial 
information and training to members on a one-to-one basis. Many credit 
unions, including West Texas, actively work in schools to teach 
personal finance skills to children and teenagers. CUNA has formed a 
national partnership with the National Endowment for Financial 
Education (NEFE) to teach the High School Financial Planning 
Program' to high school seniors across the Nation. And 
financial literacy is another aspect of providing Individual 
Development Accounts (IDA's), described above, which are also available 
through many credit unions in addition to West Texas.
    Throughout the course of the year, we participate in several 
programs that bring financial awareness to our members. Every spring we 
organize a Credit Fair. We bring together the Consumer Credit 
Counseling Services and the Credit Bureau of El Paso to advise members 
on building and maintaining good credit. Other topics include the 
following: learning to be debt free, how to live within your means, and 
how to save for the future. We have a good turn out every year and our 
members show gratitude for the added convenience of bringing these 
services to them.
    In order to promote International Credit Union Day, in October, and 
National Credit Union Youth Week, in April, we have participated in 
local high school presentations. In these presentations we teach the 
importance of financial literacy to our youth. We cover topics such as, 
``Time Is On Your Side,'' which explains the benefits of saving at an 
early age. Money management is emphasized. We review a ``good'' credit 
report and a ``bad'' one, while explaining why it is important to 
maintain ``good'' credit. Students, as well as teachers, are grateful 
for our involvement with the youth.
    Every quarter in our bilingual newsletter we include articles that 
increase our members' financial awareness. We try to tackle issues that 
are of interest to our members and affect our community.

Affordable Housing Program
    In the year 2000, a study was performed by a group of professors 
from New Mexico State University. The study indicated that a 
substantial market exists in El Paso County for affordable housing 
which is not being served. As previously mentioned, El Paso is one of 
the poorest Metropolitan Statistical Areas in the Nation.
    With grant money from CUNA's National Credit Union Foundation and 
the Texas Credit Union League State Credit Union Foundation, eight 
credit unions located in El Paso County, Texas, chartered and wholly 
own the El Paso Affordable Housing Credit Union Service Organization 
(AHCUSO). The AHCUSO is an affordable mortgage and homeownership-
counseling agency. AHCUSO's mission is to provide financial literacy 
and homeownership counseling to thousands of low-income El Paso county 
residents.
    The AHCUSO has partnered with the El Paso Housing Authority and has 
committed $1.8 million to the financing of affordable homes, of which 
approximately $500,000 has been closed. HUD provides down payment 
assistance, and the financing and servicing is being done by the 
AHCUSO.
    Presently, negotiations are going on with Fannie Mae in an effort 
to get them to relax their underwriting criteria in order to provide 
more affordable housing to the El Paso community.

Credit Unions Combat Predatory and Payday Lenders
    Over the past decade, high-cost credit facilities, such as payday 
lenders and subprime mortgage lenders, have flourished across the 
country, particularly in the 
underserved areas. Unfortunately, many of these lenders incorporate 
predatory 
practices into their programs, such as exorbitant fees and interest 
rates, frequent ``flipping'' of the loans to needlessly increase costs, 
undisclosed balloon notes and unnecessary insurance premiums.
    Credit unions have stepped up their efforts to combat predatory 
lenders in neighborhoods by offering affordable alternatives for both 
payday loans and mortgage loans. A ``payday loan'' refers to the use of 
a post-dated check to receive a small loan until the next payday. 
Generally, the annual percentage rate for a payday loan is more than 
400 percent.
    The demand for these payday loans continues to increase, and there 
are now more payday lenders across the country than credit unions.
    To reverse this disturbing trend, credit unions have developed 
affordable alternatives to the high-cost payday loan. For example, some 
credit unions offer their members up to $300 at 18 percent with up to 6 
months to pay back the loan, as long as the member has direct deposit. 
Some credit unions offer emergency loans, for specific purposes, with 
no fees or interest attached. Some credit unions have opened facilities 
in underserved neighborhoods to offer not only small unsecured loans, 
but also low-cost check cashing, affordable money orders, bill-paying 
services, bus tokens, and free credit counseling.
    Credit unions also have developed a variety of subprime lending 
programs to help consumers build credit, get into homes with as little 
as 1 percent down, and pick up smart credit habits as they reduce their 
loan rates. For example, one credit union program offers subprime loans 
at 2 percent or 4 percent above normal rates, depending on collateral. 
The credit union drops this subprime rate to the prime rate when the 
borrower has made 12 on-time payments.
    Another credit union program offers its subprime borrowers several 
ways to reduce their interest rates. For example, attending one 
consumer credit counseling class reduces the rate by \1/2\ percent; 
attending more than one class will reduce the rate by 1 percent; 
depositing $15 a month into a savings account for a year reduces the 
rate by \1/2\ percent; and for each year the debt does not increase, 
the rate drops 1 percent.
    In cities like El Paso, predatory lending practices have reached 
epidemic proportions. Credit unions are uniquely positioned to help 
combat these practices, particularly if given additional tools to do 
so.
    Finally, CUNA applauds Chairman Sarbanes and other Members of the 
Committee for your commitment to eliminating predatory lending 
practices through the introduction of ``The Predatory Lending Consumer 
Protection Act of 2002.'' We look forward to reviewing the details of 
the bill and working with the Committee staff to support the passage of 
an effective antipredatory lending law.

