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CONSUMER PROTECTION AND MIDDLE-CLASS 

WEALTH BUILDING IN AN AGE OF GROWING 

HOUSEHOLD DEBT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER 

PROTECTION 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING CONSUMER PROTECTION AND MIDDLE-CLASS WEALTH 

BUILDING 

OCTOBER 4, 2011 

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

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

SHERROD BROWN, Ohio, Chairman 

BOB CORKER, Tennessee, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JERRY MORAN, Kansas 

MIKE CRAPO, Idaho 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

GRAHAM STEELE, Subcommittee Staff Director 

MICHAEL BRIGHT, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

TUESDAY, OCTOBER 4, 2011 

Page 

Opening statement of Chairman Brown ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Corker .................................................................................................. 3 

WITNESSES 

Atif Mian, Associate Professor of Economics and Finance, Haas School of 

Business and Department of Economics, University of California, Berkeley . 5 

Prepared statement .......................................................................................... 30 

Katherine Porter, Professor of Law, University of California Irvine School 

of Law .................................................................................................................... 6 

Prepared statement .......................................................................................... 37 

Robert M. Lawless, Professor of Law, University of Illinois College of Law ...... 8 

Prepared statement .......................................................................................... 44 

Ray Boshara, Senior Advisor, Federal Reserve Bank of St. Louis ...................... 9 

Prepared statement .......................................................................................... 49 

G. Michael Flores, Chief Executive Officer, Bretton Woods, Inc. ........................ 11 

Prepared statement .......................................................................................... 54 

Douglas Fecher, President and Chief Executive Officer, Wright-Patterson Federal Credit Union, Fairborn, Ohio ...................................................................... 13 

Prepared statement .......................................................................................... 58 

Ida Rademacher, Vice President for Policy and Research, Corporation for 

Enterprise Development ...................................................................................... 15 

Prepared statement .......................................................................................... 61 

Susan K. Weinstock, Director, Safe Checking Project, Pew Health Group, 

The Pew Charitable Trusts ................................................................................. 17 

Prepared statement .......................................................................................... 68 

(III)

(1) 

CONSUMER PROTECTION AND MIDDLE-CLASS 

WEALTH BUILDING IN AN AGE OF GROWING HOUSEHOLD DEBT 

TUESDAY, OCTOBER 4, 2011 

U.S. SENATE, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND

CONSUMER PROTECTION, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 3:10 p.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Sherrod Brown, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN SHERROD BROWN 

Chairman BROWN. The Committee will come to order. Thank you 

all for joining us. I apologize. I thank Senator Corker for actually 

being on time, and I apologize for being late. We were trying to 

work through some details on the currency bill on the Senate floor. 

Senator Corker spoke against it; then I spoke for it; and then the 

two leaders were working out some details, as they are wont to do. 

And I needed to stay to start to manage the bill, but thank you, 

all of you, for joining us. I thank Senator Merkley and Senator 

Hagan also for joining us. 

With our economy still recovering from the financial crisis, it is 

critical to understand how excessive household debt remains a burden to our Nation’s full recovery, understanding that we can better 

put our Nation back on the road to prosperity. Credit can be undeniably a good thing. It allows people to borrow against their future 

earnings to purchase essential goods and services. It allows families to buy homes and students to go to college. It helps people pay 

for food and clothing. 

It also can cause irreparable harm when those future earnings 

never materialize due to job loss or stagnant wages. It can undermine our economy when it is offered on terms designed to take advantage of consumers rather than to help their wealth grow. It is 

that capacity for wealth to grow that makes America a stable and 

prosperous country. It is that capacity to generate wealth and pass 

it down to future generations that really has created and preserved 

our middle class. 

But over the last three decades, in the last decade in several 

years in particular, the pathway to a strong economy and a strong 

middle class has been more and more difficult to travel. From 2000 

to 2010, median income for working-age households fell by more 

2 

than 10 percent. In that same decade, poverty increased overall by 

almost 4 percent. These are merely averages. The statistics, as we 

know, are far worse for Hispanic and African American households 

than they on the average in white households. 

Behind the statistics are stories of Americans forced to try to borrow as a substitute for stagnant wages and declining household 

value assets, and some were preyed upon by a burgeoning predatory lending industry. Cities like Cleveland and Dayton, here Doug 

is from, are clear examples of this devastating combination. In 

Cleveland, the same year that the LTV steel plant was filing for 

bankruptcy, Cuyahoga County officials were begging the Federal 

Reserve to crack down on predatory mortgage lending practices. 

Likewise, in Dayton, as Mr. Fecher knows all too well, we lost 

GM’s Moraine plant, a large assembly plant, at the same time that 

groups like the Miami Valley Fair Housing Coalition were going 

door to door educating the West Dayton community about the dangers of predatory refinancing schemes. The growing reliance on 

debt led to a vicious cycle. Our declining manufacturing base contributed to the dangerous growth of the financial sector. 

Financial services industry output went from 15 percent of U.S. 

gross domestic product in 1980 to 21 percent of GDP in 2010. Over 

that same period, manufacturing declined from about 21 percent of 

GDP to not much over 11 percent of GDP. Encouraged by predatory 

lending practices and flawed Government policies, including financial deregulation and free trade agreements, household debt 

reached 133 percent of household income by 2007, the highest level 

since the beginning of the Great Depression. The ensuing financial 

crisis exposed failures throughout the financial sector. It continues 

to affect families across Ohio and the Nation who have been hurt 

by the tremendous destruction of jobs and wealth and assets. Just 

this week we learned that household incomes dropped during the 

month of August. 

But we had good news that the manufacturing sector expanded. 

Wages actually declined in manufacturing and services and goodsproducing industries, and Americans were forced to tap their savings to cover those losses. 

The need to address these issues could not be clearer. I hope we 

can find some areas of agreement today because I know that Senator Corker shares some of my concerns about our indebtedness. 

I remember in our hearing in February Senator Corker wondered 

whether new rules for debit card fees would push consumers from 

checking accounts that are backed by a consumer’s assets into credit cards that are debt instruments. We did not ultimately agree on 

the swipe fee issue, but I understand and appreciate his concerns 

from that. 

Professor Porter notes in her testimony that while Wall Street is 

too big to fail, American families are too small to save. And from 

reading the first chapter of your book, it is almost that American 

families were also too small to be noticed by policy makers. 

It is important to remember that excessive household debt is 

dangerous to individual families but also is a problem for all of us. 

Professor Mian estimates that the deleveraging process caused 4 

million of the 6.2 million jobs lost between March of 2007 and 

March of 2009. I wear a canary pin on my lapel signifying many 

3 

things, one of them the canary in the mine the mine workers took 

down to the mines, where the mine worker had no protection of a 

union that was strong enough or a Government that cared enough 

in those days, and the mine worker was on his own. The canary— 

in many ways household debt in this country is the coal mine of 

our economic security. 

If you think that indebtedness will not cause greater problems 

for society, I would tell you to look at what is happening in cities 

across the country now—thousands of people in the streets protesting, among other things, illegal foreclosures, excessive student 

loan debts. Their activism reminds us that we ignore these issues 

at our own peril and the peril of the futures of our children and 

grandchildren. 

I look forward to exploring ways that policy makers can encourage responsible borrowing and sensible consumer protections. I am 

confident that the new Consumer Financial Protection Bureau will 

be a tool to help American families rebuild some of the wealth that 

they have lost over the last decade. I look forward to a vote in this 

Committee, I believe perhaps as early as Thursday, on whether to 

confirm former Ohio Attorney General Richard Cordray as the first 

Director. I think that would be good for American families and 

good for the American economy. 

Senator Corker. 

STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Thank you, Mr. Chairman, and I thank each of 

you. I will be very brief. I think one of you actually has a flight 

to catch, and I do not usually make long comments anyway. 

I will say that I am looking forward to your testimony. I probably 

more than anybody on our side of the aisle spent a great deal of 

time trying to negotiate a consumer protection bureau and really 

think that we should have one. It is my hope that the Administration will try to institutionalize and not cause it to be something 

that is personality-based where one person that is a know-all is 

setting the landscape for the entire financial industry, but instead 

of that there will be some appropriate checks and balances. And I 

think if that occurs ever, we will actually end up having someone 

leading the consumer protection agency with the appropriate type 

of institutional checks and balances. 

I will also say that while I very much agree with my friend regarding some of the concerns that I have with consumers, sometimes we as policy makers create policies that have unintended 

consequences. And, you know, it is pretty interesting to see the 

senior Senator from Illinois on the floor sort of apologizing to everybody in some ways that in creating the Durbin amendment we 

basically shifted money out of the pockets of consumers into the 

bottom line of Walmart and Target and other entities. So unintended consequences do occur. 

Whether you agree or disagree with what I just said, the fact is 

we need to be careful as policy makers, and I look forward to your 

help in making sure that we make prudent decisions. So thank you 

for being here. 

Chairman BROWN. Thank you, Senator Corker. 

4 

Senator Merkley, do you have an opening statement? Senator 

Hagan, an opening statement? OK. Thank you. 

I will introduce the panel with brief introductions, then go from 

left to right. And, Ms. Porter, thank you for being here, and if you 

have to leave, certainly we will be mostly concluded, perhaps entirely concluded by then. 

Atif Mian is an associate professor of economics and finance at 

the Haas School of Business at the University of California at 

Berkeley. His recent work is centered on understanding the origins 

of the global financial crisis, the political economy of Government 

intervention in financial markets, and the link between asset 

prices, household borrowing, and consumption. 

Katherine Porter is a professor of law at U.C.-Irvine where she 

teaches courses on consumer bankruptcy and consumer law. She is 

a regular contributor to Credit Slips, a blog that discusses issues 

related to credit and finance and bankruptcy. She is the editor of 

the forthcoming book, ‘‘Broke: How Debt Bankrupts the Middle 

Class.’’ 

Robert Lawless is a professor of law at the University of Illinois 

College of Law, codirector of the program on law, behavior, and social science. He is a regular contributor to the blog Credit Slips. 

From January to May of 2000, he was a visiting professor at the 

Ohio State University’s College of Law. I am sure that he still regrets leaving to this very day. 

Ray Boshara, also an Ohio native, is senior advisor at the Federal Reserve Bank of St. Louis. His work at the Fed focuses on 

household financial stability with an emphasis on strengthening 

the balance sheets of American families, how that contributes to 

economic growth. He served as an advisor the Clinton, George W. 

Bush, and Obama administrations. He is a graduate of Ohio State. 

No more comment on that. 

Michael Flores is president and CEO of Bretton Woods, Inc., a 

specialty management consulting firm serving financial institutions, with 30 years of financial institution experience through his 

employment in banking as well as consulting. Welcome. 

Douglas Fecher is president and CEO of Ohio’s largest credit 

union, Wright-Patterson Credit Union, a credit union with $1.5 billion in assets. He worked his way up from a teller to become the 

CEO, a position he has held for almost 11 years. He is past director 

and chairman of the Ohio Credit Union League. 

IDA Rademacher is the vice president for policy and research at 

the Corporation for Enterprise Development. She leads its policy 

and research team in their efforts to advance comprehensive research and policy agendas that expand asset- and wealth-building 

opportunities for all Americans. 

Last, Susan Weinstock is the project director for the Pew Charitable Trusts’ Safe Checking in the Electronic Age Project. Previously she was the financial reform campaign director at the Consumer Federation of America. Prior to joining them in 2009, she 

worked on a number of different positions at AARP. 

Professor Mian, if you would begin. Thank you all for joining us. 

5 

STATEMENT OF ATIF MIAN, ASSOCIATE PROFESSOR OF ECONOMICS AND FINANCE, HAAS SCHOOL OF BUSINESS AND DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, 

BERKELEY 

Mr. MIAN. Thank you, Chairman Brown and Senator Corker, for 

inviting me. I am going to talk about the role of household leverage 

in the current economic crisis and the importance of household balance sheets in explaining macroeconomic fluctuations. My comments today are based on research that my coauthor Amir Sufi and 

I have done over the years. 

In order to understand the role of household balance sheets in 

the current economic slump, we must begin from the unprecedented and staggering increase in household debt during the 2000s. 

The sharp expansion in the supply of mortgage credit in the U.S. 

resulted in U.S. household debt doubling from $7 trillion in 2001 

to $14 trillion in 2007. This massive accumulation of debt by households with largely stagnant real wages was not sustainable. Correspondingly, toward the second half of 2006, mortgage delinquencies started to creep up, and about five quarters later the U.S. 

enters into a full-blown recession. 

Our research shows quite conclusively that the main reason for 

the U.S. economic collapse was a process referred to as 

‘‘deleveraging’’ of household balance sheets. That is, faced with reduced net worth, highly leveraged households sharply cut back on 

consumption to conserve debt capacity and pay back existing debt. 

For example, we find that consumption such as the sale of new 

automobiles drops significantly more in areas with highly leveraged 

households. This drop in consumption severely impacted job losses 

as well. For example, job losses in the nontradable sectors, such as 

retail where businesses must depend on local demand to survive, 

job losses in such sectors were much higher in highly indebted 

counties. Extending these job losses over the entire economy, we 

find that we can conservatively attribute 4 million of the 6.2 million jobs lost between March of 2007 and March of 2009 to this 

process of deleveraging. In other words, 65 percent of total jobs lost 

in the U.S. are due to this deleveraging, and the drop in aggregate 

demand as a result of it. 

Policy choices in the face of extremely damaging effects of 

deleveraging and aggregate demand cycle are somewhat obvious. 

We must do more to facilitate principal debt reduction for highly 

indebted and underwater homeowners. The economy can neither 

afford to foreclose these homes nor bear the costs associated with 

reduced aggregate demand. Despite almost 4 years since the start 

of the deleveraging cycle, only $1 trillion out of the $7 trillion of 

debt accumulated over 2001 to 2007 has either been paid down or 

written off. 

The dilemma for efforts to reduce household indebtedness is that 

from a lender’s perspective it is not in their interest to write down 

debt that continues to be serviced on time. But as my analysis 

highlights, the collective consequences of such individually rational 

actions are quite unpleasant. If a large number of financially distressed homeowners cut back on consumption in order to protect 

their homes and continue paying their mortgages, the aggregate 

demand and employment consequences hurt everyone. Therefore, I 

6 

repeat, we must do more to facilitate principal debt reduction for 

highly indebted and underwater homeowners. 

In the long run, it is important to keep in mind that the relationship between high household leverage and long economic slumps is 

not limited to our current experience. In his seminal paper, Irving 

Fisher in 1933 described the role that high household indebtedness 

played in deepening and perpetuating the Great Depression. In 

order to prevent such episodes from happening again, we need to 

reevaluate our financial structure. In particular, I would submit 

that we need to put in place contingencies that will automatically 

write down the value of outstanding debt if the overall economic 

environment is sufficiently negative. 

For example, mortgage principal can be automatically written 

down if the local house price index falls below a certain threshold. 

If we had such contingencies in place in the current mortgage contracts, we could have avoided the extreme economic pain due to the 

negative deleveraging and aggregate demand cycle. 

I thank you very much for your time and consideration. 

Chairman BROWN. Thank you, Dr. Mian. 

Dr. Porter, Ms. Porter, thank you. 

STATEMENT OF KATHERINE PORTER, PROFESSOR OF LAW, 

UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW 

Ms. PORTER. I appreciate the opportunity to talk to you today 

about the reasons that thoughtful consumer protection is a vital 

necessity to our country’s future economic health. The decade of increases in consumer debt has reshaped the prospects of American 

families, and the recovery from the recession presents challenges 

for families trying to make prudent financial decisions and navigate this difficult economy. These challenges mean that consumer 

credit law will be a major determinant of the well-being of families 

for decades to come. 

Before the recession, for decades families added debt. In the mid1980s, the ratio of debt to personal income, personal disposable income was 65 percent. By 2007, that U.S. household leverage ratio 

had more than doubled, reaching an all-time high of 133 percent. 

Unfortunately for families, the debt binge was not accompanied by 

meaningful increases in disposable income. While income crept up, 

debt jumped up. 

The growth in debt also outstripped the appreciation of assets, 

eroding the wealth of families. As far back as 1995, the amount of 

mortgage debt began to increase faster than house values, and between 2001 and 2004, a period of relative prosperity, the typical 

household’s wealth actually declined. This expansion in borrowing 

spanned social classes, racial groups, sexes, and generations. Every 

age group except those 75 years or older took on increased debt between 1998 and 2007. African Americans, Hispanics, and non-Hispanic whites all become more indebted in this same period. 

People who lack a high school diploma and families headed by 

households over age 65, between 65 and 74, had particularly sharp 

increases in debt. By 2007, when those debt burdens peaked, 77 

percent of households had some type of outstanding consumer debt. 

Consumer debt has become one of the most common shared qualities of the middle class, higher than the fraction of the population 

7 

that owns a home, is married, has graduated from college, or attends church regularly. And as that debt increased, so, too, did the 

risk of financial failure. 

Today millions of Americans are struggling to avoid financial collapse. We all hope that the worst of the financial crisis is over. 

Subprime lenders have gone bankrupt. Most subprime and nontraditional mortgage products were eliminated by the market and 

later, for good measure, by the Federal Reserve and the DoddFrank Act. In the aggregate, families are dialing down their debt 

loads, and lenders have changed their practices. 

Some may use this credit retrenchment to argue against consumer protection laws or to justify reconfiguring the Consumer Financial Protection Bureau. In my opinion, these efforts are misguided. They fundamentally misunderstand the nature of the consumer debt overhang that is harming families and the overall economy. It is precisely in today’s turbulent, difficult economy that an 

energetic and dedicated consumer protection regulator is needed to 

aid families. Why? 

First, a regulator is needed because consumer debt remains at a 

level that would have been unthinkable a generation or two ago. 

Overindebtedness was not a temporary feature of the U.S. economy, and it is not a problem of the distant past cured by the recession, Government stimulus programs, or Dodd-Frank. 

Second, consumer protection is crucial because default rates remain very high. Foreclosures are a well-known story, but other 

worrisome trends exist, including significant increases in student 

loan default rates and a 28-percent increase last year in complaints 

to the FTC about debt collectors. Debt collection and default are 

not isolated experiences. They are now a routine and painful part 

of what it means to be middle class in the United States. 

Third, credit retrenchment, which has begun, will be a long and 

painful process. For many families it will mean lost homes, repossessed cars, second jobs, and dunning from debt collectors. Changes 

in credit standards and fears about taking on credit make it harder 

for families to hang onto the rung on the economic ladder where 

they are or to climb up it. 

Fourth, a Consumer Financial Protection Bureau can help ease 

anxiety about the turbulent economy. Americans’ appetite for risk 

reflects in part the insecurity that they face because of their debt 

loads. Americans are frustrated with the lack of an effective and 

sustained Government response to their hardships. Asked in 2010 

whom Government had helped a great deal during the recession, 

53 percent said banks, 44 percent fingered large corporations, and 

just 2 percent thought economic policies had helped the middle 

class. The banks may have been too big to fail, but families seem 

to have been too small to save. Middle-class Americans feel abandoned and that the Government’s response to the financial crisis 

missed their pain. 

Today families are in uncharted territory, facing risks in the job 

market, declines in Government service, and uncertain access to 

credit. It is precisely in this environment that consumer protection 

law can help families regain confidence in the American economy 

and make informed and smart decisions to rebuild their wealth. In 

this economy, the Consumer Financial Protection Bureau, which is 

8 

charged with monitoring the functioning of the credit markets, can 

be of use to develop outreach and education initiatives and provide 

technical expertise to lawmakers. 

I urge the Committee to move forward with the Consumer Financial Protection Bureau, confirming a Director so that its important 

work can begin. 

Chairman BROWN. Thank you, Professor Porter. 

Professor Lawless, welcome. 

STATEMENT OF ROBERT M. LAWLESS, PROFESSOR OF LAW, 

UNIVERSITY OF ILLINOIS COLLEGE OF LAW 

Mr. LAWLESS. Thank you, and thank you for inviting. In your invitation letter, you asked me to address household debt and the 

trends in household debt and how those trends affect in the extreme bankruptcy filings. But before I get into that, I want to talk 

a little bit about the subtext of what is, I think, in everybody’s 

mind as we’re talking here—this new financial regulator that is 

about to come on board. 

One of the things that I think people have forgotten is that in 

the lead-up to Dodd-Frank, in the wake of the financial crisis, there 

was a lot of discussion about what should happen. Then there are 

people like me. I am a believer that there are some products out 

there that people just cannot possibly afford. And I think the best 

solution to fixing those products is to ban them altogether. 

Now, I understand that is a controversial position. Not everyone 

is going to agree with that. But people of good faith and good judgment can differ over those type of policy outcomes. 

I think one of the things that has been forgotten in today’s debates and with the heated rhetoric is that one of the reasons the 

Consumer Financial Protection Bureau was so popular at the time 

of Dodd-Frank was that it was in many ways a compromise solution between those who would go further and those who felt that 

not a lot needed to be done. 

I would hope that, as we begin to discuss what the shape of the 

Consumer Financial Protection Bureau will look like going forward, 

we will remember that it was, again, in many ways a compromise 

solution. 

What you asked me here today mainly to talk about was about 

trends in household debt, and, Senator Brown, in your opening 

statement, you have already discussed some of this. I will not belabor the point. But one thing I would like to highlight that is in 

my written testimony is comparing the United States to other 

countries. 

You talked about the tremendous run-up in household debt over 

the past generations, and it is absolutely correct. In preparing for 

this testimony, I ran some numbers. Consumer debt in this country, even after you adjust for population growth and inflation, has 

increased 46 percent in the past 25 years, 106 percent in the past 

50 years. That is not counting mortgages. If you put mortgages into 

that calculation, private household debt is 220 percent more than 

it was 25 years ago, and 374 percent more than it was 50 years 

ago—almost 4 times as much. 

9 

We live in a very different time than our parents and our grandparents. Today, people coming of age can expect to be indebted for 

most of their adult lives. 

The United States, according to statistics from the Organization 

for Economic Cooperation and Development, leads the world in 

short-term debt. We owe $9,663 per capita in short-term debt, 

things like credit cards and payday loans. These are the types of 

loans that are most likely to be taken out on short notice, most 

likely to be taken out under pressure, most likely to be taken out 

without full information, and most likely to be subject to abuse. 

Moreover, household debt is undoubtedly linked to bankruptcy. 

Indeed, I think it is a common fiction that what drives bankruptcy 

filings in this country are the ups and downs of the economy. That 

turns out not to be true. It is outstanding household debt. Debt creates conditions for bankruptcy in the long run. In the short run, 

decreasing availability of credit puts people who might otherwise 

be able to stave off the day of reckoning into bankruptcy. You can 

actually have increased bankruptcy filing rates in economic boom 

times, like the 1990s, when high consumer borrowing in the early 

part of the decade laid the conditions for people to need bankruptcy 

and then some lesser availability of consumer credit drove them 

into the bankruptcy courthouse. 

You can also have decreased bankruptcy filing rates in economic 

busts, as is going to happen this year when bankruptcy filing rates 

will be down about 10 percent. Why? In the immediate aftermath 

of the 2007–08 financial crisis, people were less able to borrow, creating less need for bankruptcy today. And according to the Federal 

Reserve, consumer credit is now slightly easier to get than it was 

at this time last year. People are able to use borrowing to stave off 

the day of reckoning. 

So it is not the economy, which, again, I think people mistakenly 

blame for bankruptcy rates. They think that layoffs or unemployment is what is driving bankruptcy. Statistically, it turns out to be 

the amount of household debt. 

Now, the Consumer Financial Protection Bureau, of course, was 

not created to stop debt. As Senator Brown noted, responsible borrowing is good. People borrow to finance their houses, to finance 

automobiles, to finance their education. But what the Consumer Financial Protection Bureau is there to do is to stop the abuses that 

place individual households at risk of things like bankruptcy and 

to act as a check on runaway lending practices that place our whole 

economy at risk, as Professor Mian indicated. 

Thank you again for inviting me. 

Chairman BROWN. Thank you very much, Mr. Lawless. 

Mr. Boshara, proceed. Thank you. 

STATEMENT OF RAY BOSHARA, SENIOR ADVISOR, FEDERAL 

RESERVE BANK OF ST. LOUIS 

Mr. BOSHARA. Well, I am not only a proud graduate of OSU, but 

Revere High School in Akron, Ohio, and I worked for Congressman 

Tony Hall for many years, so plenty of Ohio credentials here. 

I need to say that, of course, these are my own views and not 

necessarily the views of the Federal Reserve Bank of St. Louis or 

the Board of Governors of the Federal Reserve System. 

10 

I was asked to talk about solutions more on the other side of the 

balance sheet: How do you help families build up savings and assets? Let me get right to my punch line. 

Looking back, we have seen the damage to families, communities, and the broader economy derived from three severe balance 

sheet shortcomings: 

First, we as a Nation let debt levels rise to damaging levels. 

Second, we did not help families buildup their savings. 

And, third, we failed to help families diversify their assets beyond housing. 

Going forward, we must address, proactively, each of these shortcomings. We need adequate savings, good wealth-building debt, 

and a diversity of assets. In other words, we need to look at the 

entire balance sheet, especially of low- and moderate-income families. 

When we build up net worth, we will see two things: 

First, we are going to see a stronger economy. Several people 

have identified weak balance sheets at the core of the economic 

downturn. The IMF, the Bank for International Settlements, others 

on this panel. If we strengthen balance sheets, we can turn that 

around and help revive the economy. 

Second, when we buildup net worth, we are going to see stronger 

families and better economic mobility outcomes. What researchers 

have done over the last several years is isolate what is called the 

‘‘asset effect.’’ What do you get from asset ownership, independent 

of income, education, and a whole other series of factors? What do 

you get when you own assets that you do not otherwise get? You 

get more mobility. You get better health outcomes, and better child 

outcomes, better educational outcomes. So building assets gets you 

better financial security, and a better society as well. 

I have five ideas in my written testimony, but first let me say 

something that unifies my recommendations. Building assets is not 

a new idea. The Federal Government is already very generously in 

the asset-building business. Through tax breaks for retirement, 

home ownership, college savings, investment, and business ownership, we have very generously encouraged better-off families, the 

upper half of the population, to build savings and wealth. I, therefore, think that the core policy challenge is to take this great policy 

that we have for building wealth for better-off Americans and make 

it work for those in the bottom half. How do we extend the savings 

mechanisms and incentives so that they work for people below median income? We need to ‘‘bundle’’ savings and investment opportunities for the lower half just as we have for the upper half. So it 

is not a new idea here; we just have to extend what we are doing 

already. 

