1.53 Minutes

of

The Meeting of the FDIC Advisory Committee on Economic Inclusion

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D. C .

Open to Public Observation

March 2, 2011 - 8: 58 A.M.

The meeting of the FDIC Advisory Committee on Economic

Incl usion ("ComE- IN" or "Committee") was called to order by

Martin J. Gruenberg, Vice Chairman of the Board of Directors of

the Federal Deposit Insurance Corporation ("Corporation" or

"FDIC") .

The members of ComE- IN present at the meeting were

Michael S. Barr, Professor of Law, Uni versi ty of Michigan Law

School; Ted Beck, President and Chief Executive Officer ("CEO"),

National Endowment for Financial Education ("NEFE"); Kelvin

Boston, Executive Producer and Host of PBS's Moneywise with

Kelvin Boston; Martin Eakes, CEO, Self-Help/Center for

Responsible Lending, Durham, North Carolina; Lawrence K. Fish,

Former Chairman and CEO, Citizens Financial Group, Inc.; Rev. Dr.

Floyd H. Flake, Senior Pastor, Greater Allen AME Cathedral of New

York; Wade Henderson, President and CEO, Leadership Conference on

Civil Rights, and Counselor to the Leadership Conference on Civil

Rights Education Fund; Manuel Orozco, Senior Associate at the

Inter-American Dialogue, and Senior Researcher, Institute for the

Study of International Migration, Georgetown University; Rebecca

W. Rimel, President and CEO, The Pew Chari table Trusts; John W.

Ryan, Executive Vice President, Conference of State Bank

Supervisors; Robert K. Steel, Deputy Mayor for Economic

Development, The City of New York, New York; and Peter Tufano,

Syl van C. Coleman Professor of Financial Management, Harvard

Business School, and Senior Associate Dean for Planning and

Uni versi ty Affairs. Diana L. Taylor, Committee Chairman and

Managing Director, Wolfensohn & Company, L. L. C., New York, New

York; Ester R. Fuchs, Professor, School of International and
154

Publ ic Affairs, Columbia Uni versi ty; Alden J. McDonald, Jr.,

President and CEO, Liberty Bank and Trust Company, New Orleans,

Louisiana; Bruce D. Murphy, Executive Vice President and

President, Community Development Banking, KeyBank National

Association; J. Michael Shepherd, President and CEO, Bank of the

West and BancWest Corporation; and Deborah C. Wright, Chairman

and CEO, Carver Bancorp Inc., New York, New York, were absent

from the meeting.

Members of the Corporation's Board of Directors present at

the meeting were Martin J. Gruenberg, Vice Chairman, and

Thomas J. Curry, Director (Appointive). Michael W. Briggs,

Acting Designated Federal Officer for the Committee and

Supervisory Counsel, Consumer/Compliance Section, Corporate,

Consumer, Insurance, and Legislation Branch, FDIC Legal Division,

also was present at the meeting. Corporation staff who attended

the meeting included Ruth R. Amberg, Charlotte M. Bahin, Sandra

S. Barker, Christine Davis, Keith L. Edens, Michael J. Barry,

Valerie J. Best, Leah E. Bullis, Luke H. Brown, Kathleen S.

Brueger, Susan Burhouse, Glenn E. Cobb, Keith S. Ernst, Robert E.

Feldman, Leneta G. Gregorie, Sally J. Kearney, Kenyon T. Kilber,

Ellen W. Lazar, Alan W. Levy, Rae-Ann Miller, Robert W. Mooney,

Janet V. Norcom, Yazmin Osaki, Victoria Pawelski, Mark Pearce,

Phyllis Pratt, Carolyn D. Rebmann, Luke W. Reynolds, Sherrie

Rhine, Barbara A. Ryan, and Jesse o. Villarreal.

Vice Chairman Gruenberg opened and presided at the meeting.

He began by welcoming Ms. Rimel to the Committee and announcing

the appointment of Mark Pearce as the Director of the

Corporation's new Division of Depositor and Consumer Protection

("DCP"). He then provided brief updates on two initiatives of the

Committee, the safe transaction and savings account pilot and the

small -dollar loan pilot, and announced implementation of a new

Chairman's Award for Excellence in Serving the Needs of Low- and

Moderate-Income ("LMI") Consumers. Regarding the award, he

advised that it was a valuable new effort to recognize

individuals or groups involved in creating and promoting

affordable credit products, transaction accounts, savings

accounts, and other programs that effectively reach out to LMI

consumers.

Next, Vice Chairman Gruenberg provided an overview of the

meeting agenda, advising that the opening session would focus on

the issue of teaching financial education, and that the afternoon

session would focus on mortgage lending. With respect to

financial education, he reminded the Committee that it has long

been a priority for the FDIC and that the FDIC had recently

entered into an agreement with the U. S. Department of Education

("DOE") and the National Credit Union Administration ("NCUA") to

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155

promote access to financial education for LMI students and

families, with emphasis on strengthening the ability of educators

to provide financial education in the classroom. With respect to

mortgage lending, he advised that the Mortgage Subcommittee had

met the previous day to look at the challenges of addressing the

mortgage lending needs of LMI borrowers in the aftermath of the

recent housing crisis in the United States, with the results of

that meeting to form the basis for the afternoon discussion. He

then turned the discussion over to Mr. Beck.

As an introduction to the panel presentations, Mr. Beck,

circulating textbooks printed in 1917 and 1919 to illustrate his

point, noted that financial education was once prevalent in

American schools and that the current push for financial

education represents a return to what was done previously. He

advised that, currently, there are more than 200 financial

programs offered by nonprofit, government, and financial

education industry sources, with some, such as the FDIC Money

Smart Program and NEFE programs, having a fairly large presence;

that the number of available programs has generated a lot of

confusion; that, until very recently, there was little

collaboration between the various entities offering such

programs, with the possible exception of those participating in

the National Jump$tart Coalition; and that, although a great deal

of research was conducted on financial education, the research

was somewhat limited in its depth and funding. He indicated,

however, that more recently there has been a much stronger sense

of cooperation among stakeholders, citing as an example the FDIC

partnership with DOE and NCUA; and that funding is now deeper,

wi th several very important research centers being funded through

the Social Security Administrat ion. He nevertheless cautioned

that many challenges remain, particularly with respect to the

lack of teacher preparedness to provide financial education

instruction and, despite some progress, the lack of consensus on

core competencies and standards for financial education programs.

