356

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

April 24, 2014 9:04 A.M.

The meeting of the FDIC Advisory Committee on Economic

Inclusion ("ComE-IN" or "Committee") was ca"lled to order by

Martin J. Gruenberg, 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 Robert A.

Annibale, Global Director, Citi Microfinance and Community

Development; Michael S. Barr, Professor of Law, University of

Michigan Law School; Ted Beck, President and Chief Executive

Officer ("CEO"), National Endowment for Financial Education;

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

Kelvin Boston; Jose Cisneros, Treasurer, City and County of San

Francisco, California; Martin Eakes, CEO, Self-Help/Center for

Responsible Lending, Durham, North Carolina; Rev. Dr. Floyd H.

Flake, Senior Pastor, Greater Allen AME Cathedral of New York;

Andrea Levere, President, Corporation for Enterprise Development,

Washington, D.C.; Patricia A. McCoy, Director of the Insurance

Law Center and the Connecticut Mutual Professor of Law,

University of Connecticut Law; Alden J.McDonald, Jr., President

and CEO, Liberty Bank and Trust, New Orleans, Louisiana; Bruce D.

Murphy, Executive Vice President and President, Community

Development Banking, KeyBank National Association; John W. Ryan,

Executive Vice President, Conference of State Bank Supervisors;

Phillip L. Swagel, Professor in International Economic Policy,

University of Maryland, Senior Fellow at the Milken Institute and

a visiting scholar at the American Enterprise Institute; and John

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C. Weicher, Director, Hudson Institute's Center for Housing and

Financial Markets.

Ester R. Fuchs, Professor, School of International and

Public Affairs, Columbia University; Wade Henderson, President

and CEO, Leadership Conference on Civil Rights, and Counselor to

the Leadership Conference on Civil Rights Education Fund; 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;

J. Michael Shepherd, Chairman and CEO, Bank of the West and

BancWest Corporation; Robert K. Steel, Deputy Mayor for Economic

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

Dean and Professor of Finance, Said Business School, Oxford

University andFounder and CEO of 020 Fund, were absent from the

meeting.

Members of the Corporation's Board of Directors present at

the meeting were Martin J. Gruenberg, Chairman, and Jeremiah o.

Norton, Director (Appointive). Roberta K. McInerney, Designated

Federal Officer for the Committee and Deputy General Counsel,

Corporate, Consumer, Insurance, and Legislation Branch, FDIC

Legal Division, also was present at the meeting.

Corporation staff who attended the meeting included Willa M.

Allen, James L. Anderson, Michael L. Bachman, Michael W. Briggs,

Lariece M. Brown, Susan Burhousel Alexander S. Cheng, Karyen Chu,

Patricia A. Colohan, Kymberly K. Copa, Carolyn D. Curran, Debra

A. Decker, Willie B. Donaldson, Doreen R. Eberley, Keith S.

Ernst, Robert E. Feldman, Lekeshia Frasure, Janet R. Gordon,

Bobbie Gray, Shannon N. Greco, Matthew Homer, Shamara L. Humbles,

Craig R. Jarvill, Ron Jauregui, Kathy Kalser, Arleas Upton Kea,

Sally J. Kearney, Cheh Kim, Alan W. Levy, Alicia Lloro,

Christopher Lucas, Jonathan N. Miller, Robert W. Mooney, Phoebe

D. Morse, Thomas E. Nixon, Janet V. Norcom, Elizabeth Ortiz,

Yazmin E. Osaki, Mark E. Pearce, Sylvia H. Plunkett, Luke W.

Reynolds, Sherrie Rhine, Jay Rosenstein, Barbara A. Ryan, Richard

M. Schwartz, Kenneth Shaw, Patience R. Singleton, Lori Thompson,

Lauren A. Whitaker, and James Yagley.

William A. Rowe, III, Deputy to the Chief of Staff and

Liaison to the FDIC, Grovetta N. Gardineer, and Barry Wides,

Office of the Comptroller of the Currency, were also present at

the meeting.

April 24, 2014
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Chairman Gruenberg opened and presided at the meeting.

Chairman Gruenberg began by introducing two new members to

the Committee. First, he welcomed Patricia A. McCoy to the

Committee. He noted that she is a Professor of Law at the

University of Connecticut School of Law, serves as Director of

the Insurance Law Center at the School, has had a distinguished

academic career with a particular focus on consumer protection in

the financial services area, and, from 2010 to 2011, served at

the United States Department of the Treasury where she helped

create the Consumer Financial Protection Bureau ("CFPB"). She

later served as the CFPB's first Assistant Director for Mortgage

Markets. He then welcomed Phillip L. Swagel to the Committee.