So what are my five ideas? First, build assets early in life. As 

I mentioned, when one has assets, the better he or she will do. It 

turns out that the earlier in life you have assets, the better you are 

going to do. The best idea that I know of is to establish savings accounts at birth for every child born in America with greater resources directed at lower-wealth families. And I am pleased to recognize the leadership of two Members of the Subcommittee for 

their work on this issue: Senator Schumer and Senator DeMint. If 

we cannot achieve such an ambitious policy, I would encourage us 

11 

to think about something like a ‘‘Kid’s Roth’’ or a ‘‘Young Savers 

Account’’ or a ‘‘Roth at Birth’’—a voluntary account that would let 

kids start saving for some kind of a long-term asset. 

Second, we need to build assets at tax time. The IRS now has 

a ‘‘split refunds’’ form, which lets you take your refund and send 

it to three separate accounts. We can do a lot with that infrastructure. We also can improve the Federal Saver’s Credit, which Senator Menendez has provided leadership on. 

Third, we can build assets at the workplace. I benefit, many of 

the folks in this room benefit, from the Federal Thrift Savings 

Plan. That and other kinds of retirement plans have built enormous pension wealth in this country. We can use that infrastructure to build other kinds of wealth as well for low-income families. 

Fourth, build unrestricted savings. You know, this is a ‘‘sweet 

spot.’’ Families with unrestricted savings get better wealth-building 

financial services, better debt, and the ability to purchase longterm assets. 

And fifth, think about the 529 college savings platform as an opportunity to build savings and wealth. In Oklahoma, they are testing the idea of giving every child a 529 savings account at birth. 

And in the city of San Francisco, they are testing the idea of giving 

every kindergartner a college savings account. We can learn from 

these innovations. 

Finally, let me close by saying that we do not necessarily have 

to spend new money to move forward on this agenda to build assets 

for the bottom half of the population, for two reasons: 

First, we can imagine a more efficient allocation of current assetbuilding subsidies. We should strive to subsidize economic activity 

that would not otherwise occur, which is the case for the bottom 

half of the population. 

And, second, we can tweak existing products, forms, and systems. 

As a matter of fact, ‘‘auto 401(k)s,’’ ‘‘split refunds,’’ my proposed 

‘‘Kid’s Roth,’’—none of these have or would cost the Federal Government any money but could generate literally millions and billions of dollars of new savings and assets by the poor. 

Thank you. 

Chairman BROWN. Thank you, Mr. Boshara. 

Mr. Flores. 

STATEMENT OF G. MICHAEL FLORES, CHIEF EXECUTIVE 

OFFICER, BRETTON WOODS, INC. 

Mr. FLORES. Good afternoon. Thank you, Mr. Chairman, Senator 

Corker, Senator Merkley. I appreciate the opportunity to be here 

today. 

I take a little bit different approach to this. As you noted in my 

bio, I have been in the financial services industry for 30 years. Actually, I have been consulting for 30 years. I started in banking 

about 7 years before that. I have seen a lot of changes in the industry, and what I want to focus on today is the impacts, as Senator 

Corker had mentioned, on unintended consequences of regulations, 

some that we are seeing right now, and then relate that to the 

CFPB and some concerns that I have there, not that I do not agree 

that we need a CFPB, it is how it is structured, how it is implemented. 

12 

First of all, let me talk about the banking business model and 

why we are having less access to the middle class, the people we 

are talking about are starting to be marginalized out of traditional 

mainstream banking. The banking model is a 20th century banking 

model. The commercial banking system has not figured out the 

21st century model yet, and it is for good reason. 

They have two sets of customers. They have their legacy customers, and I hate to say baby boomers, but the older customers 

that still want the branch, still deal with checks, still use cash, and 

still go to the teller line. Then you have the Gen Y customers that 

will probably never step into a branch and do everything off their 

PDA. This is their bank. 

The bank has to support both those cost structures right now, so 

there is extreme pressure on their earnings. Banks have had margin compression for the last 15 years. What do they do to address 

that? They try to get more to a fee model. How do they do that? 

Well, overdrafts were the first shot at that, and I am a guilty 

party. I helped install some of those overdraft programs. But we 

did it for checks because that was a service to the consumer. If you 

returned the check, you are going to pay two to three times more 

than if you paid that check in the overdraft originally. Where we 

went off the rails with this thing is opening it up to debit card 

transactions. There was no value in that $3 plus $35 cup of coffee 

that everybody talks about. 

Then we ended up with interchange fees, and interchange was 

not driven initially as a source of fee income. It was driven to push 

people to a new service delivery model. Use that debit card. Stop 

writing checks. Get rid of the paper out of the system. Reduce reliance on cash. Use that debit card. People started using the debit 

card. The income started rising, so this is a great deal. Then we 

have regulation that addressed that and has reduced both overdraft income as well as interchange income. 

Expenses—we have increased interest expense in banks by fee 

regulating, Reg Q, and allowing payment of interest on business accounts. 

And finally, and all my clients talk about this, are compliance 

costs. Banks under $1 billion, one, do not know if they have the 

money to afford good compliance officers, and two, where are they 

going to find good compliance officers? They are few and far between and it is an extreme cost that is being added. 

So the bank is being squeezed from revenue, on the expense side, 

and what needs to be done, then, to address this? Why are banks 

not offering the services to the middle class? Service charge income—you have read in the last two or 3 days the new service 

charges going in, and as you had said, we have now had a transfer 

of wealth from the consumer through the bank to the merchant, 

which was not the intended consequence of the original legislation. 

Alternatives to checking accounts—with these high rates, people 

are going to start dropping checking accounts. What is the alternative? Right now, it is the general purpose reloadable prepaid 

card. Well, there are some restrictions in that that say if you allow 

the consumer as a service to pay their bills with that card, then 

we are going to not allow the exemption for the prepaid cards on 

interchange. 

13 

And so the providers are faced with, do we cut service or do we 

cut our revenues, and that is yet to be determined what is going 

to happen. 

Finally, let me talk about the CFPB for a moment. As I said earlier, I think it is needed. My concern is there is a concentration of 

power the way it is currently structured, and I am concerned about 

accountability. I think my opinion is it should be accountable to 

Congress. 

And finally, I believe the Director ought to report to a board, and 

let me tell you why. I think that board ought to be representative 

of prudential regulators and members of the industry. That way, 

when regulations are proposed, all those people can deal with—the 

prudential regulators can deal with safety and soundness issues, 

because right now we separate safety and soundness from consumer protection. And members of the industry can make their 

point of what is the potential unintended consequences of the proposed regulation. 

So what are the options that are available out there right now? 

Well, overdrafts are still there for checks, and I still maintain that 

is a valuable service to the consumer. The other option for credit 

are what some of the larger banks are testing, deposit advance 

products, which our next member of the panel will talk about his 

product. Yes, they are expensive, but they are in demand. And it 

is interesting when you talk about demand. With Reg E, you are 

requiring the consumer to opt in for debit card transactions, which 

I thought would be very low because I did not see the value. It has 

turned out to be an extraordinarily high opt in. Why? I do not understand. It is the consumer acting, saying they want that service. 

So I think we need to strike a balance, consumer needs, consumerdriven, market-driven solutions versus strictly regulatory-driven 

solutions. 

I will be happy to answer any questions. Thank you. 

Chairman BROWN. Thank you, Mr. Flores. 

Mr. Fecher, welcome. 

STATEMENT OF DOUGLAS FECHER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WRIGHT–PATTERSON FEDERAL CREDIT UNION, FAIRBORN, OHIO 

Mr. FECHER. Thank you. Thank you, Mr. Chairman. We have 

spent a lot of time talking about consumer balance sheets, and I 

am with Wright-Patterson Credit Union and we are in the business 

of fixing consumer balance sheets. We are in Dayton, Ohio, as you 

noted. We are a community hard hit by this economy. In the last 

3 years, we have lost 33,000 jobs in Dayton. Our members are facing an uncertain financial future. 

I have a lot of the same statistics some of the other witnesses 

had on the incredible rise in consumer debt over the years, the 

drop in their savings rates, which at one point even became negative, the drop in their home prices, and the one that is most alarming to me, household net worth is $5.5 trillion less today than it 

was at the beginning of the financial crisis. 

But I am the one on the street trying to serve these folks who 

come in that are overloaded with debt. They cannot afford to make 

their next car payment. They are worried about their house. They 

14 

do not know what to do next and they come to see me at the credit 

union and our staff. 

Clearly, the need for our affordable financial services have never 

been greater, and that is where I think the cooperative credit union 

model comes into play. Our mission is simply this. We help folks 

achieve financial freedom for themselves and their families. 

Specific to debt, this whole issue of debt, the way you make good 

loans is you make them up front in a way that they can afford to 

be repaid and you know that going in. You make them for provident and productive purposes, not speculative purposes. You tell 

the members exactly what their loans are going to cost. You make 

sure they know every single fee that they might be faced with in 

the future. You take every opportunity to advise the member on 

how to increase their savings accounts, even when they are taking 

out a loan. And if they do happen to fall behind, you treat them 

with dignity and respect and work with them on a plan to bring 

them back to financial health, if that includes modification, adjusting their rate, or whatever it takes to get them back to financial 

health, although I do not agree that reducing principal balances ultimately will just shift the cost somewhere else in the economy. 

These principles are the foundation of the way Wright-Patterson 

Credit Union lends money. We try to create an environment where 

we help people change their lives. In my written testimony, you 

will see several stories of how we serve members through mortgage 

modifications, credit cards that are not designed to tempt people to 

spend money but designed to help them pay down their debt. We 

have emergency payday loan products that are affordable for a borrower who runs into a short-term need of emergency cash. 

We educate. We serve the airmen and airwomen of Wright-Patterson Air Force Base and we find them in great need of first-time 

car buyer loans, but they have never borrowed money before and 

they do not know how. So we teach them how to do that through 

our financial counseling and education services, just to name a few 

of the things that we have done. 

We are proud of the way we help our members save because we 

can see the impact it makes on their lives, but I have to take the 

other side on some parts of this. Like all smaller financial institutions—we are under about $2 billion in assets—we face challenges 

that make it harder for us to do this stuff. Since 2008, we have 

been given more than 160 new rules and regulations from some 27 

different financial agencies, or Federal agencies, despite the fact 

that our Nation’s credit unions had nothing to do with the financial 

crisis. 

While we would rather hire loan advisors, the people that can 

meet with our members to teach them how to make better use of 

their own money, we find ourselves trying to hire compliance officers, and that is the truth. It is not a statement other than the 

truth. And all we really do with those compliance officers is demonstrate that we have always tried to do the right thing. The fact 

is, our Nation’s community-based financial institutions, as I sit 

here today, are worried that, ultimately, if you are under a billion 

dollars in assets, you could be regulated out of business. This country does not need fewer small institutions, it needs more of them. 

15 

I would also like to comment briefly on the CFPB. I have to 

admit, we are a little concerned that it might create another level 

of regulation for us to follow, but we support the goals of the agency. There are abuses going on that need to be curtailed. I note that 

we have a branch in an area of town next to a pawn shop, next 

to a payday lender, and the only one there that is regulated is us. 

The CFPB needs to address that fact. 

I also think that the greater transparency in the simplified disclosures that a new agency such as this would require would highlight the way credit unions have always done business. I can also 

talk about Richard Cordray. He has outstanding qualifications and 

he understands the unique role of credit unions and what they do 

in the lives of consumers. But I have to say this. We hope the agency empowers credit unions and other lenders to do their jobs of 

helping consumers to save and make better use of their loans without adding an excessive regulatory cost. And we hope Congress will 

ensure the Bureau fulfills its mandate to address unnecessary and 

burdensome regulation. 

I will close quickly with an email I received just last week from 

a member who personifies the typical financial challenge faced by 

our membership. I quote, ‘‘I am writing you today to inform you of 

the difference your company has made in my life. My previous car 

payment was $348, and with my rent being $699 a month, including my other household bills, I could barely make ends meet. Some 

weeks, I could not feed myself due to the strain of having this enormous car payment. Just 2 weeks ago, your credit union approved 

me for a car payment of $192. You guys saved me $156 each 

month. My interest rate went from 24 percent to 8 percent. You 

guys helped me keep food on the table.’’ 

I get emails like this all the time and it affirms to me that we 

are doing exactly what you want us to do. We are taking care of 

consumers, helping them improve their financial situation, putting 

money back in their pockets. In fact, this year alone at Wright-Patterson Credit Union, we have saved our members more than $10 

million in loan interest costs by refinancing their high-interest 

loans to lower rates. 

To conclude, I believe in the power of America’s cooperative credit unions. We have always been here for consumers, often when 

they have had nowhere else to go, in good times and bad. A credit 

union cannot be bought and it cannot be sold. If Congress strengthens and empowers credit unions, credit unions will do even more 

to help people keep more of their hard-earned money. 

I will be happy to take any questions that you have. Thank you. 

Chairman BROWN. Thank you, Mr. Fecher. 

Ms. Rademacher. 

STATEMENT OF IDA RADEMACHER, VICE PRESIDENT FOR 

POLICY AND RESEARCH, CORPORATION FOR ENTERPRISE 

DEVELOPMENT 

Ms. RADEMACHER. Thank you. Good afternoon, Chairman Brown 

and Ranking Member Corker and also Senator Merkley. I commend you for devoting a hearing to the issue of building middleclass wealth at a time when our collective and individual balance 

sheets are very much in the red, as we have been hearing about. 

16 

Some would argue that in the current economic climate, it is not 

realistic to focus on saving and wealth building, but saving is exactly the right issue to focus on. It is critical for low, moderate, and 

middle-income households precisely because these are the families 

most vulnerable to income shocks from job loss, medical emergencies, and other costs which can knock them totally off course financially. And borrowing one’s way out of one emergency often sets 

up a downward spiral of debt that can be extremely difficult to recover from. 

The need for short-term credit can also be understood as a need 

for liquidity and for savings. Research from the Urban Institute 

shows that a relatively small nest egg of about $4,000 provides as 

much protection against material hardship in the face of an economic shock as being in the next highest third of the income distribution. 

The middle-class squeeze in America is more pronounced and 

more consequential than at any time in modern history. Regarding 

savings, over half the population does not have that $4,000 nest 

egg I just mentioned. And regarding wealth, the latest report from 

the Pew Hispanic Center found that the median household wealth 

for Hispanics fell 66 percent from 2005 to 2009, 53 percent for African Americans, and 16 percent for white households. The net worth 

of white families now stands at 18 to 20 times that of Hispanic and 

black households in America, the largest gap in 25 years. 

Regarding credit and debt, I will not go over all of the statistics 

my colleagues here have already talked about. I would say that 

over half of consumers in the U.S. have what can be considered 

subprime credit scores at the moment. 

The recession has clearly exacerbated financial problems, but at 

another level, these problems reflect years of Government policy 

decisions that disproportionately, if unintentionally, help high-income households build assets while virtually ignoring the needs of 

middle-class and explicitly penalizing efforts by low-income households to save and to invest. 

Last year, CFED and the Annie E. Casey Foundation published 

a report called ‘‘Upside Down’’ which showed the Federal Government spends upwards of $400 billion a year to encourage Americans to save and to build assets. But the policies are primarily embedded in the tax code, and as a result, they are overwhelmingly 

inaccessible to middle- and lower-income households who do not 

itemize and who have a limited tax liability. 

In the study, we found that taxpayers making $1 million or more 

in 2009 received a tax break of about $95,000, which is enough to 

help finance a pretty good college education for one of their kids. 

Tax filers making less than $20,000 got a break worth about $5, 

which is enough to pay for 2 days of school lunch. This expensive, 

ineffective, and skewed allocation of tax subsidies has been relatively ineffective at generating new net savings and has added to 

both the Federal deficit and the growing wealth gap. 

Without adequate savings, without adequate income, or without 

adequate product options, the real financial choices of millions of 

Americans are limited. I would urge Members of the Subcommittee 

to take the following actions to improve the financial security of all 

Americans. 

17 

First, confirm a Director to lead the CFPB. One of the main goals 

of Dodd-Frank was to unify the entire financial services marketplace under one set of clear, transparent rules with consumer financial well-being in mind. Without a Director, the CFPB is limited in its ability to regulate in many sectors of the market, including nonbank financial institutions, payday lenders, private education lenders, consumer credit rating agencies, and mortgage 

servicers. 

Congress should also encourage the CFPB to focus on improving 

disclosures for all consumer financial products and on helping consumers build their credit scores by ensuring the accuracy of credit 

reports and by expanding the amount of information reported to 

consumer credit rating agencies that could help build the credit 

files of thin and no-file consumers. 

Beyond the CFPB, Congress can do much more to support the 

goals of wealth building in low and moderate-income families. Specifically, Congress should remove penalties in our safety net programs for developing savings that can help families move beyond— 

move into financial independence. Congress should follow the lead 

of States like Ohio that have eliminated asset tests in their TANF 

program. Congress could also consider reforming the asset test in 

the SSI program, following the trend of asset limit reform occurring 

at the State level for TANF, SNAP, and Medicaid programs. 

By expanding the savers’ credit and making the credit refundable, Congress could provide a powerful, easy, safe incentive to as 

many as 50 million lower-income tax filers who desperately need 

to build savings. Congress additionally enacting the automatic IRA 

would enable the 78 million workers who lack access to employersponsored retirement plans to use payroll reductions to open and 

fund IRAs with minimum effort. 

Congress should reauthorize the Assets for Independence Act, 

which supports one of the few programs geared specifically to lowincome families that helps to support wealth building and financial 

education to help these households get ahead. 

And Congress could also support, as my colleague raised, the creation of child savings accounts to greatly expand the economic mobility of millions of children. 

Taken together, these policies cost a small fraction of the billions 

of dollars the Federal Government currently spends to subsidize 

asset building, and they could easily be funded by capping some of 

the existing and exclusive tax breaks now in place. More importantly, they would begin to address some of the long-term inequities that contribute to the wealth gap, and they would help millions 

of families build a more secure economic future. Thank you. 

Chairman BROWN. Thank you, Ms. Rademacher. 

Ms. Weinstock, welcome. 

STATEMENT OF SUSAN K. WEINSTOCK, DIRECTOR, SAFE 

CHECKING PROJECT, PEW HEALTH GROUP, THE PEW CHARITABLE TRUSTS 

Ms. WEINSTOCK. Thank you. Thank you for the opportunity to 

discuss Pew’s research on the importance of transparent and fair 

financial products and services as well as their use as a means to 

build and sustain wealth. Based on research and critical analysis, 

18 

the Pew Health Group seeks to improve the health and well-being 

of all Americans, an important component of which is consumer financial product safety. 

The most common of these products is the checking account, 

which 9 out of 10 Americans have. In October 2010, the Pew 

Health Group’s Safe Checking Project began a study of more than 

250 types of checking accounts offered online by the 10 largest 

banks in the U.S. which held nearly 60 percent of deposits nationwide. Through this research, we identified a number of practices 

that put consumers at financial risk, potentially exposing them to 

high costs for little benefit. 

I would like to highlight three of our policy recommendations. 

Number one is the need for a disclosure box laying out account 

terms, conditions, and fees. Number two is complete disclosure of 

overdraft options. And number three is prohibition of transaction 

reordering that maximizes overdraft fees. 

First, 111 pages. That is the median length of disclosure documents from the 10 largest banks in the United States. I think we 

all can agree that disclosures are critical for consumers to make informed decisions, but the information needs to be presented in a 

format that is clear and understandable. Obviously, with 111 

pages, the checking accounts in our study did not meet this transparency standard. These documents are not user friendly, with 

highly technical and legalistic text. For this reason, we developed 

a model disclosure box to provide relevant information to checking 

account customers which is included in my written statement. 

In developing a disclosure box, we tested drafts with consumers 

in three cities. Participants thought the box would be useful if they 

wanted to investigate a bank’s offerings and/or compare multiple 

banks on the basis of fees. As a follow-up, in July of 2011, we commissioned a national survey of U.S. checking account holders. Seventy-eight percent of account holders believe it would be a positive 

change to require banks to provide a one-page summary of information about checking accounts’ terms, conditions, and fees, while 

only 4 percent think this would be negative. 

Our second research finding concerned overdraft options. Currently, there are two main categories of overdraft products. We define overdraft penalty plans as short-term advances made for a fee 

by the bank to cover an overdraft, the median cost of which is $35. 

Overdraft transfer plans involve a transfer from another account, 

either a savings account, a credit card, or a line of credit, with a 

median cost of $10. 

As of August 15, 2010, new Federal Reserve rules required that 

customers must opt into an overdraft penalty plan that covers debit 

card transactions at points of sale and ATMs. If a customer does 

not opt in, any debit card transactions that overdraw the account 

will be denied and no fee will be charged. While Pew supports this 

rule, we would have preferred for the Fed to also require that comprehensive information about all available overdraft options, including fee amount, be provided to consumers who need to understand that they have three overdraft options and what each costs: 

Not opting in, which is free; overdraft transfer plans; and overdraft 

penalty plans. 

19 

Now that these rules have transferred to the Consumer Financial 

Protection Bureau, we believe that the CFPB should amend the 

overdraft rules to ensure that overdraft policy disclosures are clear 

and comprehensive. They should require full disclosure of all three 

overdraft options prior to opt in and as part of the disclosure box. 

Americans strongly support this added disclosure. In our July 

survey, 83 percent of account holders said they want banks to be 

required to provide a summary of information about overdraft options, while only 2 percent said this would be a negative change. 

An additional research finding is on bank processing of deposits 

and withdrawals. Banks’ reorderings of transactions can greatly 

impact the overdraft fees that consumers incur. At the time of our 

study, all banks and all accounts reserved the right to process all 

debits presented in a given day from highest to lowest dollar 

amount. Since that time, Wells Fargo, Chase, and Citibank disclosed that they will no longer reorder certain types of transactions 

for at least a portion of their accounts. 

Posting orders that maximize overdraft fees, especially those that 

post withdrawals from largest to smallest, continue to be the subject of court challenges. A Federal judge in California ruled against 

a bank on this practice and stated in his summary of the case, 

quote, ‘‘The essence of this case is that Wells Fargo has devised a 

bookkeeping device to turn what would ordinarily be one overdraft 

into as many as 10 overdrafts, thereby dramatically multiplying 

the number of fees the bank can extract from a single mistake.’’ 

Depository institutions should be required to post deposits and 

withdrawals in a fully disclosed, objective, and neutral manner that 

does not maximize overdraft fees, such as chronological order. Our 

July survey shows that 70 percent of checking account holders 

agree. 

Finally, this month, we will release a longitudinal study of 2,000 

low-income Los Angeles area households. We found, not surprisingly, that between 2009 and 2010, a time of great economic turmoil, the ranks of those without a bank account increased, with 

more families leaving banking than opening accounts. But what 

was surprising was the most common reason these households 

cited for leaving banking was unexpected or unexplained fees, not 

the loss of a job or a decrease in salary. We also found in times 

of economic decline, consumers with a bank account fared better 

and were more likely to be able to pay bills and also save for the 

future. 

Our research demonstrates the central role that bank policies 

and practices have in allowing consumers to understand the terms 

and conditions of their bank accounts. Making this marketplace 

fairer would allow consumers to manage their money responsibly. 

Providing information in a clear, concise disclosure box will enhance competition and make the market more efficient. 

In addition, practices that maximize fees, like transaction reordering, should be prohibited. Transactions should be processed in 

a predictable, objective, and neutral manner that responsible consumers can follow. These changes will allow consumers to build 

and sustain wealth by removing much of the hidden risk currently 

found in checking accounts. Thank you. 

Chairman BROWN. Thank you, Ms. Weinstock. Thank you all. 

20 

Mr. Boshara noted in his testimony that family wealth has been 

concentrated in home ownership, which he said, quote, ‘‘has contributed to the stability and upward mobility of millions of families 

in this country.’’ Well, we know the effects of the housing crisis, including both predatory mortgages and foreclosure fraud, on middleclass wealth building. Let me ask a specific question that all eight 

of you, I would like to answer. Be as brief and as concise and prescriptive as you can. 

What can consumer protection do to promote home ownership as 

a vehicle for saving? And you, unfortunately, Professor Mian, had 

the least time to think about the answer, but I will start with you. 

What can consumer protection do to promote home ownership as a 

vehicle for saving in the sort of traditional ways that we used to 

or have in this country, and many people still are able to? 

Mr. MIAN. I think that the main problem, at least in hindsight 

and from our historical experience, has been that even when these 

kind of policies are successful, sometimes they may be too successful in the sort run, like we saw in the 2000s when the home ownership rate increased by a lot, and that, in turn, can lead to a boom 

or a bubble in house prices, as well. 

So as we think about incentivizing people to build value in their 

houses, we should also think about what if the economy as a whole 

makes a mistake and things turn south. Do we have the protection, 

the downside protection, that is, and that is something I was emphasizing in my initial remarks, as well. We also need to think 

about downward protection. And that is why I was talking about 

we should—when we put these regulations in place, we should also 

think about circumstances. How will the regulated and the economy react in case house prices fall by 20 percent and we have to 

reallocate the savings and debt across the economy? 

That is the fundamental problem that we are facing right now, 

and I would just urge lawmakers to think about those scenarios, 

as well, and not just expanding or helping homeowners with more 

access, but in circumstances when things turn south, how will the 

economy react, or will we force people to go into foreclosure and 

things like that. 

Chairman BROWN. Professor Porter. 

Ms. PORTER. I think one answer is that buying a house is one 

of the biggest financial decisions people will make and it is an opportunity for them to have conversations with thoughtful, concerned financial institutions like the community financial institution that Mr. Fecher works for, about their overall financial profile. 

So one of the things we have already seen the Consumer Financial Protection do is respond to its mandate in Dodd-Frank to simplify disclosures and create a combined Truth in Lending and 

RESPA disclosure. So go from multiple disclosures enforced by 

multiple regulators to one disclosure enforced by one regulator. 

That kind of simplification and the kinds of financial education 

that the Consumer Financial Protection Bureau is doing, that conversation about purchasing a home needs to be seen as part of a 

larger financial strategy, not as a one-off decision that is a sure bet 

in the economy, because as Professor Mian says, it may not be. 

So I think part of it is to continue to emphasize counseling, purchasing, disclosures, and to think about home ownership as one 

21 

step toward building a financial future rather than as the only step 

or as a sure bet financial strategy for middle-class families. We 

have too many families who put all of their savings eggs in the 

housing basket, and I think the financial education role of the Bureau and the initiatives they have already rolled out in this regard, 

their ‘‘Know Before You Owe’’ initiative is a good example of how 

to combat some of that. 

Chairman BROWN. Thank you. 

Professor Lawless. 

Mr. LAWLESS. Yes. I will try to be really brief, because I think 

there is consensus here, and I think this is a consensus in the 

academy that there has been too much of an overreliance on home 

ownership as a way to build wealth rather than focusing on housing as an item of consumption. 