He then introduced as panelists Annamaria Lusardi, Professor of

Accountancy and Economics, The George Washington Uni versi ty

School of Business; Laura Levine , Executive Director, Jump$tart

Coalition; Tom Leavitt, Executive Vice President, Merchants Bank,

Burlington, Vermont; Phil Martin, Assistant for Financial

Education and Student Aid, Office of the Secretary, DOE;

Moisette I. Green, Director of Consumer Compliance & Outreach,

NCUA; and Luke W. Reynolds, Chief, Outreach and Program

Development Section, DCP.

Ms. Lusardi began by noting the disparity between the

complexi ty of today's economic environment and the lack of

consumer sophistication with respect to the tools and knowledge

needed to navigate in that environment. To underscore her point,

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156

she pointed to the resul ts of the National Longitudinal Survey of

Youth in 2007-2008, which indicated that less than one-third of

young adult respondents were able to correctly answer three

simple questions designed to test their knowledge of interest

rate calculations, inflation, and risk diversification, and

nearly one-half of respondents were unable to correctly answer

the questions on inflation and risk diversification, with women

and respondents whose parents do not have a college degree

exhibiting the lowest levels of financial literacy and a strong

correlation between financial literacy later in life and having

had parents with stocks and mutual funds when respondents were

teenagers; the 2009 National Financial Capability Study,

conducted in collaboration with the U. S. Department of the

Treasury ("Treasury") and FINRA Investor Education Foundation,

which reinforced the earlier findings of low financial literacy

among the young; and the Jump$tart Coalition for Personal

Financial Literacy survey, which indicated that only seven

percent of high school students are deemed to be financially

knowledgeable, with a disproportionate number of white male

students from college educated families comprising that number.

Ms. Lusardi next called the Committee's attention to the

Organisation for Economic Co-operation and Development ("OECD")

Programme for International Student Assessment ("PISA"), which

every three years assesses how far students near the end of

compulsory education have acquired some of the knowledge and

skills necessary for full participation in society, advising that

in 2012, the OECD will add a module on financial literacy to PISA

that will allow comparison of financial knowledge among 18 yearold students in 19 countries, including the United States.

Noting that financial literacy questions have already been added

to national surveys in eight countries, with the results showing

low levels of financial knowledge in countries with developed

financial markets and privatized pension systems, she suggested

that, in the absence of institutions designed to teach financial

education, people are unlikely to attain financial literacy

through other means such as self-education, reading the

newspaper, or talking to others. Emphasizing the importance of

financial education, she stated that many studies show a strong

correlation between financial knowledge and the ability to manage

debt, participate in financial markets, and accumulate wealth.

She further suggested that the most cost-effective means of

providing financial education to young people is to offer such

programs in schools rather than relying on the unequal knowledge

of parents.

Summarizing two financial education initiatives, Ms. Lusardi

briefly explained Treasury's National Financial Capability

Challenge, which offers an educator toolkit and tests to measure

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157

financial knowledge in participating schools; and the Financial

Literacy Center's development of on-line financial literacy

modules in areas such as credit cards, paychecks, and car

purchases, designed for inclusion in both high school and college

courses. She noted, however, that financial education should not

be limited to the young and emphasized the importance of

financial education in the workplace, where people are

increasingly being asked to make a number of financial decisions

with respect to their benefits. In this regard, she described an

initiative by Dartmouth College, in collaboration with NEFE, to

offer a seven-step planning aid for new hires describing how to

enroll in the college's supplemental retirement that more than

doubled plan participation. In conclusion, Ms. Lusardi stressed

the importance of financial education and indicated that her

response to those who argue that it is too expensive to offer

financial education is that it is too expensive not to offer such

education.

Next, Ms. Levine provided background information on the

Jump$tart Coalition, noting that it was founded in 1995; that it

is comprised of more than 150 national coalition partners,

including government entities, financial services corporations,

and non-profit organizations; that partners and affiliates share

a commitment to financial education and financial literacy,

particularly though not exclusively for youth; and that it

operates as a clearinghouse of personal financial education

resources, curricula, tools, videos, and web sites, all of which

undergo a review process to ensure that they are truly

educational and not sales or marketing material. Regarding

Jump$tart's biannual survey of financial literacy among students,

previously mentioned by Ms. Lusardi, she advised that high school

students have been surveyed since 1997, that college students

were surveyed for the first time in 2008, and that Jump$tart is

currently working with the American Institutes for Research to

improve the original survey to provide more reliable and accurate

information.

With respect to Jump$tart initiatives, Ms. Levine advised

that Jump$tart was the first to promote April as financial

Ii teracy month; partners with 60 other entities in the Financial

Li teracy Day event on Capitol Hill; and conducts an annual

National Educator Conference in Washington, D. C., with a primary

goal of educating and supporting teachers and a secondary goal of

providing a platform for Jump$tart' s partners to showcase their

expertise and materials. She further advised that the coalition

has developed and published National Standards in K-12 Personal

Finance Education, originally created in 1998, updated in 2001

and 2007, and distributed free on-line; that reviewers of the

standards included teachers and other education representatives,

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158

as well as financial services and government representatives;

that the standards include benchmarks for 4th, 8th, and 12th grade

students; that there are 29 standards in six general areas of

competency; and that also included is a definition of financial

Ii teracy that references not just knowledge, but also the skill

to use that knowledge to manage personal finances. She observed

that one of the challenges of financial education is that

educational requirements are set at the state, and sometimes the

county or school district level rather than at the national

level, resulting in significant variance from state to state in

what is being taught.