Professor Swagel is a Professor of International Economic Policy

at the University of Maryland's School of Public Policy, directs

the University's Thomas Schelling Distinguished Visitor Series,

is a non-resident scholar at the American Enterprise Institute,

served as Assistant Secretary for Economic Policy at the

Department of Treasury from 2006 to 2009, and previously served

as Chief of Staff and senior economist at the White House Council

of Economic Advisers.

Next, Chairman Gruenberg provided an overview of the agenda,

advising that the meeting would focus on new efforts to expand

banking services to consumers. With respect to the first panel,

he recalled that the Committee previously discussed safe

accounts; that two institutions Bank of America, National

Association ("BAC"), Charlotte, North Carolina, and Union Bank,

National Association, San Francisco, California were

introducing account-based debit card products consistent with the

FDIC's model transaction accounts; and that BAC and Union Bank

representatives on the first panel would describe the structure

of these accounts, outline the research and strategy that shaped

their creation, and summarize consumer reaction. The second

panel would present a paper describing the potential of mobile

banking to expand access to the banking system, he advised. The

paper was the first of its kind, he reported, and would provide a

solid starting point for future initiatives. With respect to the

third panel, he announced that the CFPB and FDIC were introducing

a new financial education program designed for primary and

secondary level students. The new program was built upon the

FDIC's existing Money Smart Program but was designed to draw in

teachers and parents as well as students. He advised that the

fourth panel would deal with consumer demand for small-dollar

credit. Chairman Gruenberg then introduced Jonathan Miller,

Deputy Director, Policy and Research, Division of Depositor and

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Consumer Protection ("DCP"), moderator for the panel discussion

on "Safe Accounts."

Mr. Miller noted that the FDIC and the Committee previously

discussed efforts to bring unbanked and underbanked households

into mainstream banking systems; that, with the Committee's help,

the FDIC designed a safe transaction account template and

subsequently launched the Model Safe Accounts Pilot Program to

test and refine the template; the Pilot Program confirmed that

safe accounts performed on par with or better than other

transaction accounts while bringing unbanked and underbanked

consumers into the banking system; that, armed with its findings,

FDIC staff met with financial institutions to explain the results

of the Pilot Program; that various institutions agreed to design

and market safe accounts; and that today's panelists, as early

adopters, would describe initial consumer reaction to safe

accounts. Mr. Miller then introduced the panel members: Thong

Nguyen, Retail Banking Executive, BAC; and Rogger LaCruz, Vice

President, Senior Product Manager for Retail Deposits, Union

Bank.

Mr. Nguyen noted that BAC has approximately 70 million

customers in 50 million households in the United States; that a

small percentage (approximately three to four million customers)

consistently overdraft their accounts; that customers incurring

overdraft fees often contact customer service centers at

significant cost to BAC; and, even when BAC reimburses overdraft

fees, customer satisfaction suffers. BAC therefore decided to

create a product to resolve these issues with the primary goal

being to "do the right thing." Their efforts extended over a

three-year period and included meetings with advocacy groups as

well as in-depth customer studies. Based upon their findings,

BAC rolled-out "SafeBalance Banking," a robust mobile platform

that has many of the same features and benefits of BAC's

traditional checking accounts but is designed to help customers

avoid overdraft fees. The product has a fixed monthly fee of

$4.95, provides full access to tellers and ATMs, provides debit

cards with a zero liability guarantee and optional photo

security, and has full online and mobile banking access. He

emphasized that timing issues can catch customers by surprise and

so BAC worked to eliminate timing issues related to this product.

Customers can pay individuals or businesses using their debit

card in person, online and by mobile transfers, or through online

bill pay but, by allowing transactions to be approved only when

the customer has sufficient funds in the account, customers are

prevented from falling into overdraft or insufficient-funds

status. Checks are issued to recipients only after the funds

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have been withdrawn by the customer and, with respect to ATMs,

consumers cannot withdraw funds they do not have in their

account. BAC also provides online and mobile alerts so customers

can avoid timing issues altogether. In short, Mr. Nguyen said

BAC created a full-feature, online, mobile product with full

access to the banking system, banking centers, and ATMs, but

without the threat of destroying the customer's liquidity.

Moreover, BAC partnered with the Khan Academy to deliver moneymanagement training to their customers. Customers who encounter

money-management problems are encouraged to join the program and,

even though the program is just starting, several thousand

accounts have joined the program already.