So, Senator, with all due respect, I would somewhat argue the 

question. I do not think that we ought to use home ownership as 

a wealth-building strategy, although I do agree home ownership is 

something that many people will aspire to and something that we 

ought to encourage. But I would encourage us to think about housing costs rather than home ownership, and as Professor Porter and 

Professor Mian said, have home ownership just be part of a much 

bigger financial picture. 

Chairman BROWN. Thank you. 

Mr. Boshara. 

Mr. BOSHARA. Well, I agree very much, of course, with the recommendation to diversify a family’s assets beyond their homes, as 

I have mentioned. I think that is the most important thing. 

Second, we need to be clear that home ownership is something 

that is not for everybody. We have to balance risks and rewards 

and be smart about how we do home ownership going forward. 

Specifically, though, to generate savings, there are a couple of 

ideas. One is that we could escrow savings, just like we escrow 

mortgages, mortgage insurance and property taxes, so that when 

you make your payment, a portion of your payment goes automatically into a savings account and you just buildup this savings account without thinking about it, and so that when the roof breaks 

or you have some sort of emergency, you have a stock of savings 

already generated. So, you know, I would think about building in 

that savings product into the payment itself. 

The other thing I would think about is thinking of ways to let 

families capture the upside of wealth accumulation through their 

homes, which is what we want, and then, therefore, using that equity for other asset building purposes, but to pool the risk of a 

down market. You know, is there a way to somehow socialize the 

risk of price decreases. Professor—I wrote down his name and do 

not have it here—you know, there are proposals out there right 

now to basically pool the risk of a down market so more homeowners can reap the upside of a good housing market. 

Chairman BROWN. Thank you, Mr. Boshara. 

Mr. Flores. 

Mr. FLORES. I think we are getting there. I think banks are getting back to the traditional underwriting requiring 20 percent 

down. That is going to say a lot of people are not going to qualify 

22 

for home at this point in time. If they save and get to that 20 percent down, then they will. 

The next issue, and I take a little bit different tack than my colleague over here is home equity lines of credit. Over the last 10 

years, it has been a piggy-bank for consumption and that is 

eaten—even if we did not have a down economy, that has eaten up 

their equity. That economy just exacerbate it. 

So I think if somebody has that, if they have got the equity, if 

they are going to go in for a home equity line, then certainly counseling about what is the impact, what are the appropriate purposes 

of home equity should suffice, and this all boils down to financial 

literacy. Whatever form that takes, whoever provides it, it is a need 

in this country. 

Most people do not understand how to handle money. They do 

not understand the basics of banking. And then when we get into 

these high dollar credits that they are involved in, they need some 

assistance in understanding that. 

Chairman BROWN. Mr. Fecher. 

Mr. FECHER. Thank you, Senator. I would agree with some of the 

previous commenters, that we need to be careful to think that just 

owning a home is a way to build wealth. In some cases it is; in very 

many cases it is not. If I were advising a member, I would make 

sure that they have a savings account set up and get in the habit 

of putting money into it before they ever thought about building 

wealth through a home, because when the downside hits the housing market, it hits hard, as we have seen, and it can wipe out every 

bit of wealth that a moderate income person might have. 

So I think as part of the bigger financial picture, just as has been 

discussed on the disclosure side of it, I agree. We need a shorter 

way to tell members what, or consumers, what a mortgage loan is 

going to cost them and their family, what the consequences of future events might be, for example, if it is a variable rate loan, not 

what the first payment is going to be, but what the highest payment of the loan might be so that they do not spend money they 

do not have to spend on a loan that they can put back toward their 

health. 

So it is a complex answer, but it is part of a bigger financial picture and it takes sitting down with the member and showing them 

what is best for them, and each situation is different. 

Chairman BROWN. Thank you, Mr. Fecher. Ms. Rademacher. 

Ms. RADEMACHER. Thanks. I think it is important to think about 

saving as both something that has to do with the product and the 

protections, and when you think about a house, in terms of the 

product and what it takes to get the right product, consumer education, specifically home purchase education and the home 

prepurchase counseling is critical. 

Also, the types of disclosures that are available so that somebody 

can understand the kind of product they are purchasing. It is a 

very important piece of the mix. In terms of protections, I think 

that the CFPB is already looking into this in pretty expensive 

ways. 

I would say that one of the studies we did a couple of years ago 

when we looked at home owners who had purchased homes, lowincome homeowners who had purchased with an IDA, compared to 

23 

other low-income homeowners in those same communities that had 

purchased homes at the same time, that IDA gave them 

prepurchase counseling and ensured that they had savings and 

skin in the game when they went into that. 

When we looked at long-term rates of home ownership and longterm foreclosure rates, we found that if you compared the low-income homeowners from the IDA study with other low-income homeowners in that area, less than 1 percent of the IDA purchasers 

used a subprime loan versus 20 percent in the larger market, and 

the foreclosure rate was about three times less. 

So I would say that home ownership is still a value for us to 

think about in terms of a way for low-income communities to build 

wealth. It has to be done very clearly, concisely, with the kinds of 

inputs and the kinds of education and the kinds of protection others have talked about. Thanks. 

Chairman BROWN. Thank you. Ms. Weinstock. 

Ms. WEINSTOCK. I should first say that Pew is a data-driven organization and we really have not looked at housing per se, but I 

also want to say that I think it is very important that people be 

banked, and that the research that we did in Los Angeles proved 

that. 

Forty-seven percent of the banked said that they saved when 

they could, and one-third of all banked used an automatic savings 

feature to move money regularly into a savings account. And also, 

I think the savings part is the first step to moving on to greater 

purchases or whatever. 

Chairman BROWN. Thank you. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and again, thank 

each of you for your testimony. As I look at the panel, sort of Mr. 

Boshara over, I think most of the witnesses have talked about solutions and ways of moving ahead. I look at the first three witnesses 

as more talking about consumers as victims. And it has really been 

interesting to sort of have that dichotomy here on the panel. 

It seems to me that western democracies in general, governments 

have over-levered, consumers have over-levered. I mean, it has 

been sort of the culture, if you will, of western democracies in 

many ways, not every one of them, but certainly in our country, 

and Senator Brown and I were talking and I certainly could not 

blame Democrats for all of this occurring. 

There have been some policies that they have pursued. I certainly could not say that Republicans were to blame. It just seems 

to me that as a society, what we have done over the last 20 years 

or so is really move toward people consuming a lot more and taking 

on more credit, and much of what we are seeing happen today is 

just a result of our culture. 

I wonder if the first three witnesses, in any way, would respond 

to that briefly. 

Mr. MIAN. Thank you, Senator. Yes, I think that is a question 

that I analyze almost on a daily basis. I apologize if my speech 

kind of sounds more like an academic or an economist, but that is 

just the nature of how things are. 

Any economy has two kinds of people, borrowers and those who 

lend them money, the lenders and the savings, and that is true for 

24 

the U.S. and that is true everywhere. That is number one, that is 

basic fact number one. 

Basic fact number two is economies overall are going to make 

mistakes. Things are going to go up and sometimes things are 

going to come down, house prices, other kinds of assets and so on. 

The problem that we are having in the U.S. and, indeed, the problem that we having globally is the following: We had a big bubble, 

let us assume that happened, in the housing market, for example. 

As things come down, we have to distribute losses across the population. That is just a fact of how the things are. And the question 

is, how are those losses distributed across the population? Under 

the way our financial system is structured, which is largely a debtbased financial system, debt is the losses. 

The first person to get hit with those losses is the borrower. That 

is just the nature of those contracts, and that is fine. I think at the 

individual level that is fine. We can say each person is responsible 

for how much they borrow. But none of us individually control the 

macroenvironment. 

So when the macro environment turns negative, the losses are 

disproportionately shifted on one segment of the economy. So internationally that happens to be Greece. Within the U.S. that happens 

to be underwater homeowners and the borrowers. 

And the big question is, what do they do in response to that financial pressure that is being shoved in one segment of the economy? This is what I talked about in my opening remarks. They are 

cutting back. Many of them are still paying back their mortgages 

and so on, but they are cutting back drastically on their consumption, which is affecting aggregate economy and total output and 

employment. 

The big question is, that problem can be solved if people who are 

the lenders and the savers correspondingly increase their consumption. But interest rates have fallen to zero and they are still trying 

to save. That is why interest rates are zero, because they still want 

to save more and more. 

So there is this dichotomy that on the one side, the savers and 

those without the wealth, they actually are still trying to save a 

lot more when they should be reallocating their money back into 

society in goods and services. But they are not being convinced to 

boost their consumption and their investment. 

And that is the misbalance that we have had, because of this 

over-leveraging of the economy in the household sector for the U.S., 

and also more globally with the sovereign debt problem. And we 

have to realign this tension, this dichotomy between the saving 

class and the borrowing class, and part of it has to be that we have 

to distribute losses more equitably. That is a challenge for the financial system as a whole. 

Senator CORKER. I find your solution really odd. I mean, you 

have got 9 out of 10 borrowers who are current on their mortgages. 

You have got 1 out of 10 that are not, and what you have really 

thrown out is the bank creating a partnership with the borrower 

so that when things are all good, the borrower bears the fruits of— 

or has the fruits of home equity, but when things go bad, then the 

principal amount goes down as far as what the bank is owed. That 

is really strange. 

25 

And what that does, I think, is drive up everybody else’s borrowing cost within the system. So I have to say, that is one of the 

oddest proposals I have ever heard and really goes against the 

grain of those people who are responsible being able to get lower 

rates to borrow their loans because they are responsible. Those people that are irresponsible, in essence, are creating a burden for 

every other borrower. And you think that is the way we should 

solve this problem? 

Mr. MIAN. I think partly one can argue that it is true that the 

cost of credit was too cheap or too low. So to the extent that we 

put part of the perceived burden looking forward back on the lenders so they price these costs in, it might actually be useful to limit 

the over-leveraging of the sector. 

So just the fact that the cost of credit goes up, it is not always 

good for the cost of credit to go down if people do not take into account these macroeconomic costs, or extranalities as they are sometimes referred to. That is number one. 

But I think that the broader principle is that one can design 

these contracts in a way that you can also give some of the upside 

to the lender so as to minimize the cost up front. And certainly, if 

someone comes in with enough of a downpayment, it will actually 

build into the downpayment requirement as well. 

If someone comes in with enough of a downpayment, then you do 

not have to worry about the bank absorbing too much of the down 

side. 

Senator CORKER. Obviously during the Dodd-Frank debate, I 

tried to cause there to be a minimum downpayment. I think what 

you are actually arguing is what many folks on my side of the aisle 

have argued for years, and that is that people ought to have a reasonable downpayment. 

I think Mr. Flores alluded to that and I think Mr. Fecher agrees 

with that. People ought to have a downpayment and we should not 

subsidize the interest rates for housing. They ought to be based on 

fair market values, and that is something that many of us have 

been arguing for years. Hopefully we will get to that point. 

But I have to say, the idea of basically creating a partnership 

whereby if things go good, one side wins. If things go bad, the lender loses. It is really odd and I doubt that will make it into the 

mainstay here. But do you want to go ahead, Mrs. Porter, and respond? 

Ms. PORTER. So you hypothesize that—you said that you think 

it has been sort of the culture of democracies to over-lever? 

Senator CORKER. The culture recently in many western democracies has been over-consumption, by Government, by individuals, 

by—you know, it has just been an over-spending type of arrangement. And I find many of these solutions, solutions that are being 

created to sort of cause people’s culture to overcome the culture 

that has been created, when maybe the real solution is just causing 

people to not consume as much and not borrow as much. 

I mean, what really happened was, it seems to me that financial 

institutions were meeting the needs of consumers. Consumers 

wanted to be able to borrow more and they did. There is no doubt 

there are products that were out there that were tricky, and I understand all that, and I am all for disclosure. 

26 

I myself, I feel like I am fairly sophisticated, but have a difficult 

time reading some of these disclosure forms. I am all for that, but 

the fact is, it seems like many of the solutions or many of the 

things that you all talked about was people being victims when, in 

essence, it is kind of way society has been in general over the last 

20 or so years. 

Ms. PORTER. OK. So I do not think of consumers as victims and 

I do not think I used that word. What I do think is that there have 

been decades of taking on increased debt. Part of that increased 

debt reflects stagnation in wages and difficulties in keeping up 

with levels of consumption. 

So we have had very sharp increased costs in health care, sharp 

rises in tuition costs, a run-up in the housing market which in part 

was fed by cheap credit in the housing market. So some of the costs 

of treading water have been met by borrowing. 

I think that one of the major justifications for getting the Bureau 

put to work quickly is I think we have gone from, as you said, cultures of over-levering to just sort of cultures of panic. And so we 

see families who really do not know what to do in today’s economy. 

Should I still buy a home? Is buying a home still safe? If it is, what 

kinds of products are out there? How should I navigate in this 

economy? 

And I think that having the Bureau fully operational with a confirmed director, it lets the financial institutions know where to take 

their questions and concerns. It lets families know where to take 

their questions and concerns. So I think it is finding that new culture going forward. We need certainty in order to do that. 

And so, I think that part of this cultural change is we know consumers are dialing down on consumer debt and that consumer debt 

is dropping. What they do not always know, as some of the other 

panelists have talked about, is where to put that money if they are 

not going to consume it, how to save it properly. 

And so, I think the CFPB, the Bureau, is a very important part 

of rethinking our culture and engaging in conversations with financial institutions about their role and engaging in conversations 

with families and bringing those two parties together for conversation. I think right now you just have uncertainty about the future 

of the Bureau. 

Senator CORKER. This Bureau is going to have an even more expanded role than I thought in causing culture to change. Let me 

ask you this. I mean, would it be detrimental, do you think, to this 

new Bureau to have a board of directors that this new person who 

is doing all these things you just mentioned could bounce off decisions? I mean, would that be something that you think might be 

helpful to someone who might be heading this Bureau? 

Ms. PORTER. I think there already are procedures in place in the 

design of the Bureau that Congress enacted. 

Senator CORKER. But would a board be harmful? 

Ms. PORTER. I think a board could be harmful, yes. I think that 

the procedures that are there, like the normal Administrative Procedures Act rulemaking provide a well-known, long-standing mechanism. 

Senator CORKER. What kind of organization do you have? What 

is the name of your organization? 

27 

Ms. PORTER. Oh, sorry. Who I work for? 

Senator CORKER. Yes. 

Ms. PORTER. I am a law professor. 

Senator CORKER. OK. And does the school that you work with, 

do they have a board of directors? 

Ms. PORTER. We have regents, but we also have a president that 

wields an enormous amount of power. 

Senator CORKER. And does he have a board of trustees? 

Ms. PORTER. We have regents. That is what they are called. 

Senator CORKER. So board of regents. 

Ms. PORTER. They do not have control over everything and they 

are different than Federal regulators. Most Federal agencies, the 

Department of Transportation, the Department of Agriculture, they 

have single secretaries that are headed by single institutions, single people, and we have chosen that structure for the vast majority 

of Government organizations for a reason. 

Our financial regulators, like the Office of the Comptroller of the 

Currency, the Office of Thrift Supervision, the FDIC are headed by 

single people. So I think the Bureau has important checks built 

into it and I support those checks. 

The fact that they have to go through the rulemaking process 

and allow for rules to have public comment, the fact that the Financial Stability Oversight Council has a role in looking at what 

the Bureau is doing, and if necessary, in their belief, to serve this 

financial system, vetoing those rules. 

So I strongly support the checks that are there. I think Congress 

thought very hard about them just 1 year ago. But I would not restructure the entire Bureau. And I think this threat of restructuring is delaying the Bureau from beginning its really important 

work. I think families need that work to start. They are tired of 

waiting. 

Senator CORKER. Well, look, I do not think I have been as constructive today, Senator Brown. I apologize. I want to say to all of 

you who have testified, from Mr. Boshara over, that I really appreciate the comments you have made. I know our staff has made 

notes and I think there have been a lot of constructive comments 

made. 

I do think as it relates to the Bureau, that it is unlikely, based 

on just reading the tea leaves, that there will be a Bureau head 

unless there are appropriate checks and balances, and it is my 

hope, very soon, I know that I have reached out to the Administration, I know others have. 

I hope that very soon those types of checks and balances, just 

having a board and an appropriate veto process, will actually occur. 

I do not think that that is an end-all by any stretch solution to 

many of the problems that have been laid out. 

I do want to thank the panelists on this side for many of the solutions that you have laid out and the input that you have given 

today, and certainly, Mr. Fecher, the proactive activities that are 

taking place within your organization, and certainly the savings 

issues that you brought forth, Mr. Boshara. 

Chairman BROWN. Thank you. Now, Ms. Porter, I know that you 

need to leave at 4:30. It is 4:30. We are not asking you to leave 

28 

because you disagreed with Senator Corker because you actually 

agreed with me or I agreed with you. But thank you. 

I have one question, two more questions, and then if Senator 

Corker wants to go again he certainly can too. Any of you can answer, any or all of you. Ms. Rademacher said something, she pointed out in her written testimony, consumers accumulated $18-plus 

billion in new credit card debt in the second quarter of 2011, a 66 

percent increase over the same quarter in 2010. 

What do any of you make of that? Anybody want to answer that? 

Do not feel obligated, but if any of you want, I would like to hear 

any thoughts. 

Mr. FLORES. I think you are operating from a much lower base. 

From 2007 to 2008, credit card lines were cut significantly. Balances were reduced significantly. So when you look at the growth, 

that percentage is from a smaller base than we have dealt with 

historically. 

Chairman BROWN. Anybody else? Ms. Rademacher. 

Ms. RADEMACHER. I would agree. I think, especially if you look 

2 years past, the growth from 2 years ago was 368 percent. So I 

do think there is a rebound. People in the last couple of years have 

gotten comfortable with the credit available again and are becoming—moving more toward the use of credit in the ways that we had 

seen it before. So I agree that it was a shock that had dipped credit 

use and then it is actually building again. 

Chairman BROWN. OK. Professor Lawless. 

Mr. LAWLESS. Yes, I just wanted to add that this illustrates the 

falsity of the idea that somehow we are now in a changed society, 

that we had this big run-up in consumer credit and now, with the 

financial crisis, subprime lending is gone, we are going to be in a 

different society going forward. I think that is just a falsehood and 

I think the recent statistics probably indicate that. 

Chairman BROWN. OK. Thank you. One more question. In an August Subcommittee hearing, I asked the minority’s witness about 

the lack of a permanent director at the Consumer Bureau. He said, 

quote, The anomaly of not confirming Mr. Cordray is there will be 

imposition of the banking sector of consumer rules, not a bad thing, 

but there will not be an imposition of those rules in the nonbank 

financial sector, the shadow banking system not a good thing. 

Mr. Fecher, your discussion of the credit union that you recently 

opened to members Center and West Dayton and the Wright-Dunbar area of Dayton, what does the lack of a full-time director mean 

for your credit union in relation to who your competitors are in 

that neighborhood? 

Mr. FECHER. Well, I think it is exactly as you just said. The fact 

of the matter, I am the most regulated financial service provider 

in that neighborhood. The least regulated are the payday lenders 

and the pawn shops that are right next door to me. 

It is difficult on the consumers. It is difficult on us. We support 

the CFPB and what it tries to do, but the first place I would put 

them is at the unregulated financial service provider, the shadow 

banks and so forth that you talked about because that is where the 

real abuses are taking place. They are not taking place in the typical banking sector for the most part, in my opinion. 

29 

Chairman BROWN. You talked in your testimony, Mr. Fecher, 

about the increasing number of regulations. Can the Consumer Bureau help you streamline those regulations and small institutions 

generally? 

Mr. FECHER. I certainly hope so. I certainly hope so. The burden—when I first got into this business back in ’80s, to make a 

first mortgage loan took a handful of pieces of paper to disclose the 

loan to the borrower. Today the package can be 100 pages or even 

200 pages long. 

When I think of 200 pages that we have to print, train our employees how to understand, how to explain them, I just see dollar 

signs adding up. And here is the twist to it. It has gotten so complex, I think as Ms. Weinstock said, people do not read them. They 

do not understand them. They do not even try because it is a 

daunting task to look at this stack of pieces of paper. 

So what I would like to see the CFPB do is just make it easier 

on the consumer to understand the cost of what they are doing in 

a page or two, if possible, and we need to get rid of these entire 

stacks of disclosures that just confuse everybody. 

Chairman BROWN. Thanks. Mr. Flores, last comment. 

Mr. FLORES. I would just like to make one comment on the shadow banking system. I have done research in the alternative financial services space, and yes, payday loans are not legislated or regulated at a Federal level, but they certainly are at a State level, 

and in some States, rather significantly just like State-chartered 

banks are. 

So I think it is a bit misleading saying they are unregulated. 

Chairman BROWN. OK, thank you. I found Senator Corker’s comments interesting and we have discussed briefly, and he expanded 

on it, the culture of sort of borrowing and spending in this society. 

I think it is exacerbated. I think that is part of the story and I 

agree with him on that. I think it is exacerbated by how we have 

seen incomes go up at the top and incomes pretty stagnant for 

most Americans. 

There was an interesting piece in the Washington Post, a front 

page piece today about CEO pay and how it is not really paying 

for performance anymore, and I was recently at a company—well, 

I will not go into that. But I have just seen that there is not the 

more spouses working, the decline in wages, how hard it is for 

somebody in the middle class now. 

Anyone that wants to make additional comments may submit 

anything in writing in the next week. Appreciate Senator Corker 

being here always, and thank you, all seven of you, for your patience and your testimony and your insight and your public service. 

The Subcommittee is adjourned. 

[Whereupon, at 4:37 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

30 

1 In particular, cities in Arizona and Nevada are important outliers. See, Mian and Sufi (2009 

and 2011a) for more details. 

PREPARED STATEMENT OF ATIF MIAN 

ASSOCIATE PROFESSOR OF ECONOMICS AND FINANCE, HAAS SCHOOL OF BUSINESS AND

DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, BERKELEY

OCTOBER 4, 2011 

I thank the Senate Subcommittee on Financial Institutions and Consumer Protection for inviting me to talk about the role of household leverage in the current economic crisis and the importance of household balance sheets in explaining macroeconomic fluctuations. My discussion on this topic—which is based on my research 

over the years with Amir Sufi of University of Chicago Booth School of Business— 

is divided into three parts. 

First, I discuss the magnitude and nature of household debt accumulation in the 

U.S. over the past decade. Second, I show how the timing and severity of the current economic collapse is closely related to the deleveraging of U.S. household balance sheets in the aftermath of the housing market downturn. Deleveraging by 

highly indebted households forces them to cut back on consumption. The resulting 

loss in aggregate demand is responsible for a majority of the jobs lost during the 

2007–09 recession. Finally, I discuss the type of reforms needed to resolve the U.S. 

household leverage crisis and put the economy back on track. 

Section 1: The Accumulation of U.S. Household Debt 

The increase in household leverage prior to the recession was stunning by any 

historical comparison. From 2001 to 2007, household debt doubled from $7 trillion 

to $14 trillion (see, Figure 1). The household debt to income ratio increased by more 

during these 6 years than it had increased in the 45 years prior. In fact, the household debt to income ratio in 2007 was higher than at any point since 1929. Recent 

data suggest that over a quarter of mortgaged homes in the U.S. are underwater 

relative to their mortgage value. 

Why did U.S. households borrow so much and in such a short span of time? What 

kind of households borrowed the most? I explore this question in a couple of papers 

with Amir Sufi (Mian and Sufi 2009 and 2011a). Our explanation for the increase 

in household debt begins with the dramatic expansion in mortgage originations to 

low credit quality households from 2002 to 2007. Mortgage-related debt makes up 

70 to 75 percent of household debt and was primarily responsible for the overall increase in household debt. 

We argue that the primary explanation behind the dramatic increase in mortgage 

debt was a securitization-driven shift in the supply of mortgage credit. The fraction 

of home purchase mortgages that were securitized by non-GSE institutions rose 

from 3 percent to almost 20 percent from 2002 to 2005, before collapsing completely 

by 2008. Moreover, non-GSE securitization primarily targeted zip codes that had a 

large share of subprime borrowers. In these zip codes, mortgage denial rates 

dropped dramatically and debt to income ratios skyrocketed. 

An important lesson regarding mortgage expansion during the 2000s, is that the 

expansion does not reflect productivity or permanent income improvements for new 

borrowers. In particular, mortgage credit growth and income growth were negatively 

correlated at the zip code level from 2002 to 2005, despite being positively correlated 

in every other time period back to 1990. Mortgage credit flowed into areas with declining incomes at a faster pace. 

One consequence of the rapid increase in supply of mortgage credit was its impact 

on house prices. As credit became more easily available to households that were historically rationed out of the credit market, house prices began to rise. Moreover, the 

increase in house prices was not uniform across the U.S. House price appreciated 

faster in areas that had difficult-to-build terrain, i.e., where housing supply was inelastic. While this mechanism does not explain all of the cross-sectional variation 

in house price growth across the U.S., it does explain a major proportion of it. 1

The increase in house prices had a large impact on further encouraging the accumulation of debt by households. In Mian and Sufi (2011a) we focus on the feedback 

effect from house prices to household borrowing by analyzing individual level borrowing data on U.S. household that already owned their homes in 1997 before mortgage credit expanded. We find that existing homeowners borrowed 25 to 30 cents 

against the rising value of their home equity from 2002 to 2006. 

The home equity-based borrowing channel is strongest for low credit quality borrowers, borrowers with high credit card utilization rate, and younger borrowers. 

Moreover, home-equity borrowing was not used to purchase new properties or to pay 

31 

down expensive credit card balances, implying that the new debt was likely used 

for real outlays such as home improvement and consumption. Overall, we estimate 

that the home-equity based borrowing channel can explain 50 percent of the overall 

increase in debt among homeowners from 2002 to 2006. 

To summarize, rapid increase in the supply of securitization-driven mortgage 

credit in early 2000s induced U.S. households particularly those in subprime neighborhoods to accumulate debt. The expansion in credit supply also fueled a remarkable increase in house prices and U.S. homeowners borrowed aggressively against 

the rising value of their houses. While overall debt increased by 7 trillion dollars, 

the increase was not uniform across the U.S. Household leverage growth was concentrated in areas with relatively inelastic housing supply, and among younger 

households and households with low credit scores. 

Section 2: Household Deleveraging, Aggregate Demand, and Unemployment 

A. The Beginnings of the Crisis 

The accumulation of debt by households with largely stagnant real wages was not 

sustainable. Markets began to realize this towards the second half of 2006 as mortgage delinquencies crept up. In fact many of the first set of borrowers to default 

were those who could not even afford to carry their first few months of mortgage 

payments. Unable to refinance or sell their homes at a higher price, many homeowners began defaulting on their loan obligations. 