Concluding her presentation, Ms. Levine expressed her

excitement about a new Jump$tart initiative, in conjunction with

NEFE and a steering committee of eight organizations, to

collaborate on a teacher training institute. She stated that the

hope is that the initiative will improve and ensure the quality

of financial education in the classroom, provide consistency in

financial education across the country, and create a standardized

teacher training module that will allow teachers to incorporate

personal financial education into a variety of different

disciplines. She reiterated Ms. Lusardi's sentiments that the

need for financial education is great and suggested that the best

chance for doing that successfully is through collaboration and

by focusing on the effectiveness of financial education programs.

Mr. Martin then offered DOE's perspective on financial

education, indicating that DOE ini tiati ves are aimed at achieving

the President's goal of having the highest proportion of college

graduates in the world by 2020. He explained that, in order to

accomplish the goal, the United States would need to do a better

job of getting students through, and not just into, postsecondary programs; that a number of financial decisions made by

families, including whether they save for college, correctly

estimate the cost of college, and apply for financial aid, have

an impact on attaining the goal; and that there is also a strong

connection between meeting the goal and revising the No Child

Left Behind Act to address issues at the elementary and secondary

levels of education. Regarding the No Child Left Behind Act, he

advised that there is a move toward having accountability be a

measure of progress as opposed to a snapshot of achievement, to

encourage states to set high standards; that the National

Governors Association and the Council of Chief State School

Officers have developed common core standards in mathematics and

English language arts, which have been adopted in over 40 states

and set a high bar for students; and that there exists a

tremendous opportunity to think about how to connect financial

education with the newly developed common core standards,

particularly in mathematics.

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Next addressing the area of teacher effectiveness, Mr.

Martin suggested that one measure of teacher success is student

success; that teacher training programs need to incorporate into

their design evaluation mechanisms to provide data on the impact

of training on students; that data on training effectiveness

should be incorporated into decision-making about which training

programs should be offered on a larger scale. In this regard, he

stated that DOE has created a What Works Clearinghouse, an online site where users can research effective education practices.

Noting the lack of sufficient scientific research to create a

similar site for financial education, he indicated that one of

the reasons he is excited about the partnership with FDIC and

NCUA is because initial evidence suggests that having savings

accounts makes it significantly more likely that students will

enroll in college and that he is looking forward to building on

that work.

After providing the Committee with a brief history of

Merchants Bank and its approach to community banking and

information on the demographics of the State of Vermont, Mr.

Leavitt advised that in 1997, Vermont passed Act 60, the Equal

Educational Opportunity Act, making it state policy to provide

substantially equal educational opportunities to every child,

resulting in an increase in K through 12 staffing of

approximately 25 percent over the past decade which, when coupled

with a 13 to 14 percent decrease in enrollment has offered excess

capacity that can be deployed toward the Jump$tart teacher

training ini tiati ve. He explained that Merchants Bank, because

of its statewide presence and commitment to financial education,

was uniquely positioned to work with teachers in the various

school districts; that Merchants Bank has partnered with the

Center for Financial Literacy at Champlain College to launch the

Vermont Teachers Financial Literacy Institute; and that the

immediate goal was to put a minimum of 105 Vermont secondary

school teachers through an intensive five-day training program.

Elaborating on the teacher training program, Mr. Leavitt

advised that it will provide three graduate credits toward

certification and license renewal; that it will develop

participants' knowledge of financial literacy through interactive

exercises, group projects, and collaborative training; that it

would provide information on free resources for use in the

classroom; and that it will provide classroom strategies for

creating an engaging learning environment, along with lesson

plans for financial education. Ending his presentation, he

stated that the Institute hoped to get participation from at

least 75 percent of Vermont high schools during the first three

years and to build on that going forward; that testing and

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outcomes will be important aspects of the program; and that the

State of Vermont was hopeful that it could create a model for

teacher training that can be effectively used elsewhere.

Next, Mr. Reynolds and Ms. Green jointly briefed the

Committee on the purpose and essential elements of and the

implementation plans for the partnership agreement between the

FDIC, DOE, and NCUA. Mr. Reynolds began by noting that the

purpose of the agreement is to promote financial education and

savings programs to schools, financial institutions, education

grantees, and other stakeholders, with a focus on LMI students

and their families; and that key provisions include notifying

grantees of the Gaining Early Awareness and Readiness for

Undergraduates Program ("GEAR UP") and the TRIO Program of the

opportuni ty to receive technical assistance from, and use the

existing financial education resources of, the FDIC and others.

He further noted that, in February 2011, the FDIC released an

updated version of Money Smart for Young Adults, its financial

education curriculum for teachers of students between the ages of

12 and 20, and that DOE was very helpful in reviewing and

updating the sections of the curriculum related to financing

higher education.

Ms. Green then advised that, with respect to implementation,

NCUA is undertaking a number of initiatives, including inviting

DOE to participate in a number of conferences NCUA sponsors for

its members, inviting education stakeholders to attend for the

first time at NCUA's expense to facilitate the sharing of

information, planning a networking luncheon, and encouraging

member credit unions to reach out to and create partnerships with

local organizations in their communities to continue work in the

area of financial education. She stated that, in addition, NCUA

is making internal changes to its supervision program to make

allowances for credit unions that partner with local entities to

facilitate the opening of small dollar savings accounts for

children to encourage wealth building.