Conclusion
    In conclusion, on behalf of CUNA, I am grateful for the opportunity 
to have commented on the plight of the ``unbanked'' and ``underserved'' 
and how West Texas Credit Union and credit unions across the country 
are trying to reach out and bring them into the financial mainstream. 
There is no more pressing need in my opinion, for it is only through 
economic opportunity that we can solve many of the problems facing our 
Nation's poorest and most deprived individuals. I have witnessed first-
hand that poor people want to work and know even with a little bit of 
savings they can grow and thrive. Whether it is through the First 
Accounts Program, affordable housing programs, enhanced IDA's, expanded 
opportunities to serve their communities, or financial literacy, credit 
unions stand ready to meet this very important challenge.

                               ----------
                   STATEMENT OF CLIFFORD N. ROSENTHAL
                           Executive Director
       National Federation of Community Development Credit Unions

                              May 2, 2002

    The National Federation of Community Development Credit Unions 
(NFCDCU) is a nonprofit association that represents those credit unions 
with the specific mission of serving low- to moderate-income 
communities. Many of the people served by our credit unions come from 
the ranks of the ``unbanked.'' They are people whose ``life savings'' 
sometimes hover in the double digits, who live from paycheck to 
paycheck and cannot afford the high fees that most banks would charge 
customers with their modest balances. Some are recent or longstanding 
immigrants.
    Our 215 member community development credit unions (CDCU's) are 
found in 40 States, the District of Columbia, and Puerto Rico. They 
serve more than a million people living in urban, rural, or 
reservation-based communities. They have served unbanked American 
communities for as long as 70 years.
    In the last decade, several Federal initiatives have begun to aid 
CDCU's in our work of providing financial services to the unbanked. The 
Community Development Financial Institutions (CDFI) Fund, in 
particular, has made a dramatic difference in the ability of some of 
our credit unions to reach out far more widely to the unbanked. CDFI 
Fund assistance has enabled them to open branches in places like San 
Francisco's Tenderloin district (Northeast Community FCU), in a 
farmworker community of Watsonville, California (Santa Cruz Community 
CU), in the South Bronx (Bethex FCU) and the Lower East Side (Lower 
East Side People's FCU) of New York City. It has enabled a county-wide 
credit union in Mississippi (Quitman/Tricounty FCU) to add two more 
counties to its service area, and has enabled 
a credit union that serves the Navajo and other reservations to add 
electronic 
services. Many of these changes would have been impossible without the 
CDFI Fund. For this reason, it is vital that the Senate Banking 
Committee, in reviewing service to the unbanked, add its voice in 
support of increased appropriations for the CDFI Fund.
    The First Accounts Program through the U.S. Treasury is an 
intriguing and a 
potentially important initiative. Our organizations, like many others, 
applied to the First Accounts initiative of the Treasury Department. 
Regardless of whether we are successful, we commend the Treasury 
Department for encouraging creative, diverse approaches to delivering 
services to the unbanked. Since this is the first effort of its kind, 
we will look forward with interest to the results of the Treasury 
Department's award program. Inevitably, revisions and more precise 
targeting of the program will be required after the initial round. But 
we encourage the continuation of this significant effort.
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