Figure 2 plots the quarterly change in mortgage defaults and unemployment, and 

shows that default rates kept increasing for five straight quarters before there was 

an increase in the unemployment rate in the second quarter of 2007. This evidence 

is suggestive of the causal role that high household leverage and a weak housing 

market played in generating employment and output declines (see, Mian and Sufi 

2010 for details). The next section shows more direct evidence of this channel. 

B. Deleveraging and Aggregate Demand 

How has the sharp rise in household debt from 2002 to 2007 affected economic 

recovery? When a large class of consumers see the value of their houses decline and 

realize that they can no longer rely on further borrowing to sustain their standard 

of living, they go into a ‘‘deleveraging mode’’. Deleveraging refers to the process 

where consumers stop relying on more credit for consumption and start making efforts to pay down existing debt to more manageable level. The scale of this problem 

can be judged from a recent study by Core Logic that reports that almost a quarter 

of homeowners who are current on their mortgages are underwater. 

Once a large fraction of homeowners start cutting back on consumption as a result 

of deleveraging, there is a reduction in aggregate demand and the economy goes into 

a recession. Interest rates fall to help slowdown the fall in consumption and output. 

However, whether interest rate drop is sufficient to halt aggregate demand decline 

depends critically on the extent to which lenders (i.e., savers) increase their consumption in response to declining interest rates. If—as has been the case in the current slump—even an interest rate of zero fails to boost consumption sufficiently for 

the lending class, aggregate demand will fall and the economy goes into a recession. 

I explain below how this deleveraging—aggregate demand channel is responsible 

for the large drop in U.S. output and employment. As noted earlier, the accumulation of leverage across the U.S. differed widely, depending in part on the elasticity 

of housing supply in an area. There are thus important differences across the U.S. 

in the extent to which a given area has suffered from the deleveraging shock. These 

differences are illustrated in Figure 3 that comes from Mian and Sufi (2011c). 

Figure 3 splits U.S. counties into four quartiles based on the debt to income ratio 

as of 2006. High (low) household leverage counties are counties in the top (bottom) 

quartile of the 2006 debt to income distribution. The top left panel shows that high 

household leverage counties experienced much more severe house price declines during the recession and afterward. House prices declined from 2006 to 2010 by 40 percent in these areas. 

The decline in house prices represented a severe credit shock to households. As 

the top left panel shows, home equity limits from 2007 to 2010 declined by 25 percent in high leverage counties. The shock to credit availability translated into lower 

household borrowing. From 2007 to 2010, debt in these counties dropped by 15 percent, which translates into $600 billion. 

The deleveraging shock also translates into aggregate demand. The lower right 

panel shows that consumption—as proxied by sale of new automobiles—drops significantly more in high leverage counties. High household leverage counties experienced a drop in auto sales of 50 percent from 2006 to 2009, with only a slight recovery in 2010. Mian, Rao, and Sufi (2011) show that the pattern in auto sales in Figure 3 also holds for consumption across other goods, including furniture, appliances, 

32 

grocery, and restaurant spending. Moreover, within high leverage counties, the drop 

in auto sales is significantly higher in more subprime neighborhoods that are hit 

larger by the deleveraging shock. 

The magnitude of the drop in these variables is far smaller in counties with low 

household leverage before the recession. As of 2010, house prices were down only 

10 percent, home equity limits had dropped only 8 percent, and household borrowing 

was down only slightly relative to the 2008 peak. Auto sales dropped sharply even 

in low leverage counties, but the drop was much less severe and the recovery in 

2010 is stronger. 

C. Deleveraging and Unemployment 

Figure 3 shows evidence of weak consumer demand for durable goods in high 

household debt counties. How does the sharp decline in consumption in high leverage areas affect aggregate unemployment? Answering this question with geographical variation has been difficult given an obvious barrier: the goods consumed 

in one part of the country are not necessarily produced in that area. For example, 

if Californians sharply reduce auto purchases because of excessive leverage, the decline in auto purchases will likely reduce employment in Michigan. Given this one 

only examines job losses in high leverage areas such as California. 

However job losses in goods and services that are nontradable and hence must 

be produced in the city where they are consumed do not suffer from this problem. 

We therefore split consumption goods into those consumed locally (nontradable) and 

those consumed nationally (tradable), and use the impact of deleveraging shock on 

local nontradable employment to back out the total effect of deleveraging and reduced aggregate demand on employment (see, Mian and Sufi 2011c for details). 

The central insight of our approach is that one can estimate the aggregate effect 

of household deleveraging on unemployment by examining how nontradable employment varies across counties with varying degrees of deleveraging shocks. We classify 

industries as nontradable if they are focused in the retail or restaurant business. 

Given that high leverage counties are those with a large boom and bust in residential investment, we explicitly remove construction from the nontradable sector. In 

other words, our nontradable industry category does not include construction or any 

other real estate related business. 

The first step of the empirical methodology is to estimate the effect of 

deleveraging on employment in industries producing nontradable goods. The left 

panel of Figure 4 show a very strong and quantitatively large relation between 

household leverage measured as of 2006 and employment declines in nontradable 

industries from 2007 to 2009. For example, going from the 10th to the 90th percentile of county distribution by leverage increase job loss as a fraction of total employment in the county by 4.4 percentage points. 

The right panel of Figure 4 repeats the analysis for employment losses in the 

tradable sector and shows that there is no relationship between county deleveraging 

shock and job loss in the tradable sector. The reason for this is that losses in the 

tradable sector are distributed equally across the U.S. as mentioned earlier. However, we can use the relationship between job losses and deleveraging shock in the 

nontradable sector to back out the number of nationwide jobs that have been lost 

in the tradable sector due to the deleveraging shock and resulting decline in demand. 

We do this calculation carefully in Mian and Sufi (2011c) and perform a number 

of checks to ensure that the number we compute is driven by the deleveraging— 

aggregate demand phenomena and not any alternative explanation. The total number of job losses that we can conservatively attribute to the deleveraging—aggregate 

demand channel is staggering. We estimate that deleveraging of the household sector accounts for 4 million of the 6.2 million jobs lost between March 2007 and March 

2009 in our sample. In other words, 65 percent of total jobs lost in the U.S. are due 

to deleveraging and the drop in aggregate demand as a result of it. 

Section 3: Policy Choices 

The analysis above identifies the deleveraging—aggregate demand channel as the 

most important mechanism responsible for economic downturn and job losses in the 

American economy. The sharp drop in consumer demand in areas that accumulated 

the most leverage and large employment losses associated with the drop in consumer demand highlight the economic importance of the deleveraging—aggregate 

demand channel. 

Unfortunately the current deleveraging cycle in the U.S. is painfully slow. How 

long will this cycle last? Despite more than 3 years since the start of this cycle, the 

amount of debt paid off or written down remains stubbornly small. Out of the 7 trillion dollars accumulated over 2001–2007, only about one trillion has been paid down 

33 

2Foreclosures is a very costly mechanism to reduce indebtedness, especially in the current 

environment. In a recent paper, Mian, Sufi, and Trebbi (2011), we show that foreclosures significantly reduce the value of homes in the neighborhood of foreclosed home and lower house prices 

have a negative feedback effect on local consumption and investment. 

or written off. U.S. household balance sheets remain highly levered by historical 

standards. The most recent monthly auto sales data also continue to show significant weakness in consumer demand among high leverage counties. 

In the face of the very slow deleveraging process and its high economic cost, we 

urgently need policies that help reduce leverage for highly indebted households 

without forcing them into costly actions such as bankruptcy and foreclosures. 2 The 

threat of foreclosure and losing one’s home may force many underwater homeowners 

to continue paying their mortgage bills but the resulting drop in aggregate demand 

hurts everyone. Indeed most recent data from Core Logic suggests that a quarter 

of U.S. homeowners owe more than their house is worth, and yet continue to make 

mortgage payments. 

The dilemma for efforts to reduce household indebtedness is that from a lender’s 

perspective it is not in their interest to write down debt that continues to be serviced on time. But as my analysis highlights, the collective consequences of such ‘‘individually rational’’ actions are quite unpleasant. If a large number of financially 

distressed homeowners cut back on consumption in order to protect their homes and 

continue paying their mortgages, the aggregate demand and employment consequences hurt everyone. 

An obvious policy proposal to facilitate leverage reduction is principal write-down 

on underwater mortgages. While the Government did initiate some related programs in the past, they have been largely ineffective in achieving the desired goal. 

To be sure, there are complicated legal issues pertaining to mortgage debt restructuring. Similarly any orderly mechanism of debt restructuring should minimize unwanted disruptions in the banking and financial system. These are difficult and 

complex problems, but not impossible to address and require collective regulatory 

and legislative action. 

While the focus of my discussion has been the recent U.S. economic downturn, the 

relationship between high household leverage and long economic slumps is not limited to our current experience. In his seminal paper, Irving Fisher (1933) described 

the role that high household indebtedness and the process of deleveraging played 

in perpetuating the Great Depression. More recent empirical work by scholars such 

as Mishkin (1978), Olney (1999), and Eichengreen and Mitchener (2003) further 

supports this view of the Great Depression. Evidence from Japanese and European 

recessions (e.g., King 1994) also highlights problems associated with leverage. 

Our collective experience from historical recessions as well as the most recent 

global slump point to a fundamental weakness in the modern financial system: its 

inability to distribute downside risk equitably and efficiently across the population. 

The tendency to rely too much on debt-financed economic activity implies that in 

the event of a negative economywide shock, most of the financial pain is pushed on 

a particular segment of the population (i.e., the borrowing class). As the recent U.S. 

experience reminds us, pushing most of the downside risk on one segment of the 

population is seriously damaging for the overall economy. 

Going forward, in order to avoid deep economic slumps resulting from an overlevered household sector, we need to put in place contingencies that will automatically write down the value of outstanding debt if the overall economic environment 

is sufficiently negative. There is a lot to think through here before implementing 

a particular policy. However, it is practically feasible to redesign debt covenants by 

introducing contingencies for economic downturns. 

For example, mortgage principal can be automatically written down if the local 

house price index falls beyond a certain threshold. Since such contingencies are 

written on aggregate states of nature, they do not suffer from the standard moral 

hazard criticism. Lenders will obviously price such contingencies in before extending 

credit, but it is a price that benefits borrowers and the economy in the long run. 

If we had such contingencies present in the current mortgage contracts, we could 

have avoided the extreme economic pain due to the negative deleveraging—aggregate demand cycle. 

Bibliography 

Barry Eichengreen and Kris Mitchener, ‘‘The Great Depression as a Credit Boom 

Gone Wrong’’, BIS Working Paper 137, September, 2003. 

Irving Fisher, ‘‘The Debt-Deflation Theory of Great Depressions’’, Econometrica, 

337–357, 1933. 

34 

Mervyn King, ‘‘Debt Deflation: Theory and Evidence,’’ European Economic Review, 

38: 419–445, 1994. 

Atif R. Mian and Amir Sufir, ‘‘The Consequences of Mortgage Credit Expansion: 

Evidence From the U.S. Mortgage Default Crisis’’, Quarterly Journal of Economics 

124: 1449–1496, 2009. 

Atif R. Mian and Amir Sufir, ‘‘Household Leverage and the Recession of 2007 to 

2009’’, IMF Economic Review, 58: 74–117, 2010. 

Atif R. Mian and Amir Sufir, ‘‘House Prices, Home Equity-Based Borrowing, and the 

U.S. Household Leverage Crisis’’, American Economic Review, August, 2011a. 

Atif R. Mian and Amir Sufir, ‘‘Consumers and the Economy, Part II: Household 

Debt and the Weak U.S. Recovery’’, FRBSF Economic Letter, January 18, 2011, 

2011b. 

Atif R. Mian and Amir Sufir, ‘‘What Explains High Unemployment? The 

Deleveraging—Aggregate Demand Hypothesis’’, Working Paper, 2011c. 

Atif R. Mian, Kamalesh Rao, and Amir Sufi, ‘‘Deleveraging, Consumption, and the 

Economic Slump’’, Working Paper, 2011. 

Atif R. Mian, Amir Sufi, and Francesco Trebbi, ‘‘Foreclosures, House Prices and the 

Real Economy’’, NBER Working Paper # 16685, 2011. 

Frederic S. Mishkin, ‘‘The Household Balance Sheet and the Great Depression’’, 

Journal of Economic History, 38: 918–937, 1978. 

Martha Olney, ‘‘Avoiding Default: The Role of Credit in the Consumption Collapse 

of 1930’’, Quarterly Journal of Economics, 114: 319–335, 1999. 


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1 Homi Kharas, ‘‘The Emerging Middle Class in Developing Countries’’, Working Paper no. 

285 at 7, Organisation for Economic Co-operation and Development Centre, Washington, DC, 

2010. http://www.oecd.org/dataoecd/12/52/44457738.pdf 2White House, ‘‘White House Announces Middle Class Task Force’’, Press Release, January 

30, 2009. http://www.whitehouse.gov/the-press-office/obama-announces-middle-class-task-force 3White House, ‘‘Remarks by the President and Vice President at Middle Class Task Force 

Meeting’’, Press Release, January 25, 2010. http://www.whitehouse.gov/the-press-office/remarks-president-and-vice-president-middle-class-task-force-meeting 4 Joseph I. Biden, ‘‘Annual Report of the White House Task Force on the Middle Class’’, Washington, DC: Office of the Vice President of the United States, 2010. Accessed August 16, 2010. 

http://www.whitehouse.gov/sites/default/files/microsites/100226-annual-report-middleclass.pdf 5Federal Reserve Bank of San Francisco, ‘‘U.S. Household Deleveraging and Future Consumption Growth’’, FRBSF Economic Letter 1, no. 2009-16 (May 15, 2009). Accessed October 2, 

2011. http:// http://www.frbsf.org/publications/economics/letter/2009/el2009-16.pdf 6 Atif R. Mian and Amir Sufi. ‘‘Household Leverage and the Recession of 2007 to 2009’’, Working Paper 15896 at 1, National Bureau of Economic Research, Cambridge, MA, 2010. http:// 

www.nber.org/papers/w15896 

PREPARED STATEMENT OF KATHERINE PORTER 

PROFESSOR OF LAW, UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW

OCTOBER 4, 2011 

Introduction 

My testimony addresses the reasons that thoughtful consumer protection is a vital 

necessity to our country’s future economic health. In the last two generations, increases in household borrowing and changes in consumer financial services have reshaped the economy. The result is that consumer credit law will be a major determinant of the well-being of middle-class families for decades to come. To monitor 

this marketplace and its role in family economic security and the entire economy, 

lawmakers need the expertise and energy of a dedicated regulator on consumer 

credit such as the Consumer Financial Protection Bureau. 

I am Professor of Law at the University of California, Irvine, School of Law. I 

have worked at several leading law schools, including Harvard Law School and the 

University of California, Berkeley, School of Law. I have conducted research on 

household economic security and consumer debt since 2001. My empirical research 

on abuses in the mortgage servicing industry was among the first efforts to document misbehaviors in foreclosure and bankruptcy cases that violate the rule of law. 

I am a principal investigator of the 2007 Consumer Bankruptcy Project, the Nation’s 

largest study of families that file bankruptcy. I am the author of more than a dozen 

law review articles on consumer credit issues and am the editor of a forthcoming 

book, Broke: How Debt Bankrupts the Middle Class (Stanford Univ. Press, 2011). 

Debt: The New Middle-Class Marker 

The middle class is a powerful concept. Historically, the size and prosperity of the 

American middle class has been heralded as a great social and economic achievement. Membership in the middle class is associated with home ownership, educational opportunity, comfortable retirement, access to health care, and last but certainly not least, an appetite for consumer goods. 1 The middle class also has political 

appeal, as demonstrated by President Obama’s decision during his very first week 

in office to establish a Middle-Class Task Force. 2 As chair of the task force, Vice 

President Biden explained that middle-class life is the ‘‘old-fashioned notion of the 

American Dream’’ and that he and the President ‘‘have long believed that you can’t 

have a strong America without a growing middle class. It’s that simple. It’s that 

basic.’’ 3 The task force has focused its energy on job creation, retirement security, 

work–family issues, and higher education. 4

But the task force has largely ignored a revolutionary change in the lives of middle class Americans: the increase in household debt. In the mid-1980s, the ratio of 

debt to personal disposable income for American households was 65 percent. During 

the next two decades, U.S. household leverage more than doubled, reaching an alltime high of 133 percent in 2007. 5 Measured in the aggregate, the ratio of household debt to GDP reached its highest level since the onset of the Great Depression. 6

This record debt burden, which crested just as the financial crisis began, set up families to suffer deeply as foreclosures, unemployment, and wage stagnation set in for 

the years to follow. 

The consumer debt overhang, however, began long before the financial crisis and 

recession. Exhortations about subprime mortgages reflect only a relatively minor 

piece of a much broader recalibration in the balance sheets of middle-class families. 

Debt began to climb steeply around 1985, with its growth accelerating in nearly 

38 

7 Edward N. Wolff, ‘‘Recent Trends in Household Wealth in the United States: Rising Debt 

and the Middle-Class Squeeze—An Update to 2007’’, Working Paper no. 589 at 34, Levy Economics Institute, Bard College, Annandale-on-Hudson, NY, 2010. http://www.levyinstitute.org/ 

pubs/wpl589.pdf 8 Ibid., 47, table 5. 9 Ibid., 50, table 8. 

every subsequent year until the onset of the recession. The run-up in consumer debt 

coincided with a period of deregulation of financial institutions and the preemption 

of State consumer protection laws and State usury laws that regulated interest 

rates. Unfortunately for American families, the debt binge was not accompanied by 

meaningful increases in disposable income. While income crept up, debt shot up, as 

Figure 1 illustrates. As debt grows relative to income, families must stretch their 

dollars further to pay for current consumption, while keeping up with debt payments. At some point, income simply becomes insufficient, and families must either 

curtail spending or default on debt. We are suffering these consequences now, as 

consumer spending stagnates and families shed debt through foreclosures and default. 

The growth in debt outstripped the appreciation of assets during the last several 

decades. In other words, increases in liabilities—mortgage debt, home equity lines 

of credit, student loans, and credit cards—collectively grew faster than increases in 

assets—houses, cars, stocks, or cash savings. Edward Wolff of the Levy Economics 

Institute has calculated that as far back as 1995, the amount of mortgage debt 

began to increase faster than house values. 7 The result of the increased borrowing 

was to constrain or retard growth in household wealth. Indeed, between 2001 and 

2004, the typical (median) American household’s wealth actually declined. 8 This 

was an unprecedented event because the wealth decline occurred during a period 

of overall economic expansion. 

For the middle class, household debt outstripped household asset accumulation. 

For households with wealth between the 20th and 80th percentiles of the entire distribution, the debt-equity ratio climbed from 37.4 in 1983 to 51.3 in 1998, and then 

topped off at 61 percent in 2004 and 2007. 9 Whether assessed against income or 

assets, debt grew in proportion to other changes in families’ balance sheets. What 


10411005.eps
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10 Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and Kevin B. Moore. ‘‘Changes in 

U.S. Family Finances From 2004 to 2007: Evidence from the Survey of Consumer Finances’’, 

Federal Reserve Bulletin 95, A37, table 12 (February 2009). 11Wolff, ‘‘Recent Trends in Household Wealth in the United States’’, 26. 12 Bucks et al., ‘‘Changes in U.S. Family Finances’’, A42. 13 Ibid., p. A37. 14 In 2007, the U.S. home ownership rate was 68.1 percent. United States Census Bureau. 

‘‘Housing Vacancies and Homeownership (CPS/HVS) Annual Statistics: 2007’’. Last revised February 20, 2008. http://www.census.gov/hhes/www/housing/hvs/annual07/ann07t12.html. As 

of 2007, 54.7 percent of American men and 51.2 percent of American women were married. 

United States Census Bureau. ‘‘America’s Families and Living Arrangements: 2007’’. Accessed 

January 2, 2011. http://www.census.gov/population/www/socdemo/hh-fam/cps2007.html. In 

2007, 27 percent of adults aged 25 or older reported having at least a bachelor’s degree. Sarah 

R. Crissey. Educational Attainment in the United States: 2007. Washington, DC: U.S. Census 

Bureau, 2009. Accessed August 16, 2010. http://www.census.gov/prod/2009pubs/p20-560.pdf. 

A 2007 Gallup survey found that more than 40 percent of Americans claimed to attend church 

or synagogue regularly. Frank Newport. ‘‘Just Why Do Americans Attend Church?’’ Gallup, 

April 6, 2007. Accessed January 24, 2011. http://www.gallup.com/poll/27124/Just-Why-Americans-Attend-Church.aspx. 15 Robert M. Lawless, ‘‘The Paradox of Consumer Credit’’, University of Illinois Law Review 

2007 no. 1 361–362 (2007). 16 Robert M. Lawless, ‘‘Bankruptcy Filings Dropping More Rapidly Than Expected’’, Credit 

Slips: A Discussion on Credit, Finance, and Bankruptcy (blog), September 9, 2011. http:// 

www.creditslips.org/creditslips/2011/09/bankruptcy-filings-dropping-more-rapidly-than-expected.html#more 17Katherine Newman, ‘‘Falling From Grace 9’’, New York: Free Press, 1988. 

looked like a boom economy in the first half of the 2000s actually produced an increase in financial risk for families by loading them with unsustainable debt. 

The expansion in borrowing spanned social classes, racial and ethnic groups, 

sexes, and generations. Every age group, except those 75 years or older, had increased leverage ratios between 1998 and 2007. 10 Similarly, African Americans, 

Hispanics, and non-Hispanic Whites all saw their leverage ratios grow from 2001 

to 2007. 11 This is not to suggest that the debt explosion was equally distributed. 

For example, between 2004 and 2007, typical people who lacked a high school diploma and typical households headed by a person between ages 65 and 74 had particularly sharp increases in their debt burdens. 12 In particular periods, some groups 

saw modest declines in consumer debt, but the overwhelming trend was increased 

amounts of debt among nearly every type of family. By 2007, when debt burdens 

peaked, 77 percent of American households had some type of outstanding debt. 13

Consumer debt has become one of the most common shared qualities of middle-class 

Americans, usurping the fraction of the population that owns their home, is married, has graduated from college, or attends church regularly. 14

Too Big to Fail and Too Small To Save: Families in the Recession 

As debt increases, so too does the risk of financial failure. This is as true for 

American families as it is for large corporations, where the catchy phrase ‘‘highly 

leveraged’’ captures a profound tilt into the red on a balance sheet. The staples of 

middle-class life—going to college, buying a house, starting a small business—carried with them more financial risk in recent decades because they required more 

borrowing and new riskier forms of borrowing. The escalation in debt turned the 

smart financial decisions of the prior generation, such as purchasing a home or taking on student loans, into high-stakes economic gambles for middle-class families. 

Today, millions of Americans are losing those bets, struggling to avoid financial collapse. 

One place to see the pain of overindebtedness is in the experience of bankrupt 

families. Over the long haul, increases in consumer debt seem to explain a significant portion of the increased numbers of consumer bankruptcies. 15 This year approximately 1.4 million families will file bankruptcy. 16 They will publicly ‘‘fall from 

grace,’’ skidding down the economic spectrum. 17 These families’ aspirations of middle-class security evaporated under pressure from debt collectors, looming foreclosures, and the loss of hope of earning their way out of their financial problems. 

At least for now, their version of the American Dream has been replaced by a desperate hope that things do not get even worse. Driven by debt, these families are 

at rock bottom. 

Households that file bankruptcy have typically struggled seriously with their 

debts for the previous 1 to 2 years. In fact, many households spent months simply 

scraping together the money and paperwork needed to file a bankruptcy petition. 

Nearly all of these families will remember their few minutes with the bankruptcy 

trustee as one of the most painful moments of their lives. Bankruptcy is a headVerDate Nov 24 2008 13:15 May 17, 2012 Jkt 048080 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-04 DISTILLER FILE\100411.TXT JASON
40 

18 In 2010, Americans filed just over 1.5 million nonbusiness bankruptcies, compared to nearly 

2.9 million foreclosure filings. Leslie E. Linfield, 2010 ‘‘Annual Consumer Bankruptcy Demographics Report: A Five Year Perspective of the American Debtor’’, 7n10, Institute for Financial 

Literacy. (September 2011) Accessed October 1, 2011. http://www.financiallit.org/PDF/ 

2010lDemographicslReport.pdf; Julie Schmit ‘‘Joblessness Drove Foreclosures in 2010’’, USA 

Today, p. 6A (January 27, 2011). 19The default rate represents the percentage of student loans that fell into default among 

those whose payments were first due in the prior fiscal year. Kevin Helliker, ‘‘Student-Loan Defaults on the Rise’’, The Wall Street Journal, p. A2 (September 13, 2011). 20Federal Trade Commission, ‘‘Annual Report 2011: Fair Debt Collection Practices Act’’, 5 

(March 2011). http://www.ftc.gov/os/2011/03/110321fairdebtcollectreport.pdf. 21Michael Hurd and Susan Rohwedder, ‘‘Effects of the Financial Crisis and Great Recession 

on American Households’’, Working Paper WR-810 at 27. RAND Corporation, Santa Monica, CA, 

2010. http://www.rand.org/pubs/workinglpapers/WR810.html 22 Nelson D. Schwartz, ‘‘Jobless and Staying That Way’’, New York Times, WK1, August 8, 

2010. Accessed February 4, 2011. http://www.nytimes.com/2010/08/08/weekinreview/ 

08schwartz.html 23Federal Reserve Board, ‘‘Household Debt Service and Financial Obligations Ratios’’, Last 

Updated September 20, 2011. http://www.federalreserve.gov/releases/housedebt/ 

on encounter with promises to pay that cannot be honored and privations suffered 

trying fruitlessly to make ends meet. 

Millions of families suffer serious financial hardship but do not file bankruptcy. 

The number of foreclosures outstrips bankruptcy filings by nearly a two-to-one margin. 18 The Department of Education reported last month a Federal student loan default rate of 8.8 percent in fiscal 2009, and increase from 7 percent the previous 

year. 19 Last year, 140,000 people complained to the Federal Trade Commission 

about the tactics used by debt collectors, an increase of 28 percent from 2009. 20 A 

survey by RAND researchers found that between November 2008 and April 2010 39 

percent of families had experienced one or more indicators of financial distress: unemployment, negative equity in their home, or being 2 months behind on their mortgage or in foreclosure. 21 Debt collection and default are not isolated experiences; 

they are becoming a routine part of the middle-class experience, albeit a painful one. 