During the discussion that followed, Committee members and

panelists covered a number of topics, including how to encourage

financial services and other organizations to get more involved

in financial education, the tension between economic inclusion

for the underserved and financial literacy, and the extent to

which the FDIC, NCUA, and DOE and their employees participate in

financial education efforts. Mr. Barr commended Mr. Leavitt on

the high level of involvement of Merchants Bank in financial

education efforts and asked how he would go about encouraging

other companies to become involved on a broader scale, in

response to which Mr. Leavitt advised that Merchants Bank has

communications vehicles in place to keep its business clients

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informed about the bank's financial education efforts and to

explain why financial education is important to the health of

their enterprises, with the hope that it will generate more

funding for the program. Regarding the tension between economic

inclusion for the underserved and financial literacy, Mr. Fish

indicated that while his focus had been on helping underserved

communities be better informed and having access to more suitable

financial products, the focus of the presentations indicated that

financial literacy is a national problem and not limited to

underserved communities; Mr. Henderson indicated that he thought

the Committee has a responsibility as its primary task to focus

on economic inclusion for the poorest of the poor and that

financial literacy is a larger issue; Ms. Lusardi agreed that

there is a failure at the national level with respect to

financial education, but observed that the failure

disproportionately affects more vulnerable groups, such as those

in LMI communi ties; Mr. Orozco argued that there is a strong

relationship between financial literacy and economic inclusion;

and Mr. Boston stated that everyone who lives in America, which

is basically a free enterprise system, needs to be financially

literate and that the issue, therefore, goes across all economic

strata. On the issue of agency participation in financial

education efforts, Mr. Martin advised that the expertise of his

office is student financial aid and that it does have an

ambassador program, pursuant to which there is employee outreach

to churches and other community organizations to help students

and their families understand the financial aid process; Mr.

Reynolds advised that the FDIC has developed a Volunteer

Community Service Policy that encourages FDIC staff to volunteer

in their communities, that, as a result of the Committee's

recommendation, the FDIC is developing an adopt-a-school program,

and that FDIC staff teach Money Smart for Young Adults in

schools; and Ms. Green advised that the NCUA also participates in

an adopt-a-school program, with staff allowed to tutor students

during their lunch breaks and on their own time, and encourages

individual volunteerism and community service.

Commi t tee members al so made a number of suggest ions. Mr.

Orozco suggested that there is a need to revisit the strategic

approach to financial education, with a view toward adopting

different approaches for different target populations such as

migrants, young adults, and the elderly; and that more emphasis

should be placed on workforce education. Mr. Steel suggested

that financial education should not be solely a financial

services issue and that some effort should be made to include the

Business Roundtable in addressing the problem of financial

literacy. Mr. Henderson, in agreement with Mr. Steel, suggested

that progress on the issue of financial literacy requires greater

coordination between Federal and state entities and should

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involve the National Governors Association, education

stakeholders, and the Business Roundtable. Mr. Barr suggested

that, for its next meeting, the Committee consider a discussion

of desirable levels of financial literacy within the core

competencies developed by Treasury, with emphasis on relating

desirable levels of literacy to the actual financial choices

people face in their day-to-day lives.

Mr. Henderson, acknowledging that there is an underlying

tension in the Committee's work, stated that it is not an actionoriented body and that the issue was, having heard the panel

presentations, identifying what the Committee could do to make a

difference. Vice Chairman Gruenberg, taking note of Mr.

Henderson's observation and other comments touching on the

advisory nature of the Committee's role, pointed out that a

number of initiatives undertaken by the FDIC, including its

partnership with DOE and NCUA, were an outgrowth of Committee

recommendations and indicated that the FDIC would continue to

look to the Committee for additional recommendations.

Vice Chairman Gruenberg then announced that the meeting

would briefly recess. Accordingly, at 10: 51 a. m., the meeting

stood in recess.

* * * * * * *

The meeting reconvened at 11: 03 a. m. that same day, at which

time Vice Chairman Gruenberg introduced Ellen W. Lazar, Senior

Advisor to the Chairman for Consumer Policy, as moderator of the

panel discussion on "Issues Update and Status Report on Strategic

Plan Proj ects."

Ms. Lazar reminded the Committee that, as mentioned earlier

by Vice Chairman Gruenberg, the FDIC had recently reorganized and

in the process created a new division, DCP. She then introduced

Mark Pearce, the Division Director, to share with the Committee

his vision for DCP and his thoughts about his new assignment.

Mr. Pearce began by informing the Committee that there were

two motivating factors for creation of the new division: to make

certain that the FDIC has an enhanced and continuing strategic

focus on consumer protection issues and to ensure that the FDIC

is well positioned to be in alignment with the new regulatory

structure arising from the creation of the new Consumer Financial

Protection Bureau ("CFPB"). He advised that DCP combines the

consumer protection examination, supervisory policy, research,

community outreach, and consumer assistance functions into one

coordinated unit that focuses on consumer protection; that

approximately 95 percent of the staff was transferred from other

March 2, 2011
163

parts of the FDIC; that Jonathan N. Miller, who previously served

as the Team Leader for the Consumer Protection Team on the Senate

Banking, Housing, and Urban Affairs Committee's Housing

Subcommittee, has joined DCP as Deputy Director for Policy and

Research; and that Keith S. Ernst, previously Director of

Research for the Center for Responsible Lending in North

Carolina, has joined DCP as Associate Director for Consumer

Research and Examination Support.

Elaborating on DCP's strategic focus on consumer protection

issues, Mr. Pearce stated that the FDIC has as part of its

mission maintaining public confidence in the banking system,

cri tical components of which include ensuring, through

examination and enforcement functions, that consumers are treated

fairly, with emphasis on practices that create the highest risk

of harm; and ensuring that the banking system is broadly

inclusive of all segments of society, particularly in the area of

access to credit. He expressed excitement at leading the new

division and welcomed the Committee's feedback on what DCP can do

to promote fairness and inclusion.

In response to a question from Mr. Barr regarding DCP

coordination with the CFPB, Mr. Pearce indicated that part of the

FDIC's motivation in creating DCP was to better align its

consumer protection efforts with those of the new bureau; that

the relationship has been very positive, with the new bureau

representing an opportunity to forge strong relationships; that a

number of FDIC staff are on detail to the CFPB; and that there

has been ongoing communication with the CFPB as it develops its

programs to help CFPB staff understand the FDIC's practices and

generally sharing information that may point the way to various

al ternati ves that may be available to the CFPB.