The ‘‘new normal’’ of the U.S. economy—a world of layoffs and job losses, cuts in 

social programs, and continued housing depreciation—only means that more people 

will find themselves collapsing under the weight of debts incurred in brighter economic times. 22

The experiences that are so evident in the wake of the recession highlight the fact 

that some people will lose the borrowing game that has become the American economy. The consumer spending that drove the economy at the end of the 20th century 

was not costless. It was bought and paid for with interest charges, late fees, increased stress about making ends meet, and sometimes, with the humiliation of 

bankruptcy. Increased consumption was largely financed by debt, rather than by increases in wages or appreciation of assets. Heavy household debt burdens ratchet 

up risk and reduce the security of the middle-class families. 

The consumer debt phenomenon is not a temporary one; it will be a defining feature of American society for decades. It is a fact that consumer debt levels are going 

down. The ‘‘deleveraging’’ process of paying down debt and increasing savings that 

began in late 2007 has lasted 4 years and shows no signs of reversing. The Federal 

Reserve Board calculates the household debt service ratio for each quarter. This is 

an estimate of the ratio of debt payments on outstanding mortgages and consumer 

debt to disposable personal income. In 2011, the ratio declined to levels not seen 

since the late 1990s. 23 But these levels still remain far beyond those of the prior 

decades. Overindebtedness is declining but it is not a problem of the distant past, 

cured by the recession, Government stimulus programs, or the enactment of the 

Dodd-Frank financial reform law. 

Retrenchment has been and will be painful—both for families and for lenders. For 

many families, it has meant homes lost to foreclosure, cars taken in repossession, 

trade-offs in family time for second jobs, and dunning from debt collectors. Opportunities to launch a new business, attend college, or start a family have been foregone. 

Changes in credit standards and fears about the consequences of credit have pushed 

many families further down the economic ladder, reducing assets and consumer confidence. Credit retrenchment, just like the increases in consumer credit in years before, dramatically reshapes the well-being of the middle class. 

Consumer confidence is critically affected by consumer debt. The lack of access to 

credit that is a consequence of the financial crisis is making Americans pessimistic 

about their futures. In a September 2010 poll, only half of Americans agreed that 

‘‘the American Dream—that if you work hard you’ll get ahead—still holds true’’; 

41 

24 Holly Bailey, ‘‘ABC News/Yahoo! News Poll: People Are Losing Faith in the American 

Dream’’, Yahoo! News, September 21, 2010. Accessed January 30, 2011. http:// 

news.yahoo.com/s/ybloglupshot/abc-newsyahoo-news-poll-people-are-losing-faith-in-the-american-dream 25 Jacob S. Hacker, in Katherine Porter (ed.), ‘‘Broke: How Debt Bankrupts the Middle Class, 

227’’, Stanford University Press, 2011 (citing The Tarrance Group and Lake Snell Perry Mermin 

and Associates, Battleground XXVII, 29. Washington, DC: George Washington University, 2006. 

http:/www.lakeresearch.com/polls/pdf/bg305/charts.pdf). 26 Hacker, Broke, supra n25, at 230. 

more than 4 in 10 said it no longer did. 24 This middle-class discontent runs deep 

and retards efforts to stimulate economic growth. Americans are famously opportunity loving, but even back in 2005 during a robust economy, 62 percent favored 

the ‘‘stability of knowing your present sources of income are protected over concern 

with the opportunity to make money in the future,’’ which attracted 29 percent of 

respondents. 25 Problems in managing consumer debt have increased economic anxiety. 

Americans’ appetite for risk and the aspirations of the middle class reflect in part 

the financial insecurity of consumer debt levels. With this type of uncertainty, the 

middle-class struggles to hang on, rather than propelling itself forward. 

At a conference that I attended, someone quipped that while banks were ‘‘too big 

to fail,’’ families were ‘‘too small to save.’’ In part, this comment reflects the powerful importance of the risk frame in public policy, and that small incidences of harm 

rarely receive the attention of large ones—even if the accumulation of small harms 

dwarfs the single large harm. This preference to prioritize single large events over 

multiple smaller ones shortchanges middle-class families. For example, the Treasury’s bold intervention in the capital markets is a stark contrast to its anemic response to foreclosures at the family level. Neither the Home Affordable Modification 

Program, nor the Government’s most recent effort, the Emergency Homeowners’ 

Loan Program, delivered on its promises, with delays in program roll-out and problems in administration. Overall, an estimated less than 1 million Americans have 

received a mortgage modification, refinance, or loan from these programs. In that 

same period, since 2007, over 2 million foreclosures have been completed. Today, estimates are that more than 6 million homeowners are delinquent on their mortgages 

and 16 million homeowners have no equity in their homes. 

Americans are frustrated with the lack of an effective and sustained Government 

response to their financial hardships. Asked in mid-2010 whom Government had 

helped ‘‘a great deal’’ during the downturn, 53 percent of Americans said banks and 

financial institutions; 44 percent fingered large corporations. Just 2 percent thought 

economic policies had helped the middle class a great deal. 26 Middle-class Americans feel abandoned. Although their reactions range from anti-Government rhetoric 

to calls for more intervention, people are united across the political spectrum in feeling that Government’s response to the financial crisis missed the mark. The lack 

of a Government regulator focused on consumer credit, including home ownership 

markets, is a likely contributor to the feeling that families are too often an afterthought in the design of economic policy. 

From Subprime to Safe? Changing Financial Services 

The debt loads that are commonplace among today’s families would have been 

simply unthinkable a generation or two ago. While the recession that began in mid2007 has widened the scope of the financial pain caused by overindebtedness, the 

problem predated the large-scale economic meltdown that captured headlines. Put 

another way, the bursting of the housing bubble and subprime loans are not the 

problem, or certainly not the entire problem, to be solved by consumer protection. 

The rising levels of household debt and the burdens they impose on families are not 

about a few bad actors or a couple of innovative loan products gone awry. Certainly, 

subprime loans and that market are poster children for the need for better oversight 

of consumer credit. However, they are only one part of a larger revolution in our 

economy that imposes more debt and more financial risk on families. 

The receding financial crisis and the elimination of a subprime mortgage market 

do not mean that families today enjoy the economic security that traditionally characterized the middle class. Indeed, families today face a level of uncertainty about 

jobs, taxes, Government services, and credit access that leave them in uncharted 

territory. It is precisely in such an environment that consumer protection law can 

help families regain confidence in the American economy and make informed and 

smart financial decisions to build and protect their wealth. 

A few examples illustrate the point. In the 1990s and first half of 2000s, home 

equity loans provided a solution for families who had unexpected expenses or a temporary loss of income. Those products are unavailable to homeowners who are unVerDate Nov 24 2008 13:15 May 17, 2012 Jkt 048080 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-04 DISTILLER FILE\100411.TXT JASON
42 

27 Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 

123 Stat. 1734 (2010). 28 Ronald J. Mann, ‘‘Adopting, Using, and Discarding Paper and Electronic Payment Instruments: Variation by Age and Race’’, May 2011. Fig. 7.14 (finding that consumers over the age 

of 45 appear significantly less likely to use debit cards, controlling for race, household status, 

income, and education). 29Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 

Stat. 1376, §1001 (2010). 

derwater or who have limited equity. This reduction in home wealth leads families 

to look for other options, such as taking on increased student loans to pay for college 

rather than refinancing a house to pay tuition. Yet this alternative has its own 

risks; the generation graduating today and in upcoming years is more likely to have 

student loans and owe thousands of dollars more than their predecessors. This 

growing student loan market needs sustained attention and monitoring from the 

Government. Parents and children need financial education on these products and 

their consequences, and innovative in this market needs monitoring to protect 

against unfair or deceptive practices. 

Another example of ongoing consumer protection issues is changes in retail banking and payment systems. Well before the effective date of the CARD Act in 2010, 27

younger people were more likely to prefer debit cards to credit cards. 28 The industry 

is rolling out new fees for debit cards, and mobile payments are growing in popularity. These changes mean consumers will have new choices and questions. 

Similarly, the growth in debt among older Americans, combined with longer lifespans, mean that retirement is no longer synonymous with economic stability. Millions of seniors owe money on their mortgages, and this group is particularly likely 

to make use of credit cards. They are also targeted repeatedly in financial scams. 

As the baby boomers age and they enter retirement in financial positions quite different from the Greatest Generation, their behaviors and needs will change the financial profile of the middle class. These older Americans will look to the Government for education about consumer credit and will count on consumer protection 

laws to shield them from abusive practices that prey on older Americans. 

In 2010, Congress created the Consumer Financial Protection Bureau (the ‘‘Bureau’’). 29 It is specifically charged with monitoring the functioning of the consumer 

credit markets. Already, the Bureau has developed outreach and education initiatives, perhaps most notably its work on servicemembers and their families. These 

efforts need to continue and accelerate to help families rebuild after the financial 

crisis. The Bureau may well have been effective in guarding against the harms of 

subprime lending but the bankruptcy of subprime lenders and the atrophy of the 

mortgage market does not eliminate the need for the Bureau. To the contrary, it 

is precisely in today’s uncertain climate that families need a single, visible place to 

look for financial education. 

In its lawmaking functions, the need is similar. Dozens of financial products, including credit cards, debit cards, and student loans are in transition in the wake 

of the recession and its aftermath. While Congress in Dodd-Frank and the Federal 

Reserve in its rulemaking have addressed some aspects of the mortgage market, the 

future of home ownership remains unsettled. We do not know if the 30-year fixed 

loan will emerge as the sole mortgage product or if a variety of products will proliferate; the market and the regulation of the market will work together to determine these answers. The lesson of the subprime loan market is that there is a grave 

danger that the Federal Government will pay insufficient attention to consumer 

credit markets without a dedicated regulator, and that families and the entire economy can suffer as a result. Families need a powerful voice in these conversations 

that focus on their well-being; the checks and balances that Congress built into the 

Bureau’s design ensure that financial institutions—and their traditional regulators—will also have a voice in determining the future of consumer credit law. That 

is entirely proper in my opinion. We should guard against weakening the Bureau 

now that the worst of the financial crisis may be against us. The uncertainty of the 

future makes the Bureau even more necessary than during the height of the financial crisis when policy makers were focused on acute problems. Government needs 

to continue to engage in monitoring and regulating consumer credit to help the 

economy recover and rebuild middle-class wealth. 

Protecting Middle-Class Prosperity 

Today, millions of middle-class families are experiencing deep economic pain. Consumer debt is not the only reason for the increasing financial vulnerability of Americans; stagnant wages, increased volatility in the labor market, health care and college costs that outpace inflation, and longer life spans that strain retirement savings all play a role. Consumer debt is a powerful force that affects middle-class prosVerDate Nov 24 2008 13:15 May 17, 2012 Jkt 048080 PO 00000 Frm 00046 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-04 DISTILLER FILE\100411.TXT JASON
43 

30Federal Reserve Bank of San Francisco, ‘‘U.S. Household Deleveraging’’, supra n5, at 3. 

perity, however, because in the last two decades debt was the crutch of families 

wounded by other economic harms. Debt smoothes consumption over time; for example, it can ease the uneven income that characterizes the rising cadre of temporary 

and contract workers in America. Debt substitutes for cost controls in markets gone 

astray; for example, people increasingly must finance medical bills because they 

overwhelm their monthly budgets. Debt fills gaps in making ends meet when social 

programs erode; for example, people may borrow from a payday lender to cover utility bills as local governments eliminate energy subsidy programs. 

These functions for debt are not inherently bad. To the contrary, debt has long 

been a lynchpin of opportunity in our society. But too many Americans have borrowed too much and that they taken on debts that worsened, rather than improved, 

their financial situations. In bankruptcies, foreclosures, economic anxiety, and joblessness, we see the harms of consumer debt. The cost of debt is not just the annual 

percentage rate charged to a family. It is also the social costs of some borrowers 

becoming hopelessly mired in debt and the macroeconomic effect of overleveraged 

households. Those costs are being paid by today’s middle-class families during the 

recession and will likely continue to be paid in the upcoming decade. Economic models show that lowering the debt-to-income ratios of households in the next decade 

and beyond will have significant changes on the macroeconomy and its ability to 

grow through increased consumption. 30 The cumulative result of households’ debt 

burdens is to create a drag on economic growth for the entire Nation. 

America’s relationship with borrowing is at a turning point. Lenders have tightened underwriting standards, and households are reducing their spending and saving more of their incomes. The open question is whether this retrenchment will endure or accelerate. Will America reverse more than two decades of reliance on consumer borrowing and gradually work its way back to debt burdens of the post-War 

period of prosperity? Or will the borrowing habit return in a few years as the recession recedes, with another boom in borrowing replacing the last few years of bust? 

The choice between those paths has profound consequences for the economic security of America’s middle class. 

Congress continues to consider ways to help families with bills such as the Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011, but it should not have 

to act alone. The executive branch needs to contribute expertise and administrative 

support. The Bureau is a crucial part of helping to navigate the future of our economy. Through research, rulemaking, and education, the Bureau will provide a roadmap for legislative activity and consumer decision making. It can respond nimbly 

to the rapid changes that are common in today’s turbulent economy and it can help 

consumers stay informed of changes to markets and laws that could aid them in rebuilding and maintaining wealth. 

The Bureau’s central mission is to nurture the marketplace for consumer credit, 

and it’s time to allow it to begin its work in earnest by confirming a permanent director and putting to rest efforts to redesign the carefully crafted structure of the 

Bureau that Congress approved only a year ago. The uncertainty about credit markets is worsened by efforts to dismantle or defang the Bureau. Institutions and industry need a clear path forward, and they need a place to bring concerns about 

the future of consumer protection regulation. A fully operational Bureau allows families and institutions to adapt and to begin to recover in the wake of the recession 

and new pressures on families’ financial well-being. 

Conclusion 

Going forward, our Nation cannot afford to adopt a blind belief that consumer 

credit markets require little attention. The unmanageable debt burdens that pushed 

us into a recession and are hampering our recovery powerfully demonstrate that 

more debt does not equal more prosperity. We cannot sustain national economic 

prosperity while unmanageable borrowing undermines the prosperity of American 

families. But neither can we afford to limit opportunity and shunt upward mobility 

for the middle class by buying into fear that all borrowing is bad or accepting an 

endless downward spiral of consumer credit. The challenge is to figure out how to 

calibrate consumer credit markets to balance the harms of borrowing against its 

benefits. The Consumer Financial Protection Bureau is a critical aspect of meeting 

that challenge. Its vitality will help our economy recover and flourish, and its vigilance in the future will safeguard the well-being of American families as consumer 

debt markets change. 

44 

1The Limits of Contract as Product, 157 U. Pa. L. Rev. PENNumbra 160 (2009) (available 

at http://www.pennumbra.com/responses/02-2009/Lawless.pdf). 2Oren Bar-Gill and Elizabeth Warren, ‘‘Making Credit Safer’’, 157 U. Pa. L. Rev. 1 (2008); 

Elizabeth Warren, ‘‘Unsafe at Any Rate’’, Democracy: A Journal of Ideas, Summer 2007, at p. 

8. 

PREPARED STATEMENT OF ROBERT M. LAWLESS 

PROFESSOR OF LAW, UNIVERSITY OF ILLINOIS COLLEGE OF LAW

OCTOBER 4, 2011 

Congress created the Consumer Financial Protection Bureau (CFPB) to put an 

end to lending practices that rely on consumer confusion to create profits for the 

lenders. Although the CFPB has now come into existence, partisan politics have 

hampered the CFPB’s ability to fully vindicate its statutory mandate. The Senate 

has yet to act on the confirmation of a permanent director, and some members of 

Congress have vowed to scale back the agency’s powers. Thank you for inviting me 

here today. In my testimony, I will describe the problems that led Congress to create the CFPB in the first place and how these problems continue to plague American consumers. 

I am a professor of law and codirector of the Illinois Program on Law, Behavior 

and Social Science at the University of Illinois College of Law. In my courses and 

research, I study the problems that lead both consumers and businesses into financial distress and how we as a society react to financial distress. Along with seven 

other scholars, including copanelist Professor Katherine Porter, I regularly contribute to Credit Slips (http://www.creditslips.org), a blog that discusses issues related to credit, finance, and bankruptcy. My testimony today draws on what I have 

learned as a scholar and teacher of lending and bankruptcy. The views I am expressing are my own and not necessarily the views of my university or any other 

organization with which I am affiliated. 

A Middle-of-the-Road Agency 

I am here today as someone who was skeptical about the creation of a consumer 

financial agency. 1 My skepticism stemmed not from the oft-repeated concerns over 

an agency that has too much authority. Rather, my concern was that a consumer 

financial agency did not go far enough. Professor Warren framed her proposal for 

a consumer financial agency largely in terms of informational problems between 

consumers and lenders. 2 Under this vision, plain English disclosures would ameliorate many of the most abusive lending practices. In Professor Warren’s words, ‘‘the 

basic premise of a market is full information.’’ The agency would stand in the middle between consumers and lenders to ensure consumers were acting with full information. 

Although providing consumers with more information is a laudable goal, many 

consumer lending transactions simply transfer wealth away from persons living at 

the economic margins of society and put this wealth in the pockets of large financial 

institutions. If we decide as a society that these wealth transfers are intolerable, 

the answer is not to surround these transactions with more information but to ban 

these transactions altogether. Vigorous and effective usury caps would put an end 

to predatory lending at rates approaching a 300 percent or 400 percent APR. If, for 

example, consumers systematically make mistakes to choose credit cards with low 

teaser rates but higher long-term costs, then the answer is to limit the use of teaser 

rates. 

At the time of Dodd-Frank, people of good judgment and good faith differed on 

what Congress should do to prevent a repeat of the consumer lending abuses that 

played a role in creating the financial crisis. In the heated rhetoric that often surrounds any discussion of the CFPB, it has been forgotten that the agency in many 

ways was a compromise solution between those who wanted to go further and those 

who thought no little or new regulation was necessary. 

My other reason for skepticism was the problem of regulatory capture. In legal 

and political science scholarship, ‘‘regulatory capture’’ describes a situation where an 

administrative agency becomes beholden to the interests it regulates. The agency 

begins to act on behalf of those interests instead of the citizenry. Regulatory capture 

can happen for institutional reasons such as the fact that the regulated companies 

often have the greatest incentive to monitor and lobby the administrative agency. 

Cultural forces also play a role as agencies often draw their employees from the 

same labor pool as do the companies they regulate or as agency employees come to 

know their counterparts in the regulated industry. 

In financial regulation, regulatory capture has been particularly acute. The Office 

of the Comptroller of the Currency (OCC) draws its budgets from the fees of the 

45 

3 Adam Levitin, ‘‘Why the OCC Can’t Be Relied on for Consumer Protection’’, Credit Slips 

(Aug. 21, 2008) (http://www.creditslips.org/creditslips/2008/08/why-the-occ-can.html); Stephanie Mencimer, ‘‘No Account: The Nefarious Bureaucrat Who’s Helping Banks Rip You Off’’, The 

New Republic, Aug. 27, 2007, at 14 (http://www.tnr.com/article/no-account); Alan White, ‘‘OCC 

Findings: Illegal Foreclosures, Critical Deficiencies’’, Credit Slips (Feb. 17, 2011) (http:// 

www.creditslips.org/creditslips/2011/02/occ-finds-illegal-foreclosures-critical-deficiencies.html). 4 U.S. Senate Permanent Subcommittee on Investigations, Staff Report, ‘‘Wall Street and the 

Financial Crisis: Anatomy of a Financial Collapse’’, pp. 161–242 (Apr. 13, 2011) (http:// 

hsgac.senate.gov/public/lfiles/FinanciallCrisis/FinancialCrisisReport.pdf); Robert Cyran, 

‘‘The Downfall of a Regulator’’, N.Y. Times, Apr. 8, 2009, at B2 (http://www.nytimes.com/2009/ 

04/09/business/09views.html). 5Oren Bar-Gill and Elizabeth Warren, ‘‘Making Credit Safer’’, 157 U. Pa. L. Rev. 1, 86–97 

(2008). 6Federal Reserve Statistical Release G.19 (July 2011). The term ‘‘consumer debt’’ does not include mortgages. 

banks it regulates. Many observers have noted the OCC often seems to act in ways 

that attract regulatory business and hence higher fees and bigger budgets. 3 Commentators made similar observations about the Office of Thrift Supervision (OTS), 

an agency eliminated by Dodd-Frank. 4 In their article proposing a consumer financial agency, Professors Bar-Gill and Warren described a broad failure across a number of agencies to regulate on the behalf of consumers: the Federal Reserve, the 

OCC, the OTS, the Federal Deposit Insurance Corporation, the National Credit 

Union Administration, and the Federal Trade Commission. 5

To minimize the risk of regulatory capture in an area that had proven so susceptible to it, Congress tried to insulate the CFPB from political influences. As the Subcommittee is undoubtedly aware, there have been innumerable proposals to tear 

down the structures that protect the CFPB from interest-group politics. Efforts to 

replace the one-person director of the CFPB with a commission or place the CFPB’s 

budget under the immediate control of Congress are steps in the wrong direction. 

Indeed, the very existence of these efforts, largely centered in the financial services 

industry, demonstrates the need for vigilance in keeping the CFPB a truly independent agency. In an era of permanently indebted private households and complex 

financial instruments that provide opportunities for abuse at the expense of everyday Americans, we need an effective CFPB that will not be the hand maiden of the 

industries it needs to regulate. 

An Indebted Society 

Congress did not design the CFPB as an ‘‘anti-debt’’ agency. Used properly, borrowing can be an effective financial strategy for many consumers. Many Americans 

pay for their homes, their cars, and their educations through well-considered decisions to borrow money. Individually, many of these borrowing decisions undoubtedly 

made sense. In the aggregate, however, these individual decisions have made America an indebted society with remarkably high levels of household debt. The rush by 

financial institutions to supply this debt played a role, if not the major role, in creating our current financial crisis. An effective CFPB not only can minimize the systemic risk that comes from high levels of household debt but also act to minimize 

the harm that can befall individual borrowers when they enter into borrowing decisions they do not understand or cannot possibly afford. 

Without question, the financial crisis has reduced the amount of outstanding consumer debt. According to the Federal Reserve, consumer debt has shrunk by 4.2 percent since the beginning of 2008 to July 2011 (the most recent data available). 6 This 

small reduction in consumer debt is a drop in the bucket compared to the massive 

run-up during the past several generations. Even after adjusting for inflation and 

population growth, consumer debt has risen 46 percent in the past 25 years and 106 

percent in the past 50 years. When mortgages are considered, private household 

debt has increased 220 percent in the past 25 years and a staggering 374 percent 

in the past 50 years. Many Americans now spend most of the adult lives owing 

debts to some financial institution. 

46 

Compared to other countries, Americans are a deeply indebted people. According 

to the most recent data from the Organization for Economic Co-operation and Development (OECD), Americans had total household debt of $44,041 for every man, 

woman, and child in the country, the fifth highest among all OECD countries as 

illustrated by Figure 1. Adjusting for population allows for comparison across borders. Using per capita figures, however, understates the true debt burden because 

not every man, woman, or (especially) child has outstanding debt. For the average 

person carrying debt, the burden is much higher than $44,041. 


10411006.eps
47 

7This discussion is based on my findings in Robert M. Lawless, ‘‘The Paradox of Consumer 

Credit’’, 2007 U. Ill. L. Rev. 347. Further discussion appears at Bob Lawless, ‘‘One More Time 

With Feeling’’, Credit Slips (Aug. 22, 2011) (http://www.creditslips.org/creditslips/2011/08/ 

one-more-time-with-feeling.html) and Bob Lawless, ‘‘Debt Causes Bankruptcy (But Sometimes in 

Counter-Intuitive Ways)’’, Credit Slips (Jan. 7, 2011) (http://www.creditslips.org/creditslips/ 

2011/01/debt-causes-bankruptcy-but-sometimes-in-counter-intuitive-ways.html). 

When considering just short-term household debt, the United States leads all OECD countries with $9,663 owed per capita. The OECD defines short-term debt 

as any debt loaned for less than 1 year. Long-term debt is debt loaned for periods 

of greater than 1 year with the biggest components of long-term debt being home 

mortgages and automobile loans. Short-term debt is typified by credit card debt and 

payday lending. Thus, consumers are much more likely to be using short-term debt 

for immediate consumption. It is exactly these types of borrowing decisions where 

consumers are more likely to act quickly, perhaps under some pressure and without 

careful shopping among different lenders. It is exactly these types of borrowing decision where lenders can exploit consumer confusion and lack of information. It is exactly these types of borrowing decision where the CFPB can be most effective. And, 

it is exactly these types of borrowing decision in which Americans lead the world. 

Household Debt, Bankruptcy, and the CFPB’s Role in Research 

In its invitation, the Subcommittee asked for my views on ‘‘the role of consumer 

financial products in contributing to excessive household indebtedness and, in the 

extreme, bankruptcy.’’ Part of that question is easy to answer, and part of that question is much more difficult to answer. After explaining the easier part of the answer, 

I will turn to how the CFPB would be incredibly helpful in answering the more difficult part of the question. 

The easier part of the answer is that excessive household indebtedness clearly has 

a link to bankruptcy filings. 7 In the short run, the link is counterintuitive. As consumer debt increases, bankruptcy filings generally decline in the short-term. When 

consumer debt is more readily available, households can stave off the day of reckoning by borrowing to pay for rent, medical expenses, groceries, and the other necessities of daily life. A tightening of consumer debt generally has the opposite effect, 

driving more people into bankruptcy in the short term. When its effects are measured over a long run, however, consumer debt does lead to increased bankruptcy 


10411007.eps
48 

8 Robert M. Lawless, Angela Littwin, Katherine Porter, John Pottow, Deborah Thorne, and 

Elizabeth Warren, ‘‘Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors’’, 

82 Am. Bankr. L. J. 349 (2008). 9 12 U.S.C. §5493(b)(1). 

rates. Because of its relationship to consumer debt, the bankruptcy filing rate can 

rise even during economic boom times such as the 1990s when earlier increases in 

debt created long-term conditions conducive to bankruptcy filings that then spiked 

when credit markets became more difficult for consumers to access. Another example is this year, where bankruptcy filings will fall about 10 percent even amidst a 

dire economy. The dearth of new consumer debt in the immediate wake of the financial crisis in 2007 and 2008 created a situation where there would be less long-term 

need for bankruptcy. As consumers have found it slightly easier to borrow this year, 

the conditions have been created for a decline in this year’s bankruptcy filing rate. 

Thus, contrary to popular wisdom, it is consumer indebtedness, not the Nation’s 

overall economy that plays the major role in driving the Nation’s bankruptcy filing 

rate. 

The more difficult part of the Committee’s question is the role particular consumer financial products play in creating excessive household indebtedness. Once a 

consumer gets to bankruptcy court, the fact of the bankruptcy filing and the consumer’s circumstances become a matter of public record. Researchers can use this 

information to understand the relationship between indebtedness and bankruptcy, 

as we have done, for example, in documenting how Americans are arriving in bankruptcy much further in debt than they did 30 years ago. 8 As to how people become 

overindebted in the first place, we have a much poorer understanding. For example, 

is overindebtedness often due to exogenous shocks like illness or job loss, or are poor 

purchasing decisions and overconsumption the primary driver? To what extent does 

culture or other attitudes drive overindebtedness? Are particular consumer financial 

products more likely to lead to overindebtedness? Are some consumer financial products inherently abusive in that they cost far more than any conceivable benefit they 

could be giving the borrower? The data that would provide some insight into these 

questions generally is private and beyond the ability of independent researchers to 

investigate. 

Often lost in the debates over the CFPB is the research function Congress directed it to have. Following the statutory directive given by its enabling legislation, 

the CFPB now has a research unit that investigates the following issues: 

A. Developments in markets for consumer financial products or services, including market areas of alternative consumer financial products or services with 

high growth rates and areas of risk to consumers; 

B. Access to fair and affordable credit for traditionally underserved communities; 

C. Consumer awareness, understanding, and use of disclosures and communications regarding consumer financial products or services; 

D. Consumer awareness and understanding of costs, risks, and benefits of consumer financial products or services; 

E. Consumer behavior with respect to consumer financial products or services, including performance on mortgage loans; and 

F. Experiences of traditionally underserved consumers, including un-banked and 

under-banked consumers. 9

The CFPB’s resources and access to data will make its research division a hub 

for top-flight independent scholars who are trying to work together to understand 

how and why consumers become overindebted. Although good consumer finance research is happening in some Federal agencies, most notably the Federal Reserve, 

these research departments understandably exist to serve the important regulatory 

aims of their sponsoring unit such as banking regulation. In contrast, the research 

arm of the CFPB works within an organization whose mission it is to further consumer protection. Instead of research that focuses on how consumer finance might 

affect other regulated systems, the CFPB will produce research that understands 

how consumer finance affects consumers. In a few years, we should have a much 

better understanding of whether particular financial products are most likely to lead 

to overindebtedness. 

More Than Just Outstanding Consumer Debt 

It was not just rising consumer debt that led Congress to create the CFPB. Committees such as this one had heard Americans complain for years about abusive 

practices in mortgage lending, credit card lending, arbitration, debt collection, mortgage servicing, payday loans, and many other industries. The financial crisis of 2008 

49 

created a climate in which the political will finally existed to protect consumers 

from practices where companies profited, not by providing a better product, but by 

deception, confusion, and lack of information. With the collapse of the subprime 

lending market, it is tempting to think that abusive practices around consumer financial products have disappeared and that the need for an organization like the 

CFPB has diminished. Since the CFPB was created, new problems have appeared, 

and old problems have become salient in new ways. At the risk of creating the 

misimpression that the challenges are limited by mentioning only a few specific 

problems, I will list three current areas of concern in which an effective CFPB could 

play a role. 

Reverse mortgages allow older persons to draw on equity they have in their 

homes and receive a stream of payments to help with expenses in their retirement 

years. To make an informed decision on a reverse mortgage, a consumer needs a 

good understanding of the value of the home, life expectancy, and a competitive interest rate. All of these pieces of information require estimation. Moreover, we can 

expect consumers to display bias in making these estimates such as overestimating 

the value of the home or life expectancy. In addition, persons contemplating a reverse mortgage often have liquidity constraints that create pressure to agree to the 

reverse mortgage. Some of the same players in the subprime lending market have 

moved into reverse mortgages, leading to complaints from consumer advocates that 

were similar to the complaints about subprime lending. Reports of high fees and financial products inappropriate for the consumer are becoming more and more frequent in the reverse mortgage industry, which seems poised to become the next big 

consumer lending problem area. 

Mortgage servicing problems have dominated the news. Borrowers and even their 

attorneys are unable to reach a person at mortgage servicers who can negotiate a 

reasonable solution. Paperwork mailed to servicers gets lost or goes 

unacknowledged. Court affidavits have been mass-produced and signed by persons 

with little knowledge over the facts alleged in the affidavit, a problem now known 

as ‘‘robo-signing.’’ Community-based foreclosure mediation programs founder for 

want of funds and participation by both borrower and lender. Foreclosed properties, 

wanted neither by the bank or the homeowner, sit vacant and become a blight on 

the urban landscape. 

Finally, debt collection abuses appear to be becoming more prevalent. Credit card 

collections may have replicated the robo-signing problems in the mortgage servicing 

industry. Indeed, given that many of the same players are involved and that credit 

card debt is sold in ways that is similar to mortgage debt, it would be surprising 

if the debt collection industry did not have robo-signing problems. Other debt collectors have left families who have lost relatives with the incorrect impression that the 

family is legally responsible for the debts of their deceased loved one. In some areas, 

reports have surfaced that creditors act in concert with local courts to abuse procedures known as ‘‘body attachments’’ where a debtor can be arrested for failure to 

answer interrogatories related to a debt collection. When called into court, the technical nicety of being arrested for failure to answer interrogatories, as opposed to 

nonpayment of the debt, is lost on the debtor. Instead, the creditor or the court will 

tell the debtor he or she can go free if the debtor starts making payments on the 

debt. 

Abuses in reverse mortgages, mortgage servicing, and debt collection are just a 

few of the current problems that demonstrate how a comprehensive Federal regulator can help protect consumers. Responsible companies in these industries should 

welcome the oversight of the CFPB to rid the industries of bad actors. Three years 

into the financial crisis, it can be easy to forget the conditions that led to the creation of the CFPB. It is important that short political memories not hobble an important tool for American consumers just after it starts. 

PREPARED STATEMENT OF RAY BOSHARA 

SENIOR ADVISOR, FEDERAL RESERVE BANK OF ST. LOUIS

OCTOBER 4, 2011 

Chairman Brown, Ranking Member Corker, and Members of the Subcommittee, 

thank you for the invitation to appear before you today. My name is Ray Boshara, 

and I am a senior advisor at the Federal Reserve Bank of St. Louis. Let me state 

that the views expressed here today are my own views, and not necessarily the 

views of the Federal Reserve Bank of St. Louis or the Board of Governors of the 

Federal Reserve System. 

50 

1 Atif Mian and Amir Sufi, ‘‘Household Leverage and the Recession of 2007–09’’, IMF Economic Review, vol. 58 (1), pp. 74–117, 2010. www.palgrave-journals.com/imfer/journal/v58/n1/ 

pdf/imfer20102a.pdf 2Mian and Sufi, ‘‘Household Leverage and the Recession of 2007–2009’’. 

3 Jesse Bricker, Brian Bucks, Arthur Kennickell, Traci Mach, and Kevin Moore, ‘‘Surveying 

the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009’’, Finance and Economics Discussion Series 2011-17 (Washington: Board of Governors of the Federal Reserve System), 2011. www.federalreserve.gov/pubs/feds/2011/201117/201117abs.html 4 Rakesh Kochhar, Richard Fry, and Paul Taylor, ‘‘Wealth Gaps Rise to Record Highs Between Whites, Blacks, Hispanics’’, (Washington, DC: Pew Research Center, July), 2011. http:// 

pewsocialtrends.org/files/2011/07/SDT-Wealth-Reportl7-26-11lFINAL.pdf 5 Bricker, Bucks, Kennickell, Mach, and Moore, ‘‘Surveying the Aftermath of the Storm: 

Changes in Family Finances from 2007 to 2009’’. 

6 Annamaria Lusardi, Daniel Schneider, and Peter Tufano, ‘‘Financially Fragile Households: 

Evidence and Implications’’, Brookings Papers on Economic Activity (Washington, DC: Brookings 

Institution, Spring), 2011. www.brookings.edu//media/Files/Programs/ES/BPEA/ 

2011lspringlbpealpapers/2011lspringlbpealconferencellusardi.pdf 7 Annamaria Lusardi, ‘‘Americans’ Financial Capability’’, report prepared for the Financial 

Crisis Inquiry Commission, 2011. http://fcic-static.law.stanford.edu/cdnlmedia/fcic-testimony/ 

2010-0226-Lusardi.pdf 8Debbie Borie-Holtz, Carl Van Horn, and Cliff Zukin, No End in Sight: The Agony of Prolonged Unemployment, (New Brunswick, NJ: John J. Heldrich Center for Workforce DevelopAt the Federal Reserve Bank of St. Louis, I am organizing a new effort to study 

mechanisms that promote household financial stability, with a particular emphasis 

on rebuilding the balance sheets and net worth of American households. My work 

is focused on families hardest hit by the financial crisis and the economic downturn, 

those who have experienced significant losses of employment, income, and wealth. 

We know that balance sheets matter because financially healthy families spend, 

save, and invest more, and thereby contribute to economic growth. 

My testimony is in two parts. In the first part, I discuss why a focus on household 

balance sheets is necessary. And in the second part, I offer some policy recommendations, based on my own work, to help rebuild the balance sheets of struggling families. 

Why Balance Sheets Are Important 

Balance sheets, by which I mean the savings, assets and debts of households, 

merit attention for three reasons. First, over the past few years we have all seen 

the damage to families, communities, and the broader economy derived from balance 

sheet challenges. For too many years, household debt levels rose, eventually to dangerous levels, while little was done to build up household savings and to diversify 

family assets beyond housing. When the housing bubble burst, the wealth of many 

households plunged, leaving balance sheets, according to some economists, at a historic low. 1 For instance, Mian and Sufi report that both household debt-to-income 

and household debt-to-assets ratios reached their highest points since 1950, with the 

debt-to-income ratio skyrocketing from 2001 to 2007 by more than it had in the 

prior 45 years. 2

While balance sheets have improved somewhat in the last couple of years, financial instability remains severe among the poor and persons of color, and reaches into 

the middle class. Consider these points: 

• Three-fifths or more of families across all income groups, according to the 2009 

Survey of Consumer Finances (SCF) of the Federal Reserve, reported a decline 

in wealth between 2007 and 2009, and the typical household lost nearly onefifth of its wealth, regardless of income group. 3

• The Pew Research Center finds that, in 2009, typical net worth stood at $5,677 

for blacks, $6,325 for Hispanics, and $113,149 for whites. About a third of black 

and Hispanic households had zero or negative net worth that year, compared 

with 15 percent of white households. 4

• Almost half of all households surveyed in the 2009 SCF had less than $3,000 

in liquid savings, and 20 percent had less than $3,000 in broader savings. 5

• Nearly half of all Americans consider themselves financially fragile, meaning 

that they would ‘‘probably’’ (22.2 percent) or ‘‘certainly’’ (27.9 percent) be unable 

to come up with $2,000 in 30 days to cope with a financial emergency. 6 Similarly, almost half of all Americans report having trouble making ends meet. 7

• In a survey by Holtz, Van Horn, and Zukin on the effects of unemployment and 

the recession, 70 percent of workers reported withdrawing funds saved in college and retirement accounts in order to make ends meet, 8 likely leading to 

losses of wealth in future years. 

51 

ment, Rutgers University, May), 2010. www.heldrich.rutgers.edu/sites/default/files/content/ 

WorklTrendslMayl2010l0.pdf 9Karl E. Case, John M. Quigley, and Robert J. Shiller, ‘‘Wealth Effects Revisited 1978–2009’’, 

Cowles Foundation Discussion Paper No. 1784 (New Haven, CT: Cowles Foundation for Research in Economics, Yale University, February), 2011. http://cowles.econ.yale.edu/P/cd/d17b/ 

d1784.pdf 10Mian and Sufi, ‘‘Household Leverage and the Recession of 2007–2009’’. 11Dalton Conley, ‘‘Savings, Responsibility, and Opportunity in America’’, Policy Paper (Washington: New America Foundation, April), 2009. http://newamerica.net/publications/policy/savingslresponsibilitylandlopportunitylamerica 12Daniel Cooper and Maria Luengo-Prado, ‘‘Savings and Economic Mobility’’, in Reid Cramer, 

Rourke O’Brien, Daniel Cooper, and Maria Luengo-Prado, eds., A Penny Saved Is Mobility 

Earned: Advancing Economic Mobility Through Savings (Washington: Pew Charitable Trusts, 

Economic Mobility Project, November), 2009. www.economicmobility.org/assets/pdfs/ 

EMPlSavingslReport.pdf 13Stuart M. Butler, William W. Beach, and Paul L. Winfree, Pathways to Economic Mobility: 

Key Indicators (Washington: Pew Charitable Trusts, Economic Mobility Project), 2008. 

www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/EconomiclMobility/ 

PEWlEMPlChartbookl12.pdf 14 Cooper and Luengo-Prado, ‘‘Savings and Economic Mobility’’. 15William Elliot III and Sondra Beverly, ‘‘The Role of Savings and Wealth in Reducing ‘Wilt’ 

between Expectations and College Attendance’’, Research Brief (St. Louis: Center for Social Development, Washington University, January), 2010. http://csd.wustl.edu/Publications/Documents/RB10-04.pdf 16Min Zhan and Michael Sherraden, ‘‘Assets and Liabilities, Race/Ethnicity, and Children’s 

College Education’’, Research Brief (St. Louis: Center for Social Development, Washington University, February), 2009. http://csd.wustl.edu/Publications/Documents/RB10-09.pdf 

Second, weak balance sheets impact economic growth. Weak balance sheets—especially due to lower household wealth—have had negative ‘‘wealth effects’’ on the 

economy. Case, Quigley, and Shiller state that ‘‘the results indicate that increases 

in housing market wealth have had positive effects upon household consumption, 

but declines in housing market wealth have had negative and somewhat larger effects upon consumption.’’ 9 In addition, Mian and Sufi show that ‘‘household leverage 

as of 2006 is a powerful statistical predictor of the severity of the 2007–2009 recession across U.S. counties. Those counties that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006—a full year before the official beginning of the recession in the fourth quarter of 2007.’’ 10 Many others, including the 

Bank for International Settlements and the International Monetary Fund, have recently identified weak household balance sheets as one of the key factors inhibiting 

economic growth. 

And third, a growing body of evidence indicates that families with assets generally do better in life than those without, and generally experience better social, 

behavioral, and educational outcomes. Conley, using intergenerational data, showed 

that ‘‘parental education and parental assets are the single best predictor of educational (and other socioeconomic) success for blacks and whites. Parental wealth 

proves so powerful, in fact, that when added to statistical models, parental income, 

occupation and race no longer appear to matter. That is, while race, income, job status and net worth all tend to vary hand-in-hand, careful statistical parsing shows 

that it is really net worth that drives opportunity for the next generation.’’ 11 Moreover, Cooper and Luengo-Prado found that among adults who were in the bottom 

income quartile from 1984–1989, 34 percent left the bottom by 2003–2005 if their 

initial savings were low, compared with 55 percent who left the bottom if their initial savings were high—that is, 21 percent more adults moved out of the bottom 

quartile because they had higher savings. 12 And Butler, Beach, and Winfree found 

that financial capital, along with family structure and educational attainment, are 

the three strongest predictors of economic mobility in America. 13

Further evidence suggests that the earlier in life one has assets, the better that 

person will do. For example, Cooper and Luengo-Prado found that children of lowsaving, low-income parents are significantly less likely to be upwardly mobile than 

children of high-saving, low-income parents. Specifically, they found that 71 percent 

of children born to high-saving, low-income parents move up from the bottom income quartile over a generation, compared to only 50 percent of children of low-saving, low-income parents. 14 Elliot and Beverly discovered that, remarkably, youth 

with any kind of a bank account, as long as the account was in the youth’s name, 

are seven times more likely to attend college than those lacking accounts. 15 Similarly, Zhan and Sherraden found that, after controlling for family income and other 

parent and child characteristics, financial and nonfinancial assets are positively related to, and unsecured debt is negatively related to, children’s college completion. 16

52 

17Thomas M. Shapiro, The Hidden Cost of Being African American: How Wealth Perpetuates 

Inequality (New York: Oxford University Press), 2004. 18 Bureau of Economic Analysis, www.bea.gov/newsreleases/national/pi/pinewsrelease.htm; 

Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/series/PSAVERT; and 

Massimo Guidolin and Elizabeth A. La Jeunesse, ‘‘The Decline in the U.S. Personal Saving Rate: 

Is It Real and Is It a Puzzle?’’ Federal Reserve Bank of St. Louis Review, vol. 89(6), pp. 491– 

514, 2007. 19 Board of Governors of the Federal Reserve System, Statistical Release Z.1, ‘‘Flow of Funds 

Accounts of the United States’’ (September 16), 2011. www.federalreserve.gov/releases/z1/current/z1.pdf; and CoreLogic, ‘‘New CoreLogic Data Shows Slight Decrease in Negative Equity’’, 

news release, June 7, 2011. www.corelogic.com/about-us/news/new-corelogic-data-shows-slightdecrease-in-negative-equity.aspx 20For this testimony, I will focus on savings-based approaches to building balance sheets, 

which have many advantages, although I well recognize that other important approaches exist 

to help low-resource families build assets, including Pell Grants, microenterprise programs, defined-benefit pension programs, various home ownership and rental assistance programs, public 

safety net programs, and many others. 21 Butler, Beach, and Winfree, ‘‘Pathways to Economic Mobility: Key Indicators’’; Reid Cramer 

and Rachel Black, ‘‘The Assets Report 2011: An Assessment of Federal Policies and Proposals 

To Promote Asset-Building Opportunities’’ (Washington: New America Foundation, June), 

2011.http://assets.newamerica.net/sites/newamerica.net/files/policydocs/AssetsReport2011.pdf; and ‘‘Corporation for Enterprise Development’’, ‘‘Upside Down: The $400 Billion Federal AssetBuilding Budget’’ (Washington: CFED), 2010. http://cfed.org/assets/pdfs/ 

UpsideDownlfinal.pdf 

And Shapiro, combining data analysis and in-person interviews with a demographically wide range of families, found that the presence of even small amounts of 

wealth at the right times can have a ‘‘transformative’’ effect on the life course. 17

Policy Ideas for Rebuilding Balance Sheets 

For families, reducing their debts and rebuilding their savings—or deleveraging— 

is already, painfully and slowly, underway. The household savings rate has now 

reached around 5 percent, which is significantly down from the 9 percent average 

in the 1980s, on course with the 5 percent average in the 1990s, but well above the 

nearly zero rates the U.S. fell to in the first part of this century. 18

Yet millions of families need to delever even more, although, not surprisingly, 

economists do not agree on ideal or sustainable levels of household savings and 

debt. Most agree, however, that rebuilding balance sheets and igniting the economy 

require continuing measures to resolve the housing and foreclosure crisis. Roughly 

three-quarters of total household debt is mortgage debt, and nearly one-quarter of 

homeowners nationwide have negative equity. 19 Specific recommendations to resolve the housing crisis are beyond the scope of my expertise and testimony, so I 

will focus on other ideas to help families build savings and wealth. However, before 

doing so, I would like to observe that, historically, home ownership has been an effective route to wealth accumulation for generations of families, including for lowand moderate-income families; accordingly, going forward, policy makers and researchers should continue to study responsible paths to home ownership for those 

who are ready and qualified, with all stakeholders balancing both risks and the rewards. 

While several ideas could be offered, let me suggest five savings-based recommendations to rebuild balance sheets that I think hold particular promise. 20 I 

would like to note that these recommendations are informed by a key insight 

gleaned from savings experiments in the U.S. and around the world. The most interesting question among researchers is no longer whether low-income families can 

save, but how they save and what difference it makes. That is, income is not the 

most important predictor of who saves. Instead, what matters more is who has access to structured savings mechanisms—whether through the workplace, schools, financial institutions, tax returns, community-based organizations, and others. A 

well-funded asset-building policy, one that includes several billion dollars in tax incentives, is already reaching middle- and upper-income households in the United 

States, 21 making it easier for them to accumulate savings and wealth; the core policy challenge, then, is to extend those savings mechanisms and incentives to families whose earnings fall below median income. 

First, build assets as early in life as possible. As discussed earlier, the evidence 

thus far suggests that children in homes with assets, or children with assets, do better in life than those lacking assets. Policies that automatically create a savings account at birth for every child born in America, with greater resources available for 

lower-wealth families, hold promise to expand opportunity and build a stronger middle class over time. Such a policy would, if schools structured financial education 

classes around the accounts, likely have a significant effect on building financial 

skills for children and youth—some studies show that financial know-how is the reVerDate Nov 24 2008 13:15 May 17, 2012 Jkt 048080 PO 00000 Frm 00056 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-04 DISTILLER FILE\100411.TXT JASON
53 

22David Newville, ‘‘The Saver’s Bonus: Encouraging and Facilitating Savings by Families at 

Tax Time’’, Policy Paper (Washington: New America Foundation, June), 

2009.www.newamerica.net/files/nafmigration/SaverslBonuslTwolPagerlFINALl070209.pdf 23Stephanie Chase, Leah Gjertson, and J. Michael Collins, ‘‘Coming Up with Cash in a Pinch: 

Emergency Savings and Its Alternatives’’, CFS Issue Brief 6.1 (Madison, WI: Center for Financial Security, University of Wisconsin), 2011. www.cfs.wisc.edu/Publications-Briefs/CominglUplwithlCashlinlalPinchlEmergencylSavingslandlItslAlternatives.pdf 24Signe-Mary McKernan, Caroline Ratcliffe, and Katie Vinopal, ‘‘Do Assets Help Families 

Cope with Adverse Events?’’ Brief 10 (Washington: The Urban Institute, November), 2009. 

www.urban.org/UploadedPDF/411994lhelplfamilylcope.pdf 

sult of regular saving, not the source. If such an ambitious policy cannot be achieved 

in the near term, then I would suggest the creation of a ‘‘Kids Roth’’ or ‘‘Roth at 

Birth’’ or ‘‘Young Savers Account’’—a slightly modified Roth Individual Retirement 

Account (IRA) that, voluntarily, permits children to open and make contributions to 

a life-long, tax-benefited account that can also be used for post-secondary education 

and home ownership (as current Roth IRAs allow). The creation of such a nationally 

sanctioned product directed at kids would likely spur further experimentation 

around child savings accounts, which has been hampered by product-related challenges over the last several years. 

Second, build assets and reduce debts at tax time. Income tax refunds averaged $2,700 in 2008, while about 24 million Earned Income Tax Credit (EITC) recipients 

received refunds as large as $4,824. 22 These refunds, and the broad reach of the 

tax system, offer good opportunities to repair or rebuild balance sheets. The IRS’s 

form 8888, which enables all taxpayers to deposit their refunds automatically in up 

to three separate accounts, holds great promise in leveraging tax refunds into savings and debt reduction. For example, savings bonds, in many ways an ideal product 

for small savers, can now be purchased directly at tax time. Other interesting pilots, 

including the ‘‘Refund to Savings’’ Initiative, are under way. To further facilitate 

savings at tax time, the Savers Credit, which encourages retirement savings among 

low-income taxpayers, could be improved and made available for contributions to 

college savings accounts, the purchase of savings bonds, and other preretirement assets. Third, build assets at the workplace. The workplace has always been and remains a fulcrum for building savings and assets. In fact, the vast majority of pension wealth in the U.S. is structured through employers. Experiments, such as those 

testing ‘‘Auto401(k)s’’ and the ‘‘Save More Tomorrow’’ concept, have generated encouraging results, including for low-income workers, and the Pension Protection Act 

of 1996 has removed many of the barriers to further expansion of those efforts. To 

generate more employer-based savings, policy makers could consider proposals to set 

up automatic payroll deductions into retirement and unrestricted savings accounts 

outside the workplace, informed by the ‘‘AutoIRA’’ and ‘‘AutoSave’’ concepts currently under discussion. Employers could also encourage direct deposit of paychecks, 

which appears to lead to better financial inclusion outcomes. Finally, one could also 

imagine automatic payroll deductions for other assets, such as savings for college 

or home ownership, with possible incentives to encourage further saving by lowerincome workers. 

Fourth, build unrestricted savings, which are savings that can be used for emergencies or precautionary purposes and which remain in very high demand by lowand moderate-income consumers. 23 Those with sufficient levels of unrestricted savings are more likely to be banked, more likely to pay down and secure better loans, 

and more likely to acquire a longer-term asset such as higher education, a small 

business, or a home. And they do better: The Consumer Federation of America 

found that low-income families with $500 in emergency savings had better financial 

outcomes than moderate-income families with lower savings. In addition, McKernan, 

Ratcliffe, and Vinopal found that households that are ‘‘liquid-asset poor’’ are two to 

three times more likely than those with liquid assets to experience ‘‘material hardship’’ after a job loss, health emergency, death in the family, or other adverse 

event. 24 Policy makers could consider several measures to boost unrestricted savings, including (1) expanding the EITC; (2) further studying and testing prepaid 

cards, which often include a savings ‘‘bucket′′ in addition to transaction services; and 

(3) promoting reasonably priced small-dollar lending and small-dollar savings programs among financial institutions, nonprofits, and others. 

And finally, consider supporting innovations to State-based 529 college savings 

plans and other ways to generate savings earmarked for college. Many studies have 

documented the role that a good education, especially completion of a post-secondary 

degree, has on one’s future earning and wealth, and how the lack of an education 

and skills are among the strongest predictors of downward mobility. Promising innovations to learn from include (1) the ‘‘SEED for Oklahoma Kids’’ experiment, which 

54 

25 Janet Yellen, ‘‘Housing Market Developments and Their Effects on Low- and Moderate-Income Neighborhoods’’, speech delivered the 2011 Federal Reserve Bank of Cleveland Policy Summit, June 9, 2011.www.federalreserve.gov/newsevents/speech/yellen20110609a.htm 1http://bretton-woods.com/71501/index.html 

is testing 529s established at birth; (2) the ‘‘Kindergarten to College’’ initiative in 

San Francisco, which is setting up college saving accounts for all of the city’s kindergartners; and (3) the ‘‘Early Pells’’ proposal by the College Board, which would enable a Pell-eligible family to receive a child’s Pell Grant earlier in life as a deposit 

to a 529 account. 