Ms. Lazar then introduced Michael W. Briggs, Supervisory

Counsel, who, she indicated, would fill the Committee in on

various soon-to-be implemented provisions of the Dodd-Frank Wall

Street Reform and Consumer Protection Act ("Dodd-Frank"); Luke

Brown, Associate Director, Compliance Policy Branch, DCP, who,

she indicated, would update the Committee on the progress of the

Incentives Work Group; Rae-Ann Miller, Special Advisor to the

Director , Division of Insurance and Research, who, she indicated,

would update the Committee on the progress of the Affordable

Credi t Work Group; Luke W. Reynolds, Chief, Outreach and Program

Development Section, DCP, who, she indicated, would update the

Committee on the progress of the Financial Literacy Work Group;

and Sherrie L. W. Rhine, Senior Economist, DCP, who, she

indicated, would update the Committee on the Safe Transaction and

Savings Accounts pilot.

March 2, 2011
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Mr. Briggs, noting that the afternoon session would focus on

LMI Mortgage Lending, briefed the Committee on three aspects of

Dodd-Frank, scheduled to become effective on April 1, 2011, that

would impact the origination of mortgages: escrow requirements,

appraisal independence standards, and restrictions on mortgage

loan originator compensation. Elaborating on each, he explained

that under the new rules, escrow for taxes and insurance would be

required for at least five years for certain first-lien mortgages

guaranteed or insured by any state or Federal agency; originators

of, and other persons who provide services in connection with,

extensions of credit would be prohibited from any act designed to

cause an appraiser to base a property appraisal on any factors

other than his or her independent judgment; appraisers and

appraisal management companies would be prohibited from having an

interest in the transaction or the appraised property; parties to

the transaction would have an affirmative duty to report

~ppraiser misconduct to the state licensing agency; yield spread

premiums and other types of compensation based on loan terms,

except the dollar amount of the loan, would be prohibited;

persons other than the consumer would be prohibited from paying

compensation to the loan originator in circumstances where the

consumer directly pays the originator; and loan originators would

be prohibited from steering a consumer into a loan product for

purposes of increasing their compensation.

Mr. Briggs also briefed the Committee on a proposed rule

issued by the Board of Governors of the Federal Reserve System to

implement other aspects of Dodd-Frank related to mortgage escrow.

He explained that, under the proposal, the statutory five-year

escrow requirement could be extended if the borrower had not

achieved 20 percent equity in the property at the five-year mark,

or if the borrower was in default or del inquent on the loan.

Mr. Brown then advised that the Incentives Work Group has,

on an interagency level, continued to work on a Community

Development Financial Institutions ("CDFI") conference, the

obj ect i ve of whi ch would be to promote partnerships wi th and

investment in CDFIs. He indicated that development of an agenda

was underway and that, because larger institutions already have

relationships with CDFIs, the target audience for the conference

would be mid-sized institutions and community banks. Mr. Brown

also briefed the Committee on the status of the Chairman's Award

for Excellence in Serving the Needs of LMI Consumers, reminding

Committee members that the purpose is to spotlight financial

institutions that participate in creating and promoting products

and programs that creatively and responsibly meet the credit and

deposit needs of LMI consumers and, hopefully, promoting the

replication of such efforts. He reported that the solicitation

for nominations had been issued the previous month, that the

March 2, 2011
165

deadline for nominations was March 31, that a few nominations had

already been received, and that staff was very excited about

evaluating the submissions.

Ms. Miller, reporting on Affordable Credit Work Group

ini tiati ves, advised that the work group was engaged in follow-up

efforts with respect to the Small-Dollar Loan Pilot, discussing

the pilot results with various groups in the Washington, D. C.

area and in California, Massachusetts, Kentucky, and Ohio, with

the local Alliance for Economic Inclusion promoting the pilot

resul ts on an ongoing basis. She further reported that the work

group has been working with a nonprofit organization that has

expressed an interest in maintaining a living resource of banks

and credit unions that are offering affordable loan products in

accordance with the small-dollar loan template, which would serve

to broadcast the fact that institutions other than the nine pilot

banks offer such products. As an aside, she noted that rules

applicable to credit unions had recently changed to allow more

flexibility on what they can charge on small loans, resulting in

a spike in credit unions offering small-dollar loans.

On the innovative front, Ms. Miller advised that the work

group has had a number of discussions on the idea of employerbased lending, that it was exploring the operational logistics of

what it would take to implement an employer-based model at the

FDIC to test the potential for efficiencies and benefits in costs

and delivery times for providing loans through the workplace, and

that the concept seems to be developing traction elsewhere in the

Federal service, primarily because of an increase in hardship

withdrawals and loans from 401 (k) accounts to meet short-term

emergencies. Concluding her presentation, she advised that the

work group was in the process of an internal review of a

landscape piece on micro-enterprise development and hoped to

share it with the Committee soon.

With respect to the adopt-a-school program proposal

mentioned during the first panel discussion, Mr. Reynolds advised

that it was currently in the directives process which, pursuant

to FDIC policy, provides an opportunity for employee comment on

the proposal; that the comment period closed the previous Friday,

with the majority of comments very positive in nature; that the

proposal also had been shared with and received feedback from the

Financial Literacy Work GrouPi and that the Committee would

receive an update on the outcome of the comment process at its

next meeting. Ms. Lazar added that the FDIC hopes to have the

program in place by September 2011 to coincide with the beginning

of the school year.

March 2, 2011
166

Ms. Rhine then provided an update on the Safe Transaction

and Savings Accounts Pilot, reminding the Committee that the

purpose was to determine the feasibility of offering low-cost

transaction and savings accounts to meet the needs of underserved

populations, and that the transaction accounts are card-based and

subj ect to the consumer protections of the Electronic Funds

Transfer Act and Regulation E. She reported that the pilot was

launched in January with nine banks; that the pilot banks are

currently submitting their account marketing materials to the

FDIC; and that the FDIC would collect data similar to that

collected for the small -dollar loan pilot on a quarterly basis.