As implied in the recommendations above, there is a great need to diversify the 

savings and assets of families, especially those below median income. The wealth 

of these families has been concentrated in home ownership, which has contributed 

to the stability and upward mobility of millions of families over time—but which, 

especially when not acquired responsibly, or because of price fluctuations, ended up 

being a risky asset for too many families. Home ownership, as mentioned earlier, 

clearly carries both potential risks and rewards that must be carefully weighed. It 

is wise, therefore, for families to have access to a range of savings products—shortand longer-term, restricted and unrestricted—that lead to as broad a range of financial assets (such as investments and retirement accounts) and productive assets 

(such as a home, land, post-secondary education, reliable car, or small business) as 

possible. As Federal Reserve Board Vice Chair Janet Yellen has said, ‘‘In light of 

this experience [with collapsing housing prices], it makes sense to think about the 

development of wealth-building vehicles for low- and moderate-income households 

that have some of the desirable qualities of home ownership as an investment, but 

perhaps have less of the risk. Such instruments should be simple and transparent 

and might include a savings commitment component. Although households will likely need to take on some risk in order to accumulate wealth, the risk should not have 

the potential to destroy a household’s financial security. Continued research in this 

area is badly needed.’’ 25

Conclusion 

Mr. Chairman, I commend you for convening this hearing today to look at high 

levels of household debt, consumer protection, and rebuilding the middle class. We 

know that household debt is both weighing down millions of families and stifling 

economic growth. Thankfully, we have compelling evidence, some of it presented 

here, suggesting that rebuilding balance sheets and net worth will help hard-hit 

families and the broader economy move forward. I hope to make a modest contribution to this critical challenge, and I would be pleased to answer any questions that 

you might have. 

PREPARED STATEMENT OF G. MICHAEL FLORES 

CHIEF EXECUTIVE OFFICER, BRETTON WOODS, INC. 

OCTOBER 4, 2011 

Overview 

Chairman Brown and Members of the Committee, my name is Michael Flores and 

I am CEO of Bretton Woods, Inc., an advisory firm in the financial services industry. 

My firm is in the initial stages of a new study on the impact to the middle class’s 

access to bank payments and credit facilities. We have completed studies over the 

last 10 years on overdraft issues as well as the emergence of prepaid cards. 

We demonstrated in the early 2000s that the cost of an overdraft was significantly 

higher that other sources of low dollar, short term credit. We have also shown that 

the prepaid card issuers with the most significant market share were on a par with 

basic checking accounts but are now a less expensive option available to the consumer. 

Almost every day there is a news release of banks increasing their fees to consumers. At the same time we are hearing that banks have plenty of money to lend 

but are refraining from doing so. 

The results of many studies over the last 10 years, including our own studies, 1

indicate that the majority of overdrafts were incurred by the segment of the consumer base that used free checking. Now that free checking is going away, consumers are closing their checking accounts and, as a result, losing access to this 

form of short term credit. 

55 

Our contention is that most banks are operating under a 20th century business 

model and have yet to adequately devise a 21st century model. Some of the issues 

involve the net interest margin squeeze banks have endured for the past 15 years 

as well as recent regulatory changes that have significantly impacted banks’ fee income sources. Those primary sources are overdraft fees and interchange fees. Other 

issues include the quickening pace of technology, the need to meet the expectations 

of the young consumers while still providing a service model with which the older 

customers are comfortable. 

This is what we refer to as the banks’ legacy cost structure of delivering services 

in an analog world while building the infrastructure for a digital world. 

Banks cannot profitably originate and underwrite individual small dollar loans. Our analysis indicates that $1,500 in the break-even point using data from the 

FDIC Small Dollar Loan Program. 

I have included a model in my written testimony for the Committee’s review. 

Market driven entrants are able to leap frog the old model and build a cost structure to effectively deliver these services at competitive prices. We support the ability 

of banks and alternative service providers to have the ability to develop strategic 

partnerships or acquisitions to allow legacy banks be more competitive with entrepreneurial and market driven solutions 

A key premise of this hearing is Consumer Protection. I am a true supporter of 

clear and concise disclosures so the consumer can make an informed decision. However, it is becoming apparent that the law of unintended consequences is alive and 

well. For example, the reduction in interchange fees to benefit the consumer, which 

was basically a business to business financial issue between the banks and the merchants, has inadvertently created a significant income redistribution from the consumers to the merchants in the form of higher bank fees to the consumer to lower 

costs/higher margins for the merchant. 

Given this observation, the following are my concerns with the CFPB: 

• Concentration of authority with, in my opinion, limited accountability. I believe 

that the bureau should be accountable to Congress as a check and balance, 

similar to other agencies. 

• I see inherent problems in separating safety and soundness with consumer protection. Limitations on products or pricing beyond market constraints can potentially produce limitations of credit and access to mainstream banking that 

we are now starting to see. Further reductions in income sources to banks can 

have a significant impact to safety and soundness. 

• Furthermore, the cost of compliance is increasing to a point where many small 

banks (under $1 billion assets) are limited in their ability to hire the professionals required. 

• Finally, I believe the director should report to a board with a broad representation of the interested parties. 

Thank you and I look forward to answering your questions. 

Supplemental Data 

History of Banking Overdraft Fees 

In the 1980s, we advised banks to pay all checks from low dollar to high dollar 

so the bookkeepers would have fewer items to process. Fee income was not the factor it became in the late 1990s. During this time, banks were experiencing interest 

margin compression, traditional finance companies were exiting the business of offering small dollar, short term credits products (for which the demand did not subside) and technology became available to process checks presented against insufficient funds in an automated process. The result was the development of Courtesy 

Overdraft Programs that automated the decision process bank bookkeepers and 

branch managers have manually made for decades. 

Given this new technology, banks started offering free checking. The amount of 

NSF and Overdraft items increased due to the limited options available for shortterm/low dollar credit but the costs to handle these items were significantly less. 

Accounts that banks would not open in the past, they could now do so profitably. 

We also changed the presentment order to pay large dollar checks first before the 

small dollar items. This was established was as a customer service. Paying the 

mortgage payment or rent or car payment first saved charges and embarrassment 

of ‘‘bouncing’’ those items. Secondly, when deciding to pay a check into overdraft 

was limited to checks (before debit cards and ACH became as prominent as they 

are today), this actually saved the customer money. When a bank returns a check 

unpaid, it charges the same fee as paying the check into overdraft. The depositing 

customer typically redeposits that check that may result in another NSF fee plus 

56 

2http://bretton-woods.com/71501/index.html 

3http://www.fdic.gov/bank/analytical/quarterly/2010lvol4l2/ 

FDIClQuarterlylVol4No2lSmallDollar.pdf 

any merchant fees or late fees or utility reconnect charges. In essence, paying a 

check into overdraft can be one-third the ultimate cost of returning the check. 

When banks extended the Courtesy Overdraft Program to low dollar debit card 

transactions, the customer ceased to receive value. 

The Case for Short-Term Credit Advance Loans 

The point with the brief history of overdrafts is that when a customer opens a 

basic checking account, the bank will still make the pay or return decision on checks 

presented against insufficient funds (even if the customer ‘‘opts-out’’ of debit card 

and ATM overdrafts) and charge the fee, regardless of the decision. The result of 

many studies over the last 10 years, including our own studies, 2 indicates that the 

majority of NSF/OD charges were incurred by the segment of the consumer base 

that used free checking. 

With the changing landscape of increasing checking account fees, many consumers 

of free checking are leaving banking for alternatives, including prepaid cards. The 

fact that some these consumers are out of mainstream banking while others are now 

paying more for checking accounts does not diminish the demand for low dollar 

short term credit. 

Additionally with several State initiatives and the imposition of Regulation E (opt 

in requirement) to inhibit access to short term credit, consumers are still in need 

for this credit facility. The reason banks have started offering deposit advance loans 

is that individually underwriting small dollar loans is not economically feasible. As 

a practice, our firm has advised banks since the early 1990s to not originate loans 

under certain solar limits. The minimum limit found at many banks is now $1,000 

for a consumer loan. 

Bretton Woods conducted a cost analysis to originate a small dollar loan based 

on the FDIC Small Dollar Loan Program. Our finding, as indicated in the following 

chart, show that the minimum loan amount is approximately $1,500 to breakeven. 

Interviews with participants of the SDL program indicate that these loans are unprofitable. An excerpt from the FDIC report 3 shows: 


10411008.eps
57 

4http://www.responsiblelending.org/payday-lending/research-analysis/payday-loan-inc.pdf 

5http://www.consumersunion.org/pub/corelfinanciallservices/014300.html 

• ‘‘Nevertheless, as a general guideline, pilot bankers indicated that costs related 

to launching and marketing small-dollar loan programs and originating and 

servicing small-dollar loans are similar to other loans. However, given the small 

size of SDLs and to a lesser extent NSDLs, the interest and fees generated are 

not always sufficient to achieve robust short-term profitability (emphasis 

added). Rather, most pilot bankers sought to generate long-term profitability 

through volume and by using small-dollar loans to cross-sell additional products.’’ 

The average loan amount for short term credit is approximately $300 4 according 

the Center for Responsible Lending. 

Given the average FDIC Small Dollar Loan program loan amount is $724 and our 

estimate that it takes a minimum $1,500 for a bank to break even on a consumer 

loan and the demand for a short term loan is $300, what are the options available 

to this consumer? 

The market currently has options for unanticipated short-term credit needs in the 

form of Overdrafts. There are also banks, credit unions and Alternative Financial 

Services providers that have product for anticipated short term credit needs. 

As with all products, features need to be weighed against price. The typical bank 

or credit union product has a slightly lower price point for a low dollar loan but require the applicant be a customer for a period from 1 month to 4 months and have 

no other delinquencies with existing credit products. Many consumers who have a 

need for this credit may not qualify for a checking account because of previous 

issues and reporting to Chex Systems. Others with existing accounts have or are 

considering closing their checking account due to higher fees being assessed. 

A recent article from Money Magazine, ‘‘Get a Fair Shake, Not a Shake-down’’, 

dated September, 2011, depicts the reasons for this trend in bank fees: 

Our own analyses of the cost of checking accounts compared to prepaid cards and 

check cashing using the Consumers Union standard transaction profile 5 in August 

of this year shows: 


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The bank costs are now understated given the recent news from Bank of America 

and Citibank. 

PREPARED STATEMENT OF DOUGLAS FECHER 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, WRIGHT-PATTERSON FEDERAL CREDIT

UNION, FAIRBORN, OHIO

OCTOBER 4, 2011 

Mr. Chairman and Members of the Committee, thank you for the opportunity to 

speak to you about responsible consumer lending practices. 

My name is Doug Fecher, and I am President and CEO of Wright-Patt Credit 

Union, a $2.1 billion financial cooperative serving more than 210,000 members in 

Dayton, Ohio, a community hit hard by a challenging economy. In the last 3 years, 

Dayton has lost thousands of jobs, leaving many of our credit union members to face 

an uncertain financial future. 

Attached to my testimony are several alarming statistics that put the struggles 

of the typical consumer into perspective. 

• A decade ago, the ratio of household debt to disposable income was roughly 80 

percent, which, proportionally, allowed people to effectively manage their debt. 

Today, that ratio is closer to 120 percent, leaving the typical consumer with little safety margin to help them cope in difficult times. 

• Consumer savings rates have plummeted. Two decades ago, consumers saved 

nearly 12 percent of their disposable income; today they save less than 5 percent. 

• Home prices have dropped dramatically in the last 5 years, decreasing in value 

more than 13 percent in 2008 and 5 percent so far this year. 

Clearly, the need for affordable financial services has never been greater. 

This is precisely where credit unions like Wright-Patt excel. To some, our Nation’s 

credit unions, as not-for-profit, democratically controlled cooperatives—are anachronisms in our modern financial system. But credit unions are different by design 


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with an intensely local focus that has paid enormous dividends during this time of 

financial crisis and slow economic growth. The numbers speak for themselves: 

• Every year of the past four (2007–2010) our Nation’s 7,300-plus credit unions 

have granted over $250 billion in loans; 

• Credit union members have over 45 million loans outstanding; 

• Credit union loan quality is the strongest of all insured financial institutions, 

with 60-day delinquency of just 1.6 percent, compared to bank 90-day delinquency of 4.4 percent; 

• Credit union net charge-offs peaked in 2009 at 1.22 percent of all loans and are 

now below 1.0 percent; 

• Credit union auto loan market share reached its peak of 22.7 percent when the 

auto market was at its most difficult point ever during the Great Recession (and 

in many cases credit unions were the only active lenders in their communities); 

• When home prices were failing at the greatest rate, credit unions achieved 5.8 

percent market share in mortgage originations, its highest ever; and 

• Credit union real estate loan modifications total over $10 billion helping nearly 

60,000 members stay in their homes. 

Indeed, credit unions in the United States support over 900,000 jobs. We have tripled our mortgage-lending market share in 3 years and become the Nation’s #1 

manufactured housing lender. And we’ve restarted a moribund private student market—at affordable rates—so far making more than $1 billion in student loans that 

have enabled more than 220,000 students advance their education. 

And we’ve done these things by being true to our core values of helping America’s 

consumers make smart money choices with organizations they can trust to help 

them gain a sense of financial stability in an otherwise difficult environment. 

Here’s how this plays out at Wright-Patt Credit Union. Our mission is to help 

folks achieve financial freedom for themselves and their families. Specific to members’ use of debt we follow four commonsense principles: 

1. Wright-Patt only makes affordable loans members will be able to repay; 

2. We tell members exactly what their loans will cost without hidden fees or penalties; 

3. We take every opportunity to advise members on how to increase their savings 

even when they are taking out a loan; and 

4. We treat those who fall behind with dignity and respect, and we work closely 

with members to develop reasonable plans—including modification when appropriate—to return them to sound financial health. 

These principles are the foundation of the way we lend. They create an environment where we get to help people change their lives. Here are just a few examples. 

Mortgage Modification: Wright-Patt Credit Union makes mortgage loans to help 

members enjoy affordable long-term home ownership. One member—typical of 

many—recently found herself in a predatory mortgage loan with a rate and payment 

she couldn’t afford. She was faced with losing her home. Thanks to WPCU’s partnership with Miami Valley Fair Housing, she came to Wright-Patt Credit Union. After 

a lot of hard work by our staff and by the borrower herself, we were able to find 

a mortgage that lowered her payment and reduced the loan term to 15 years. Had 

it not been for her credit union, our member would have lost her home through 

sheriff’s sale. Now she gets to keep her house with a payment she can afford and 

a loan that will help her build equity. 

Credit Cards: We also lend for credit cards differently than most. The Nation’s 

largest banks offer credit cards that are designed to get consumers to spend more 

in the hopes of receiving rewards or cash-back on their purchases. Interest rates on 

these cards routinely exceed 20 percent. At Wright-Patt, we think credit cards are 

a convenient payment mechanism, and not a temptation to run up debt. Our credit 

card does not feature rewards that entice more spending, and we charge a rate 

starting at just 6.25 percent so members have a reasonable chance of paying their 

card in full in a manageable period of time. 

Emergency ‘‘Payday’’ Loans: Wright-Patt Credit Union also offers a small-dollar 

loan product called StretchPay so members aren’t tempted to visit payday lenders 

when they run low on cash. StretchPay is now being offered by 51 other credit 

unions in Ohio, eight other States, and the District of Columbia. StretchPay is a 

‘‘payday loan alternative,’’ and does three things for members: 

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1. It offers an emergency line of credit up of $250 at an interest rate of 18 percent and an annual fee of $35. With no new advances until paid in full, we help 

members avoid a ‘‘circle of debt’’; 

2. It improves credit ratings since, unlike payday lenders, we report payments to 

credit bureaus with the ultimate goal of qualifying members for even lowercost loans on the strength of a new repayment history; and 

3. It helps members start a savings account and provide free financial education 

to teach them how to build savings rather than use high cost loans to deal with 

cash emergencies. 

First-Time Car Buyers: WPCU serves the airmen and airwomen of Wright-Patterson Air Force Base. Many of these young service men and women come to base 

straight from high school with little or no financial education. To help them gain 

reliable transportation without visiting ‘‘buy-here, pay-here’’ lots, we help them locate an affordable car, have it examined by a certified mechanic, and offer a loan 

rate and payment that fits their financial profile. 

Savings Rates: Our credit union’s responsibilities to members don’t end with lending products. We also incorporate savings programs that encourage members to become financially stronger by building up safety reserves. Every member receives a 

5 percent dividend rate on the first $500 they are able to save in their WPCU primary membership account. We use the 5 percent dividend in a time when average 

rates are less than 0.5 percent as incentive to save. We pay this rate even on accounts with balances as low as $5 so that every member has the opportunity to earn 

a decent rate on whatever they’re able to save. 

The Savings Race: Wright-Patt Credit Union, in conjunction with a local television 

station, plays ‘‘The Savings Race’’ with five local families from October through 

June. The game plays out on local newscasts and is a contest to see which of the 

five families is able to improve their net worth the most over the 8 months of the 

contest. (The game is similar to ‘‘The Biggest Loser’’ on network television which 

is devoted to losing weight; in our version we improve net worth.) Using WPCU employees as coaches, in 3 years our families have improved their net worth by a combined $389,623 of savings growth and debt reduction—that’s an improvement in net 

worth of more than $25,000 per family. The next season of ‘‘The Savings Race— 

Home Edition’’ starts October 6. 

Financial Education: Financial education is important at Wright-Patt Credit 

Union. Much of this education is around helping members know how much their 

loans actually cost and, if we can help them save money, bring their loans to the 

credit union. 

In March, 2011, we challenged members to save at least $50 on high-interest loans by refinancing with Wright-Patt. If we couldn’t save at least $50 on their 

loans, we’d pay them $50. Part of the deal was letting us review their credit report 

alongside them in detail—an act which opens more than a few eyes to just how 

much more money folks are spending than they need to. In just 6 months of the 

credit review program we’ve helped thousands of members reduce interest payments 

on existing debt by more than $10 million dollars. 

Free Financial Counseling: WPCU provides free budget and debt counseling to 

members at no cost from their credit union. Our counselors will help negotiate lower 

payments and settlements so members have a better chance of financial recovery. 

Total Savings: In the last 3 years Wright-Patt Credit Union programs have put 

more than $23 million dollars back in consumers’ pockets. Across Ohio, credit 

unions have put direct financial benefits of $132 million back into the pockets of 

Ohio’s 2.68 million credit union members. Nationwide, credit union members have 

saved almost $6.5 billion by using credit unions. 

We are proud of how much we’ve helped members save. But, like all smaller financial institutions, we face challenges that hinder our ability to spend time helping 

consumers. 

Since 2008 we’ve been given more than 160 new rules and regulations from some 

27 different Federal agencies. While credit unions would rather hire loan advisors 

and financial counselors to help consumers improve their financial situation, we’re 

instead hiring compliance offers to deal with the new rules. The largest banks have 

armies of attorneys to deal with these regulations—we don’t. It is not an exaggeration to say our Nation’s small, community-based financial institutions are exposed 

to a situation where they ultimately may be regulated out of business. This should 

concern us all. 

I’d also like to comment briefly on the new Consumer Financial Protection Bureau. Credit unions are generally in support of the bureau’s goals; to us, the greater 

transparency and consumer disclosure required by the new agency simply highlights 

the way credit unions have always done business. Richard Cordray, a fellow-Ohioan 

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who has been nominated as the agency’s director, has outstanding qualifications and 

understands the unique role credit unions play in the lives of consumers. We hope 

the agency empowers credit unions to do their jobs of helping consumers make 

smart use of credit without creating even higher regulatory costs. 

Let me close with an email I received just last week from a member who personifies the typical financial conundrum faced by our membership: 

I’m writing you today to inform you of the difference your company has 

made in my life. My previous car payment was $348 and with my rent 

being $699 a month including my other household bills I could barely make 

ends meet. Some weeks I could not feed myself due to the strain of having 

this enormous car payment. Just two weeks ago your credit union approved 

me for a car payment of $192. You guys saved me $156 dollars each month. 

My interest rate went from 23.9 percent down to 8.9 percent. You guys 

helped me keep food on the table. 

This email is one of many I regularly receive, and affirms to me that we are doing 

what you want us to do—we are taking care of consumers, helping them improve 

their financial situation, and putting money back in their pockets to use in supporting their families. I believe we need to strengthen America’s cooperative credit 

unions as an essential resource for the current fiscal crisis plaguing this country. 

To conclude, I frequently tell my staff that we are not doing our job if our members are not in better financial health today than when they first sought our services. I hope this testimony gives you a glimpse into the benefit we bring to our Nation’s financial table. 

Thank you for the opportunity to present to you today. I will be glad to answer 

any questions. 

PREPARED STATEMENT OF IDA RADEMACHER 

VICE PRESIDENT FOR POLICY AND RESEARCH, CORPORATION FOR ENTERPRISE

DEVELOPMENT

OCTOBER 4, 2011 

Good afternoon, and a special thank you to the Subcommittee on Consumer Protection and Financial Institutions—especially Chairman Brown and Ranking Member Corker—for convening a hearing focused explicitly on exploring ways to help everyday Americans build (or rebuild) their wealth at a time when our collective and 

individual balance sheets are very much in the red. For over 30 years my organization has been deeply engaged in researching and advancing promising strategies 

that help low, moderate and middle income (LMI) families and communities build 

wealth and financial resiliency. At no time has our work and the work of our many 

partners been more needed—or more difficult—than right now. And at no time has 

the leadership of Congress on issues of consumer financial protection and helping 

families save and build assets been more important than right now. 

It is my goal with this testimony to achieve three objectives: 

• First, I will provide you with a concise (but bleak) picture of the current state 

of financial security among middle- and low-income households in America, and 

describe how the set of policies we currently have on the books to protect LMI 

consumers and help them build wealth have missed their mark. 

• Second, I will present a framework that illustrates—from a household’s perspective—what it really takes to build financial security and economic mobility over 

time. 

• Third, I will describe a range of actions that members of Congress—and of this 

Subcommittee in particular—could take in the near future that would help millions of Americans successfully navigate the financial marketplace and begin to 

save, invest and build assets that will help us to rebuild our middle class and 

our economy. 

Financial Security and Stability Among LMI Households 

The middle-class squeeze in America is more pronounced and more consequential 

than at any time in modern history. New research in the last few years has really 

helped us get a better handle on some additional the dimensions of financial security that go beyond income poverty and unemployment statistics. For example: 

• Over half of the population in the U.S. with a credit score has what can be considered subprime credit. In some areas, that number closes in on 70 percent. 

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• One in four Americans either have no bank account, or are considered ‘‘underbanked’’ meaning they use alternative and largely unregulated financial products and services that are often very high cost and abusive. In the African 

American community, the number of un- and underbanked households rises to 

one in two, or 50 percent. 

• Over half the population doesn’t have enough liquid savings and assets to help 

them survive at the poverty level for 3 months if they lost their source of income (that’s only about $4,000 for a family of three). 

• Another recent survey found that over half the population isn’t confident they 

could find a way to scrape together $2000K if they had an emergency. 

• Last week the company CardHub.com published its Q2 2011 Credit Card Debt 

Study, showing that consumers accumulated $18.4 billion in new debt in the 

second quarter of 2011—a 66 percent increase over the same quarter in 2010, 

and a 368 percent increase over the same period in 2009. 

• Middle-income household debt-to-income ratios have risen from 67 percent in 

1983 to 100 percent in 2001 and 157 percent in 2007. And the evidence indicates that the debt pile-on was directed at maintaining normal consumption not 

enhanced consumption. 

None of this bodes well for the future of America’s middle class. Make no mistake, 

‘‘middle income’’ and ‘‘middle class,’’ are not synonymous. To illustrate this point, 

consider the 2009 research study from the Pew Economic Mobility Project that 

found that almost half (45 percent) of black children whose parents were solidly 

middle income ended up falling into the bottom of the income distribution as adults, 

compared to only 16 percent of whites. 

Clearly there is something besides income that has historically helped to make 

middle-class status more ‘‘sticky’’ and multigenerational. One of the key ‘‘somethings’’ has been asset development—home ownership, higher education, savings, inheritance—these are all part of the explanation. Historically white families have 

more of these. A lot more. Professor Thomas Shapiro of Brandeis University and renowned expert on racial wealth disparities finds that white families are four times 

more likely than blacks to inherit, and when they do the median inheritance is 10 

times greater. Another recent Pew report found that between 2005 and 2009 median 

household wealth plunged 66 percent among Hispanics and 53 percent for blacks, 

while dropping just 16 percent for white households. The result is that the net 

worth of white families is now 20 times greater than that of black families and 18 

times more than Hispanic households—the largest gap in 25 years. The middle class 

is shrinking across the board. But for communities of color, the middle is being decimated. 

The Role of Tax Policy in Asset Building 

The shrinking ranks of the middle class and the growing wealth gap are phenomena that are as predictable as they were preventable. The recession has clearly 

exacerbated the problem, but at its core the widening wealth gap reflects years of 

Government policy decisions that disproportionately help high-income households 

build assets while virtually ignoring the needs of the middle class and explicitly penalizing efforts by low-income households to save and invest. 

Last year CFED and the Annie E. Casey Foundation published the report ‘‘Upside Down’’, which showed that the Federal Government spends upwards of $400 billion 

a year to encourage Americans to save for retirement, go to college, start businesses, 

and purchase homes. But here’s the catch: These ‘‘asset-building’’ policies are primarily administered through the tax code as special deductions and deferrals. As 

a result these subsidies are overwhelmingly accessible primarily to Americans in the 

very highest income brackets, with little evidence that the incentives generate much 

in the way of net new savings. Meanwhile, the majority of the population in middleand lower-income brackets who do not have enough of a tax liability to warrant 

itemizing—those most in need of building a financial cushion to deal with short 

term income shocks and long term economic uncertainty—receive miniscule levels 

support. In 2009 more than half of the $400 billion in asset-building benefits went to the 

top 5 percent of tax-payers. The bottom 60 percent of households received less than 

4 percent of those subsidies. Another cut of the data shows that households making 

a million dollars or more received a $95,000 subsidy to help them build assets— 

enough to finance a pretty good college education for their kids. Households making 

less than $20,000 got about five dollars—enough to finance 2 days of school lunch. 

This ineffective and skewed allocation of expensive tax subsidies has added to 

both the Federal deficit and the growing wealth gap between Americans with means 

and those working to make ends meet. 

63 

A Framework for Household Financial Security 

The thing is we do know what it really takes for a household in America to build 

financial security over time. But at present we don’t do a lot to help average families succeed in this endeavor. CFED has created the Household Financial Security 

Framework to describe the basic elements of building household financial security, 

which, on the face of it, looks relatively straightforward. Individuals must first learn 

the knowledge and skills that enable them to earn an income and manage their financial lives. They then use their income to take care of basic living expenses and 

service debt payments, and then—if income has exceeded expenses—they can save 

some for future purposes. When they have accumulated enough liquid savings, they 

can leverage those savings and invest in assets that will appreciate over time and 

generate increasing levels of income, equity and net worth. Throughout the cycle, 

access to safe, affordable financial products, insurance and consumer protections 

help households protect the gains they make. 

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In reality, there is nothing particularly straightforward about getting a household 

balance sheet to balance, much less tip toward asset accumulation. As the data I 

reviewed earlier makes abundantly clear, financial security is the exception rather 

than the rule for the majority of Americans. Every day, as people try to navigate 

the increasingly complex financial marketplace, they need to make choices without 

full information, clear guidance or adequate protection. It’s not that people don’t understand the downsides, inconveniences and long-term implications of being 

unbanked, using costly credit, skipping their mortgage payment or failing to save 

for college or retirement. But without adequate income, savings or products options, 

their choices are limited. A big part of the problem has very little to do with individual knowledge and skills and instead has to do with the systems, structures and 

protections that exist—or don’t—in the financial marketplace. 

The primary goal of policy change aimed at strengthening the financial security 

of households should be to ensure that the market provides a range of safe, affordable, and accessible financial products that meet the transactional, savings and 

credit needs of low- and moderate-income households and to establish consumer protections that enable all households to participate fully in the consumer financial 

markets with confidence and trust. 

Which brings me to my final objective: Outlining a range of specific policies and 

actions I would urge Members of the Subcommittee to take with your colleagues to 

improve the asset building opportunities of all Americans. 

Federal Policies To Encourage Asset Building and Consumer Protection 

Some would argue that in the current economic climate, with so many people 

struggling just to make ends meet, it isn’t realistic to focus on saving and wealth 

building. But this view is unnecessarily limited; earning and saving is not an either/ 

or scenario, and it is incumbent on us to help households find a way to do both. 

Saving is critical for low-, moderate- and middle-income households precisely because these families are the most vulnerable to income shocks from job loss, medical 

emergencies, and even car repairs. Such emergencies can knock them totally off 

course financially. Research from the Urban Institute shows that owning a small 

amount of assets—even just the $4,000 or so that it takes to move out of asset poverty—provides as much protection against material hardship in the face of an economic shock as being in the next highest tier of the income distribution. As a starting point, we must at the very least commit to getting people on the path toward 

financial stability by giving them the tools and assistance required to reduce debt, 

repair credit, get banked and build savings, and by protecting them from scams and 

from abusive and deceptive products. Households need access to safe, affordable consumer financial products and services. Individuals and families need to have information in order to effectively compare the costs and benefits of different financial 

products and make the best choices for themselves. 

CFPB Recommendations 

A significant portion of this work now falls under the purview of the Consumer 

Financial Protection Bureau. This institution can provide vital support to consumers 

in the financial markets, and do so without massive new Government spending or 

onerous mandates. Rather, CFPB can do a great deal to facilitate savings and asset 

building by LMI households through ensuring that consumers’ interests are considered and valued in the context of Federal financial regulation processes that already 

exist. Congress, of course, has a critical role to fulfill with regard to CFPB; you can 

ensure that the Bureau is fully capable of meeting its mission and establish accountability for achieving its goals. 

• The first step that the Senate should take is to confirm a director to lead CFPB. 

One of the overarching goals of the Dodd-Frank Act was to unify the oversight 

and regulation of the entire financial services marketplace under one set of 

clear, transparent rules with consumer well-being in mind. Without a director, 

the Consumer Financial Protection Bureau doesn’t have the authority to regulate many types of nonbank financial businesses, leading to an uneven playing 

field in which some firms are required to play by the rules while others are not. 

The Bureau is significantly restricted in its ability to regulate in many areas, 

including nonbank financial institutions, payday lenders, private education 

lenders, consumer credit rating agencies, and mortgage servicers. 

CFPB must have a confirmed director not just for administrative reasons or to 

expand its authority, but also to actually achieve its primary objective: to protect consumers from financial products that exacerbate financial distress. Rather than banning ‘‘bad’’ products, the Bureau’s leadership has indicated that it 

plans to pursue this mission through incenting the delivery of products and 

services that provide measurable benefits to consumers and by ensuring the 

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consumers have the information they need to make informed choices about what 

products and services are best for them. The alternative credit industry thrives 

for three reasons all too familiar to consumer protection experts: first, the intense demand for emergency credit; second, a captive, vulnerable, and often unsophisticated population; and third, the lack of a single, clear, trustworthy, and 

enforceable regulations for the product landscape. CFED commends the Bureau 

for its intention to focus on improving consumers’ ability to access and understand information about these credit products through disclosures, financial 

education, and supervision of lenders. 

• Congress should encourage the CFPB to focus on improving disclosures for all 

consumer financial products. Both transaction products and credit products can 

and often do build hidden fees and penalties into their products that create conditions of financial uncertainty for LMI consumers that they can ill-afford. With 

transaction products, issues include overdraft charges, insufficient funds fees or 

point of sale charges. For example, research by former Assistant Secretary of 

the Treasury Michael Barr shows that the most important features of transaction products for LMI consumers are transparent monthly costs and Federal 

consumer protection. 

• The CFPB should examine the impact that expanding the amount of information 

reported to consumer credit rating agencies would have in helping thin- and nofile consumers build their credit records. The CFPB should study and supervise 

the credit information markets with an eye toward increasing their transparency and fairness. 

Consumer credit reports are now sought not just by prospective lenders evaluating specific consumers’ loan applications, but also by landlords, employers, 

banks and others. Credit reports have never been more critical to a person’s 

ability to participate in the financial mainstream, but they are opaque, lightly 

regulated, and difficult for consumers to work with. Moreover, as many as 70 

million Americans have no credit files or no payment histories in their credit 

files, and consequently have no credit score. Tens of millions more have too few 

payment histories in their credit files to be scored with precision. A straightforward solution is to simply add more information to credit files. Utility and 

telecommunications bills are nearly universal; including all payment information for these transactions would enhance credit access for millions of households. This market-driven policy response will help lenders better assess credit 

applicants and decrease the Nation’s persistent—and widening—wealth gap. 

Congress, however, has an important role here, that the Bureau alone cannot accomplish. Despite compelling evidence that alternative data credit reporting is a 

win-win scenario for borrowers and lenders, utility and telecom firms are reluctant 

to report full payment histories to the credit bureaus due to regulatory uncertainty; 

currently most firms only report late payments. Some States have introduced legislation to promote alternative data credit reporting while others have moved to prohibit the practice. At the Federal level, some companies that previously reported full 

payment histories to the credit bureaus have stopped due to uncertainty about privacy requirements. Congress can resolve the uncertainty through legislation that 

provides affirmative permission to utilities and telecom firms to report all payment 

history to the consumer credit bureaus. 

Beyond the CFPB 

Looking beyond the CFPB, Congress can support many equally important policy 

reforms and new opportunities to enhance the ability of LMI families to save money 

and build assets. Our research shows that current U.S. policies—or at least the 90 

percent that operate as tax expenditures—are regressive, invisible and unregulated. 

They are of little help to the majority of households that are trying and become 

more financially secure. Significant improvements could be made with the following 

proposals: 

Remove Disincentives To Save 

One way to do this would be to eliminate asset tests as this would primarily benefit working poor households. Asset limits, or caps on the maximum value of assets 

a household may have to be eligible for certain benefits programs, deter people from 

seeking work, opening bank accounts and saving money. CFED supports reforms 

that encourage economic self-reliance. Congress should consider removing the penalties in our safety net programs for developing savings that can eventually help 

families become financially independent. Congress could follow the lead of Ohio, Virginia, Alabama, Louisiana, and Maryland—all States that have eliminated asset 

tests in their TANF program. They realized that families applying for TANF had 

67 

no real financial assets. The cost of staff time to find nonexistent assets was exorbitant—Virginia reported that it was spending about $330,000 a year to weed out just 

one-half-of-one percent of participants. We commend Congress for making progress: 

Senator Chambliss led efforts to exempt IRAs, 529 and Coverdells from asset limit 

tests in SNAP. But further action is needed. 

Congress should raise asset limits in SSI. The current rates, set at $2,000 in the 

1980s and never raised for inflation, dampen initiative and discouraged people from 

banking and saving, working toward some amount of financial self reliance. The 

Senate could follow the lead of the bipartisan SSI Saver’s Act (H.R. 2103). 

Improve the Existing System for Savings 

Expand the Saver’s Credit. The Saver’s Credit should be strengthened and reformed to enable millions of Americans to receive an additional incentive to build 

their savings and enhance their financial security. The original Saver’s Credit 

passed in 2001. The IRS recently released data showing that 6.4 million tax filers 

claimed the credit in 2009, the largest number of claimants ever. The average credit 

was only $167 though, largely because tax filers with income low enough to claim 

the credit have limited tax liabilities. This speaks to the need to improve the credit, 

so it can serve the purpose it was designed for: make saving for retirement rewarding and straightforward for low- and moderate-income workers. CFED proposes expanding the Saver’s Credit to provide a 50 percent match on retirement savings up 

to $500 ($1,000 for joint filers), making the credit refundable, and depositing the 

match directly into the filer’s retirement savings account. With these changes, the 

Saver’s Credit would reach as many as 50 million tax filers. This would provide 

powerful incentive to lower-income people who desperately need to build wealth and 

provide an easy, safe way for them to save and invest. 

Enact Automatic IRA. Seventy-eight million people, half of the U.S. workforce, 

lack access to employer-sponsored retirement plans. Automatic IRA is a legislation 

that will enable workers without a retirement plan at work to use payroll deductions to open and fund IRAs with a minimum of effort. Increasing personal retirement savings is a critical challenge that policy makers should address. Social Security has been the most effective solution to elderly poverty, but it will be increasingly important for workers to supplement Social Security with personal savings. 

Automatic IRA is an inexpensive, market-friendly way to ensure that 78 million 

workers have the opportunity to save. 

Reauthorize the Assets for Independence Act. The Senate should reauthorize and 

improve the Assets for Independence Act (AFIA, P.L. 105-285). Individual Development Accounts (IDAs) are a proven tool to help low-income families achieve financial security through savings and asset building, and AFIA is the primary source 

of Federal support for IDAs. The Assets for Independence program is one of the few 

programs that reaches low-income households that focuses on wealth-building and 

financial education to help these households get ahead. As a result, AFIA has been 

critical to the success and widespread adoption of IDAs from few accounts in the 

1990s to more than 120,000 accounts today. 

Unfortunately, current economic realities such as State budget crises and reduced 

availability of philanthropic grants pose challenges to a program that has successfully helped low-income families lift themselves out of poverty. Strong interest and 

limited local funds have resulted in nearly every IDA program in the country placing potential savers on waiting lists. The reauthorization of AFIA presents an important opportunity to make small, but critical modifications to increase AFIA’s utilization and ensure its continued success. Recommendations include improving and 

streamlining requirements and opportunities for grantees, expanding participant eligibility qualifications and savings goals, and developing new partnerships, promoting research, and encouraging innovation. 

Build a New System of Child Savings Accounts 

Children’s savings accounts (CSAs), tax-preferred investment accounts opened for 

each child at birth, are powerful financial products that could expand economic and 

educational opportunities for children by encouraging long-term planning, building 

family wealth and promoting financial literacy. CFED supports the efforts of our colleagues at the New America Foundation to establish a lifetime savings account for 

every newborn child in America. The America Saving for Personal Investment, Retirement, and Education Act (The ASPIRE Act) would set up a special account at 

birth for every child that could later be used to pursue post-secondary education, 

buy a first home, or build up a nest egg for retirement. The ASPIRE Act calls for 

each child’s LSA to be endowed with a one-time $500 contribution at birth. Children 

living in households with incomes below national median income will be eligible for 

both a supplemental contribution of up to $500 at birth as well as the opportunity 

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1http://assets.newamerica.net/thelaspirelact 1Daly, Mary, Greg Duncan, Peggy McDonough, and David Williams, ‘‘Optimal Indicators of 

Socioeconomic Status for Health Research’’, American Journal of Public Health, 2002 Jul; 92(7): 

1151–1157. http://www.ncbi.nlm.nih.gov/pubmed/12084700 2Pew Health Group, ‘‘Hidden Risks: The Case for Safe and Transparent Checking Accounts’’, 

April 2011. http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/ 

SafelCheckinglinlthelElectroniclAge/PewlReportlHiddenRisks.pdf 

to earn up to $500 per year in matching funds for amounts saved in the account. 

Financial education would be offered in conjunction with the accounts.’’ 1

States and cities are starting to recognize the value and potential of offering chil- dren’s savings accounts. In Maine, every child is eligible for $500 in a college savings 529 account, and 12 other States now match contributions to 529s. In San 

Francisco, every public Kindergarten student is given a savings account upon enrollment that is seeded with $50 ($100 if they receive free and reduced cost lunch), and 

provided with matching incentives and financial education over time. Singapore, 

Canada, and even the United Kingdom have used state funds to open bank accounts 

for kids realizing that kids with college funds are more likely to achieve financially. 

Taken together, all of these policy proposals would cost a small fraction of what 

the Federal Government currently spends to subsidize asset building for taxpayers 

in the highest income brackets, and could easily be funded by capping some of those 

expensive unfair and ineffective subsidies currently in place. Most importantly, they 

would begin to address some of the long-term inequities that contribute to the 

wealth gap, and they would help millions of families build a more secure economic 

future. 

Mr. Chairman, thank you very much for this opportunity to testify before the Subcommittee. I would be pleased to answer any questions you and the other Members 

of the Subcommittee may have. 

PREPARED STATEMENT OF SUSAN K. WEINSTOCK 

DIRECTOR, SAFE CHECKING PROJECT, PEW HEALTH GROUP, THE PEW CHARITABLE

TRUSTS

OCTOBER 4, 2011 

Thank you Chairman Brown, Ranking Member Corker, and Members of the Subcommittee for the opportunity to submit testimony about the importance of transparent and fair financial products and services as a means to sustain and build 

wealth. The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life. Based on research 

and critical analysis, the Pew Health Group seeks to improve the health and wellbeing of all Americans. One important component of which is consumer financial 

product safety, as research by the Federal Reserve has documented the link between 

socioeconomic status and health. 1

Pew’s Safe Checking in the Electronic Age Project aims to restore transparency, 

fairness, responsibility and free market principles to one of the most common consumer financial products—the checking account. We appreciate this opportunity to 

provide further details on our consumer financial products and services research. 

Our findings demonstrate the importance of consumer financial protections, which 

allow families to manage their money responsibly and build savings and assets. 

Based on our research, Pew developed policy recommendations that would bring 

needed transparency, fairness, and free market principles to checking accounts. 

Nine out of 10 Americans have a checking account, making it the most widely utilized financial services product. These accounts provide a secure way for Americans 

to collect earnings and make payments, and for many, they serve as the entry to 

the financial mainstream, where savings and credit products are available. As vehicles for millions of transactions each day, checking accounts are essential to the national economy. 

In October 2010, the Pew Health Group’s Safe Checking in the Electronic Age 

Project began a study of checking account terms and conditions to examine both the 

state of the marketplace and the effect of current regulations covering checking accounts. 2 We analyzed more than 250 types of checking accounts offered online by 

the 10 largest banks in the United States, which held nearly 60 percent of deposit 

volume nationwide. Through this research, we identified a number of practices that 

put consumers at financial risk, potentially exposing them to high costs for little 

benefit. I would like to highlight three of these concerns: (1) the need for a disclosure box laying out account terms, conditions, and fees; (2) complete disclosure of 

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all overdraft options; and (3) prohibition of transaction reordering that maximizes 

overdraft fees. 

Clear Disclosure Makes the Market More Efficient by Allowing Comparison 

Shopping 

Consumers need a clear, concise, and easy-to-understand disclosure of their checking account terms and conditions. 

Disclosures are critical for consumers to make informed decisions, but the information needs to be presented in a format that is clear and understandable. They 

should convey key terms and conditions with clarity so that consumers can compare 

products and make purchasing decisions that best meet their needs. Clear disclosures will foster a transparent, fair, and competitive marketplace for all financial 

institutions by allowing them to compete for customers on a more level playing field. 

Unfortunately, the checking accounts in our study did not meet this standard. We 

found a median of 111 pages of disclosure documents, consisting of account agreements, addenda to account agreements, fee schedules, and pages on the bank’s Web 

site. The banks often used different names for the same fee or service; put the information in different documents, different media (Web or hard copy), or different locations in a document; and did not summarize or collect key information anywhere. 

Many of these documents are not user-friendly, with much of the text densely printed, difficult to decipher, and highly technical and legalistic. In response, we have 

developed a model disclosure box that could be used by financial institutions to provide relevant information to checking account customers (see below). 

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In developing the disclosure box, we tested different versions with consumers. In 

Philadelphia, Minneapolis, and Los Angeles, we heard from two groups of consumers who had opened a checking account within the past 2 years: one with parents who had assisted a young adult child and one with adults ages 21 to 35. Across 

all groups, participants were quite positive about the disclosure box. They described 

the information in the box as ‘‘comprehensive’’ and ‘‘clear,’’ and felt that a concise, 

easy-to-understand disclosure document would be useful and valuable when opening 

a checking account. Across groups, the box was seen as providing information that 

might help individuals avoid fees, penalties, and personal financial errors. One participant said, ‘‘It’s knowledge first of what you are doing so you don’t mess your account up.’’ Many thought the disclosure box would be useful if they wanted to investigate a bank and/or compare banks on the basis of fees. 

As a follow-up, in July 2011, Pew commissioned a national survey of U.S. checking account holders. We found that 78 percent of account holders find that requiring 

banks to provide a one-page summary of information about checking accounts’ 

terms, conditions, and fees would be a positive change, while only 4 percent say this 

would be a negative change. Eight-six percent of Democrats, 74 percent of those who 

identify as independents, 73 percent of Republicans, and 69 percent of those who 

identify with the Tea Party say this would be a positive change. 

The Truth in Savings Act (TISA) requires banks to offer a schedule of specified 

terms and conditions for all deposit accounts prior to account opening. Such disclosures must be available on demand to consumers so that they can ‘‘understand and 

compare accounts.’’ Similarly, the Electronic Fund Transfer Act (EFTA) requires financial institutions to disclose the terms and conditions when a consumer enrolls 

in electronic fund transfer services, such as an ATM or debit card. 

Under the Dodd-Frank Act, the rulemaking authority of TISA and EFTA passed 

over to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011. The 

CFPB has the authority and should require a one-page form that would provide account holders with important fees and terms. This regulatory change would 

strengthen disclosure requirements so customers are given all important information about their accounts up front and would enable them to shop around for the 

products most suitable to their needs. 

All Overdraft Options and Their Costs Should Be Disclosed 

Consumers should receive comprehensive information about all available overdraft options including fee amount. 

Currently, there are two main categories of overdraft products. Because banks use 

different terms for these products, Pew defines ‘‘overdraft penalty plans’’ as shortterm advances made for a fee by the bank to cover an overdraft, the median cost 

of which is $35. ‘‘Overdraft transfer plans’’ involve a transfer from another account 

or plan—a savings account, credit card, or overdraft line of credit—with a median 

cost of $10. The vast majority of accounts provided by the banks in our study offered 

both types of overdraft plans. 

As of August 15, 2010, new Federal Reserve rules require that financial institutions obtain customers’ affirmative consent (known as opt-in) before enrolling them 

in an overdraft penalty plan that covers debit card transactions at points-of-sale and 

ATMs. If a customer does not opt-in, any debit card transactions that overdraw the 

account will be denied with no fee charged. 

Although Pew supports this rule, we would have preferred the Federal Reserve 

include a requirement that comprehensive information about all available overdraft 

options (including fee amount) be provided when the account holder seeks overdraft 

coverage. Now that these rules have transferred to the CFPB, we believe that it 

should amend the Federal Reserve’s rules to ensure that overdraft policy disclosures 

are clear and comprehensive. Consumers need to understand that they have three 

overdraft options and what each costs: not opting in, which is free; overdraft transfer plans, and overdraft penalty plans. They should require full disclosure of consumers’ overdraft options prior to opt-in and as part of the disclosure box. We would 

like to see the CFPB issue a model form that would achieve more effective disclosure of overdraft options. 

In Pew’s focus groups we learned that of those participants who were familiar 

with overdraft options, some were generally well-informed about banking. However, 

several others had learned about overdraft options ‘‘the hard way,’’ when they or 

their child had overdrawn an account and accrued one or more fees. Participants 

also expressed concern that banks depict overdraft policies as ‘‘protection’’ and as 

a benefit. They tended to see overdraft protection instead as a way for banks to collect a fee, usually multiple fees. 

Our July survey showed support for better disclosure of overdraft options, with 

83 percent of account holders saying they wanted banks to be required to provide 

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3Gutierrez v. Wells Fargo Bank, N.A., 730 F. Supp. 2d 1080, 1082 (N.D. Cal. 2010). 

a summary of information about the overdraft options they offer, how the options 

work and a description of the fees, while only 2 percent said this would be a negative change. Ninety percent of Democrats, 78 percent of those who identify as independents, 81 percent of Republicans and 79 percent of those who identify with the 

Tea Party said this would be a positive change, while only 1 percent of Democrats, 

2 percent of independents, 2 percent of Republicans and 2 percent of Tea Partiers 

said this would be a negative change. Eighty-two percent of those who said they 

have a very good understanding of the terms, conditions, and fees associated with 

their checking account indicated this would be a positive change, while only 2 percent said this would be a negative change. 

Transaction Reordering Maximizes Overdraft Fees 

Policy makers should require depository institutions to post deposits and withdrawals in a fully disclosed, objective, and neutral manner that does not maximize 

overdraft fees, such as chronological order. 

Transactions (debits, deposits, and checks) presented on a given day for posting 

are frequently processed in an order different from that in which the activity occurred. Such reordering can greatly impact the overdraft fees incurred by consumers. Our research shows that as of October 2010, only one of the 10 banks studied, representing less than 5 percent of accounts, informed account holders of the 

order in which all debits and credits are posted. 

Yet at the time of the study, all banks and all accounts reserved the right to process debits presented in a given day from highest dollar amount to lowest dollar 

amount. By reordering transactions to pay the largest items first, the money in a 

checking account is more quickly depleted so that if a customer overdrafts each 

small transaction will result in a fee. Since that time, some banks have begun disclosing changes to their practices. Wells Fargo, Chase, and Citibank announced that 

they would no longer reorder certain types of transactions for at least a portion of 

their accounts. 

Currently, there are no Federal regulations that govern the order of posting 

among transactions processed on the same day. There is no legal requirement that 

banks post deposits before withdrawals, nor any law or regulation governing the 

order in which they post debits or credits. The Federal Deposit Insurance Corporation’s overdraft guidance issued in November, 2010, states that its member banks 

should review their checking procedures to ‘‘ensure they operate in a manner that 

avoids maximizing customer overdrafts and related fees through the clearing order.’’ 

The Office of the Comptroller of the Currency (OCC) released a draft guidance for 

comment in June also inquiring about this practice. 

In addition, posting orders that maximize overdraft fees, especially those that post 

withdrawals from largest to smallest, continue to be the subject of court challenges 

as an unfair and deceptive practice under State law. A Federal judge in California 

ruled against Wells Fargo on this practice and stated in his summary of the case, 

‘‘[T]he essence of this case is that Wells Fargo has devised a bookkeeping device to 

turn what would ordinarily be one overdraft into as many as 10 overdrafts, thereby 

dramatically multiplying the number of fees the bank can extract from a single mistake.’’ 3

Opponents of this practice say it enriches the bank at the expense of consumers 

who receive no benefit from the reordering of their daily debits or credits. In response, banks have contended that customers prefer the largest withdrawals to be 

posted first because these are the most important (such as rent or mortgage payments), and therefore are the transactions that one wants to have paid first. However, by opting in to overdraft coverage, the customer has expressed the desire to 

have all overdrafts covered, regardless of size. 

We maintain that policy makers should require depository institutions to post deposits and withdrawals in a fully disclosed, objective, and neutral manner that does 

not maximize overdraft fees, such as chronological order. Our July survey shows 

that the majority of the checking account holders agree. Seventy percent of respondents said it would be a positive change to require banks to process transactions in 

the order in which they occur, as opposed to processing them from highest dollar 

amount to lowest dollar amount, which can lead to more overdraft fees. 

Hidden Bank Fees Can Drive Consumers Out of the Banking System 

To encourage the working poor to build savings and credit, banks, community organizations, local leaders, and policy makers can promote policies that allow households to use their bank accounts effectively and beneficially. 

73 

This month, Pew will release a longitudinal study of 2,000 low-income Los Angeles area households, 1,000 with and 1,000 without a bank account, which explores 

the connections between financial services, the populations they serve or are failing 

to serve, and the financial stability of those populations. We found, not surprisingly, 

that between 2009 and 2010, a time of great economic turmoil throughout the country, the ranks of the unbanked (those without a bank account) increased, with more 

families leaving banking than opening bank accounts. But what was surprising was 

that the most common reason these households cited for leaving banking was unexpected or unexplained fees. Nearly one in three listed these fees as the reason for 

leaving banking. This is particularly relevant given that even in difficult economic 

times only 27 percent attributed their departure from banking to job loss or lack 

of funds. 

Our study also found that banks hold significant service and location advantages 

over alternative financial service (AFS) providers: 79 percent of crossover respondents (those with at least one bank account that regularly use AFS) report that 

banks have better customer service than check cashers and 59 percent prefer the 

location of banks to that of check cashers. However, these customers continue to 

supplement their depository accounts with services from AFS providers, citing the 

need to access cash quickly (30 percent) and the ability to purchase multiple services, such as money orders and remittances, at one time (38 percent). 

Finally, we found that the banked could better sustain their savings behaviors, 

including those associated with long-term goals such as paying for college, even during economic turmoil and when faced with high rates of job loss and declining 

household income. 

To encourage the working poor to build savings and credit, banks, community organizations, local leaders, and policy makers can promote policies that allow households to use their bank accounts effectively and beneficially. Additionally, the continued use of AFS by banked households presents an opportunity for banks to utilize their competitive advantage and capture this market for revenue-generating financial services. For example, banks can provide a comprehensive suite of products 

including money orders, remittances, check-cashing, bill pay services, and personal 

loans. Community organizations, local governments, depository institutions, along 

with efforts to reach the unbanked, such as the Bank On programs, can provide financial education to help new customers manage costs and build up assets. Banks, 

policy makers, and community organizations can capitalize on household aspirations 

to build family financial security by providing low-cost, easy-to-understand opportunities for savings and asset building. 

Pew’s research demonstrates that bank policies and practices have a central role 

in allowing consumers to use and manage their money responsibly. Yet unexpected 

fees continue to plague consumers. For vulnerable populations, these fees can mean 

the difference between having a checking account and forgoing these services altogether. Providing information in a clear, concise disclosure box so that consumers 

can comparison shop for an account that best meets their needs will enhance competition and make the market more efficient. Practices that maximize fees, like 

transaction reordering, should be prohibited, since this makes it very difficult for 

consumers to manage their money and avoid these charges. Transactions should be 

processed in a predictable manner that responsible consumers can follow. Posting 

order should be objective and neutral rather than designed to maximize fees. These 

changes allow consumers to build and sustain wealth by removing much of the hidden risks currently found in checking accounts. 

Thank you.