In conclusion, she advised that the work group would conduct a

mid-year review and share those results with the Committee.

Mr. Fish, referring back to Mr. Henderson's earlier comment

regarding the Committee's advisory nature, stated that clearly

the Commi ttee' s advice has had an impact on FDIC initiatives and

thanked staff for their reports on the progress being made on

those initiatives. Mr. Barr asked what Dodd-Frank mortgagerelated provisions would have the largest impact on FDIC- insured

insti tutions, in response to which Mr. Briggs stated that a

number of community banks have indicated that, because escrow has

not been a part of their business model, the new escrow

requirements will be expensive to implement; that, in his

opinion, the appraisal independence standards are beneficial to

both consumers and insured financial institutions; that mortgage

loan origination compensation was more of a problem in the nonbank sector; and that, on balance, there is an overall net

benefit of the Dodd-Frank mortgage provisions. In response to a

question from Director Curry as to whether the growth of prepaid

cards would have any impact on the card-based transaction

accounts being promoted in the Safe Transaction and Savings

Accounts Pilot, Ms. Rhine advised that the pilot banks' marketing

materials make it very clear that the accounts are FDIC-insured,

just like traditional checking accounts, which makes them

distinguishable from prepaid cards and that the pilot offers an

opportuni ty, perhaps through financial education, to really

highlight the functionality of card-based transaction accounts as

it relates to features and fees.

There was additional discussion of the Dodd-Frank exemption

of prepaid cards from the change in interchange fees and the

authori ty of the CFPB to regulate prepaid, debit, payroll, and

similar cards, as well as unfair and deceptive marketing

practices with respect to commercial cards.

Vice Chairman Gruenberg then announced that the meeting

would recess for lunch. Accordingly, at 11:44 p.m., the meeting

stood in recess.

March 2, 2011
167

* * * * * * *

The meeting reconvened at 1:33 p.m. that same day, whereupon

Vice Chairman Gruenberg introduced Barbara A. Ryan, Deputy to the

Vice Chairman, as moderator of the panel presenting a "Report of

the Mortgage Subcommittee Discussions Regarding Principles for

LMI Mortgage Lending."

Ms. Ryan began by providing background information on the

Mortgage Subcommittee, stating that it was created in 2010 at the

suggestion of Chairman Bair; that its basic purpose was to focus

on the current state of LMI mortgage lending in the post-crisis

environment and identify ways for banks to promote safe and

responsible mortgage lending to LMI households; and that the

subcommi t tee developed a work plan to assess the current state of

LMI mortgage lending and the potential impact of recent

legislative and regulatory changes, to review the best practices

on LMI mortgage lending issued following a 2008 conference, and

to convene a forum to solicit different views on the topic and

identify options for updating the best practices for LMI mortgage

lending to LMI households. She advised that the aforementioned

forum was held the previous day, was very well attended, and

included a series of interesting and lively discussions. She

further advised that the forum had included presentations on LMI

mortgage trends, obstacles, and challenges; discussions on

potential strategies to get out of the current trough of LMI

mortgage lending; and discussions on broad efforts currently

underway to reform housing and related Dodd-Frank rulemakings,

particularly those related to qualified residential mortgages

("QRMs"). She then introduced her fellow panelists, Eric Belsky,

Managing Director, Joint Center for Housing Studies, Harvard

Uni versi ty; Martin Eakes, CEO, Self -Help/Center for Responsible

Lending, and Chairman, Mortgage Subcommittee; and Barry Zigas,

Director, Housing Policy, Consumer Federation of America.

Mr. Belsky began by sharing his thoughts on why the topic of

LMI mortgage lending is important, noting that the largest assetbuilding opportunity for LMI individuals and families has been

and, despite the challenges of housing markets over the past

several years, continues to be through homeownership which, in

the absence of cash-out refinancing, represents a sort of forced

savings program even when housing prices remain level; that

homeownership is also likely the only chance LMI households have

to earn a leveraged return on an investment because of the

availability of mortgage credit, with little money down; and that

homeownership is a hedge against rent inflation. He then

provided a fairly comprehensive history of LMI mortgage from the

1960s to the present.

March 2, 2 0 11
168

Mr. Belsky reported that from the 1960s through 1990, LMI

communities were underserved primarily because of racial

discrimination, what he termed "statistical discrimination,"

erosion of property values in LMI neighborhoods, concerns about

credit risk because of a lack of credit history and higher

unemployment rates, and relatively lower mortgage loan amounts

coupled with high fixed costs per loan. He further reported that

this created a vicious cycle of a fear of lending, a resulting

lack of lending leading to a situation in which only cash buyers

were able to purchase, and low demand relative to supply and

price stagnation. He advised that efforts to break the cycle

began in the 1970s and continued through 1990 with, among other

things, enactment of the Home Mortgage Disclosure Act ("HMDA") to

require disclosure of information on the demographic makeup and

geographic distribution of housing-related loans; enactment of

the Community Reinvestment Act ("CRA") in an effort to encourage

financial institutions to help meet the needs of borrowers in all

communities, including LMI communities; subsequent amendment of

HMDA to include data on race and ethnicity; more rigorous

enforcement of CRA, with denial of a bank merger application on

the basis of poor CRA performance for the first time in 1989; and

more active pursuit by the u.s. Justice Department of cases based

on discrimination in the mortgage lending process. Moving to the

1990s, he advised that automated underwriting came into existence

and, with risk-based pricing, the emergence of a subprime

mortgage market.

Wi th the emergence of dual prime and subprime mortgage

markets, Mr. Belsky reported that in the 1990s, loans guaranteed

by the Federal Housing Administration ("FHA") and subprime loans

comprised a disproportionate share of growth for mortgages in

lower-income neighborhoods between 1993 and 2001, with FHA-backed

loans accounting for 32 percent of loans in low- income

neighborhoods versus 4 percent for high- income neighborhoods;

that lenders specializing in higher-priced loans, although

consti tuting only 12.8 percent of lenders, dominated the

origination of higher-priced loans in 2004, accounting for 46.4

percent of such loans; and that, in 2004 at the height of the

housing boom, lending to minority borrowers and communities, with

lenders specializing in prime loans representing 43.6 percent of

loans originated in high- income areas, but only 23.7 percent of

loans originated in low-income areas, and subprime lenders

representing almost 25 percent of loans in low-income areas, but

only 5 percent of loans in high-income areas. He further

reported that, from 2004 to 2006, the vast majority of subprime

lending to lower- income borrowers and neighborhoods was outside

the requirements and scrutiny of CRA, with 54 percent of such

loans originated by independent mortgage companies; that in 2005,

March 2, 2011
169

the vast majority of higher-priced loans were made outside of

low- income neighborhoods, with the percentage of high-priced

loans made in middle-income minority neighborhoods significantly

higher than that for loans made to low-income white and lowincome mixed neighborhoods; and that, wi thin minority

neighborhoods in 2005, high-priced loans represented a

significantly higher percentage of total loans in each census

tract than for white and mixed neighborhoods.

Moving to the current state of the mortgage market, Mr.

Belsky advised that, looking at loans originated by Fannie Mae

and Freddie Mac from 2006 to 2009, low-risk loans (loans to

borrowers with credit scores above 750 and loan-to-value ratios

below 75 percent) increased from 2 percent in 2006 to almost 90

percent in 2009 due to a tightening of underwriting standards;

and that the share of FHA-insured loans, which allow 97 percent

loan-to-value ratios, taken out by those with credit scores

between 680 and 850 increased from approximately 25 percent in

2006 to almost 60 percent in 2010, with lower credit scores

representing a constraint in FHA loan programs. He then advised

that the current environment has a disproportionate impact on

minorities for several reasons: minority renters have minimal and

significantly less savings and wealth than non-minorities, with

even minorities in the 75th percentile of savers having only

about $2,000 in savings, making down payments an issue; that

approximately 30 percent of consumers have credit scores below

660, with research indicating that, in 2001, a credit constraint

of 660 would eliminate about 20 percent of white borrowers, 42

percent of black borrowers, and 49 percent of Hispanic borrowers;

foreclosures through 2008 were markedly higher in minority census

tracts, even when controlling for income; and, from 2006 to 2008,

dramatically larger shares of the minority mortgage market were

being served by the FHA.

Concluding his remarks, Mr. Belsky offered his prescription

for what needs to happen to serve the mortgage needs of LMI

consumers in the current environment, suggesting that there is a

need to return to the underwriting standards of the 1990s,

offered in a single-priced market with gradual experimentation to

press beyond the limits; that achievement of a single-priced

market will require some kind of quid pro quo for an explicit

Federal guarantee, similar to that offered by Ginnie Mae, but

with higher loan limits and provisions that allow lender

innovation with respect to underwriting and products without the

need for additional legislative authorization; that there is a

need for affirmative obligations covering independent affiliated

mortgage companies, insurance companies, investment banks, and

whatever other firms emerge to issue mortgage-backed securities

moving forward; that for purposes of the new credit retention

March 2, 2011
170

standards mandated by Dodd-Frank, the definition of QRMs,

particularly with respect to the 5 percent capital requirements,

must be designed in a way that is not overly restrictive to

credi t; and that there must be vigorous enforcement of new laws

and regulations emanating from the CFPB, the Financial Stability

Oversight Committee, and the Council of Regulators to curtail

predatory practices and discriminatory lending.

Then, Mr. Zigas, summarizing the forum discussion on

practical solutions to LMI mortgage lending, reported that case

studies were presented for three different approaches to

providing sustainable and affordable homeownership for LMI

consumers. He advised that two of the approaches were high-touch

models and one was more of a scalable wholesale model, with the

first high-touch model involving a shared equity approach and use

of community land trusts and other forms of limited and shared

equi ty programs for those with low wealth and low down payments;

the second high-touch model , Individual Development Accounts,

involving some of the same components of the first model, with a

structured process for helping participants to build equity

through a process in which the consumer contributes a portion of

the funds and a government entity or philanthropic organization

contributes a portion of the funds; and the third wholesale model

exemplified by the Community Advantage Program ("CAP") developed

through a partnership among Fannie Mae, the Sel f -Help Venture

Fund, and the Ford Foundation, which offers fully underwritten,

low down payment loans to LMI consumers, with market interest

rates and terms similar to other conventional loans. Regarding

CAP, he reported that, after tracking over 46,000 consumers

receiving loans through the model over a 10-year period, the

results suggest that the biggest driver of success or failure

when lending to LMI individuals tends to be the structure of the

loans received rather than the characteristics of the borrower,

leading to the conclusion that good products that are well

underwritten and solidly managed can lead to very positive

outcomes. Noting that there has been a median increase in value

of $21,000 for CAP borrowers, resulting in a 29 percent return on

borrower equity, he stated that the statistics are illustrative

of the very unique opportunity that homeownership presents for

LMI individuals to benefit from a leveraged investment.

Mr. Zigas next identified the opportunities and risks of the

present housing environment, listing as opportunities the fact

that housing prices are down and interest rates are at historic

lows, with the monthly cost of buying a home in many areas lower

than the net cost of renting; the disappearance of predatory

lenders from the marketplace; and, if they remain in place, the

Dodd-Frank boundaries for mortgage lending that should help steer

lending in a much safer direction on a much sounder basis. He

March 2, 2011
171

listed as some of the risks the fact that conventional lenders

are not participating in the market to the degree hoped for; the

credi t overlays, even when loans are available, that make it

difficult for LMI consumers to get credit; the fact that the

infrastructure for CRA lending, whether it be off icers on the

ground or special processing, is not functioning as effectively

as it once did; the new mortgage originator compensation rules

that are acting as a barrier to the ability to provide premiums

for underwriters to work on small-balance loans that require more

work; the damper placed on the markets by the uncertainty as to

whether the pending rules for QRMs will require higher down

payments to qualify for the seal of approval; the uncertainty

surrounding possible reform of Fannie Mae and Freddie Mac; and

FHA policies, which appear to be moving to a more conservative

place. Bringing his summary of practical solutions to a close,

Mr. Zigas shared several points he believed were worth

highlighting. Those points were as follows: lenders' reputations

have been badly hurt by the economic crisis and they appear to be

doing very little to restore them, which may be a barrier to the

willingness of LMI consumers accessing conventional credit

markets; some aspects of LMI lending may have contributed to the

housing bubble and there should be an effort to disaggregate

those aspects, such as low down payments, that were not

contributing factors; there has been tremendous focus on borrower

responsibili ties, but there needs to be a corresponding focus on

lender responsibilities; and, finally, regulations can be an

effective means of discouraging certain practices and encouraging

others. Adding to Mr. Zigas' summary, Mr. Eakes noted that,

during the forum discussion of solutions, there was a renewed

call for lease-purchase loans, in recognition of the fact that

the current inventory of vacant structures in the United States

is the largest in history, between 10 and 13 million, and the

high number of individuals, 8 to 10 million, whose credit has

been destroyed as the result of unemployment.

Addressing principles for lending going forward, Mr. Eakes

suggested that Dodd-Frank has set a new threshold because of its

prohibitions on yield spread premiums, prepayment penalties

except in very narrow circumstances, mandatory arbitration, and

single premium credit insurance; requirement for documentation of

ability to repay a loan; requirement of escrow for taxes and

insurance; requirement for licensing and registration of mortgage

originators; and establ ishment of the QRM concept. Turning to

Treasury's February 11, 2011 report to Congress on Reforming

America's Housing Finance Market, he expressed his personal

disappointment at the proposal to increase the down payment

requirement for mortgages insured by Fannie Mae and Freddie Mac

to 10 percent without regard for compensating factors such as

mortgage insurance, noting that a 10 percent down payment

March 2, 2011
172

requirement would essentially render 90 percent of renters unable

to qualify for a mortgage. He also expressed disappointment at

inclusion in the report of a statement indicating that FHA is

considering, as a means of reducing risk exposure, the option of

lowering its maximum loan-to-value ratios for qualifying

mortgages, noting that if the down payment requirement for FHA

loans is increased from 3.5 percent to 5 percent, or 7 percent

for those with lower credit scores, it would eliminate the

prospect of homeownership for millions of potential buyers.

In closing, Mr. Eakes reported that a lot of the forum

discussion focused on rumors surrounding the possible definition

of QRMs, particularly whether it would exempt FHA loans and/or

loans sold to Fannie Mae and Freddie Mac, thereby making it

applicable only to private-label securities. He stated that, if

that proved to be the case, and the definition establishes a 20

percent down payment as a threshold, it would be a setback not

just for the middle class and minorities, but also for the

recovery of neighborhoods that require the availability of

mortgages for renters to become homeowners.

A discussion followed, during which Committee members and

panelists further explored the current challenges to LMI mortgage

lending and possible solutions. There was general agreement

regarding the difficulty of predicting the course of the mortgage

market, given the unsettled nature of legislative and regulatory

changes. Mr. Barr suggested that in addition to the factors

cited by Messrs. Zigas and Eakes, there were two other variables

that could have an impact on the mortgage market going forward:

the Basel capital rules for mortgage servicing rights and

national servicing standards. There also was a general consensus

that LMI mortgage lending should not be subj ect to arithmetic

formulas and fixed thresholds, but rather should involve a more

nuanced approach to determining creditworthiness and risk.

Messrs. Zigas and Barr suggested that, in addition to borrower

characteristics, it was important that the mortgage originator

retain some risk for a period of time. Mr. Belsky suggested, if

feasible, that the FDIC conduct research on mortgage originations

at a number of banks over a multi-year period and cross tabulate

data on loan-to-value ratio, debt-to-income ratio, borrower

credi t scores, and other relevant data to determine how well

loans performed as a means of identifying critical factors in

sustainable LMI mortgages. Ms. Ryan recalled that, in 2008, the

FDIC held a forum on Mortgage Lending for LMI Households; that,

during the conference, a set of best practices was identified,

many of which are now codified in Dodd-Frank; that any new set of

principles must go beyond those previously identified; that the

focus should now be on the two issues of access to credit and

sustainability, with counseling, education, and perhaps down

March 2, 2011
173

payment assistance at the front end and post-closing assistance

at the back end; and that it also was important to obtain a

commitment from financial institutions to support the effort.

Mr. Boston observed that, as the result of the current

crisis, many communi ties throughout the country have been

devastated by the high rate of foreclosures, with speculators

coming in to snap up properties at significantly reduced prices,

and suggested that some program should be developed to provide

opportunities for potential homebuyers to acquire the properties.

At the conclusion of the discussion, Ms. Lazar expressed

thanks to Committee members, panelists, and staff for a

successful meeting.

There being no further business, the meeting was

adjourned.

Robert E. Feldman

~

Executive Secretary

Federal Deposit Insurance

Corporation

And Committee Management Officer

FDIC Advisory Committee on Economic

Inclusion

March 2, 2011
Minutes

of

The Meeting of the FDIC Advisory Committee on Economic Inclusion

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D. C.

Open to Public Observation

March 2, 2011 - 8:58 A.M.

I hereby certify that, to the best of my knowledge, the attached

minutes are accurate and complete.

~,¡~ Martin J. Grynb~

Vice Chairman

Board of Directors

Federal Deposit Insurance Corporation

And

Presiding Officer

March 2, 2011, Meeting of the

FDIC Advisory Committee on Economic Inclusion

Dated: May 31, 2011