Mr. LaCruz then outlined Union Bank's efforts to create the

"Union Bank Access Account" ("Access Account"). Driven by its

core belief to "Do the right thing for its customers" and based

upon its review of the 2009 and 2011 FDIC Unbanked and

Underbanked Households Surveys, Union Bank designed the Access

Account to demonstrate its commitment to providing products that

serve the needs of the low-to-moderate income ("LMI") segment and

other customers who may not qualify for a traditional account.

He described the key features of the Access Account as follows:

no direct deposit requirements, no service fees with direct

deposits, no minimum balance requirements, unlimited discounted

money orders in lieu of paper checks, no overdraft or

insufficient-fund fees, and no hidden fees. He emphasized that

Access Accounts are checkless which means customers will not be

caught in the position of bouncing checks.

Mr. LaCruz then directed the Committee's attention to the

challenges consumers face when they are reported to ChexSystemsa network of financial institutions that regularly share and

consolidate information regarding closed checking and savings

accounts for the stated purpose of enabling them to assess the

risk of opening new accounts. Prior to opening an account for a

consumer, financial institutions access ChexSystems and, if the

consumer has been reported, typically decline the account with

appropriate disclosures. Thus, this segment of the population

has difficulty accessing mainstream banking. Mr. LaCruz reported

that consumers who are in ChexSystems may nonetheless qualify for

the Account Access product as long as they are not in ChexSystems

due to fraudulent activity .. He next discussed Union Bank's

analysis when setting minimum deposit requirements. He explained

that monthly service fees are $5.00 (with online statements) or

$6.00 (with paper statements) though the account is free if the

customer has a direct deposit minimum of $25.00 per month;

approximately fifty percent of its customers have direct deposit

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and thus the accounts are free to most customers. The Bank has

observed that consumers who open accounts with lesser minimum

requirements typically receive a first statement from their bank

showing a negative balance and so walk-away from the account or

fall into overdraft status; the account is closed; the consumer

is reported to ChexSystems, making it difficult to open future

accounts and pushing the consumers out of the banking system and

into check-cashing storefronts or alternative financial products.

Thus, Account Access was designed with "guardrails" to help

customers manage their accounts yet customers have full access to

tellers, ATMs, online banking, and mobile banking. He closed his

presentation by describing Union Bank's efforts to reach unbanked

and underbanked consumers. These efforts included the use of

easy-to-understand disclosure formats recommended by The Pew

Charitable Trusts ("Pew"), targeted marketing to reach at-risk

consumers, outreach to local community groups, and specialized

in-house training.

The Committee applauded Mr. Nguyen's and Mr. LaCruz's

efforts to provide affordable banking services to LMI consumers

and agreed that the accounts serve as useful entry points for

these consumers. The Committee then discussed at length the

economics underlying safe accounts, particularly focusing on the

sustainability and "marginal costs" of safe accounts. As to

whether the accounts were sustainable over the long term, Mr.

Nguyen advised that BAC's approach was to "break-even." He

explained that, due to demographics, the product is targeted to

BAC's existing customers but, given that BAC serves approximately

50 million households, that is a significant segment. Their

primary objective, then, is to focus on serving current customers

who are encountering money management issues. He explained that

the alternatives standing aside while customers pile-up

overdraft charges or turning consumers away were unpalatable.

He also saidit would be helpful to remember that many consumer

complaints concern fees, most of the fees are incurred by the

very population safe accounts are designed to help, and safe

accounts can help avoid complaints and permit the bank to focus

on other matters.

Mr. LaCruz agreed, noting that Account Access is designed to

serve and retain current customers but that, over time, Union

Bank believes the product will attract new customers to the bank.

He noted that the program has been in place for just 11 months

and they opened over 6,000 accounts. He emphasized that it is

important to get the word out to customers because the goal is to

reach customers before they have problems with ChexSystems or are

afraid to open a checking account. Customers were excited to

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hear of the program, he reported, and some customers established

accounts with high-dollar deposits, suggesting that they had

stashed funds in their homes because they did not have a bank

account. The typical user of these accounts has a smaller amount

of savings compared to their general customer base, he noted.

Consequently, Union Bank hopes to design a savings product that

can go hand-in-hand with Access Account. As the bank learns

about these customers' needs, the bank will be better situated to

address their savings concerns.

Continuing on the theme of sustainability, the Committee

discussed the challenges faced by banks having a different

marginal cost of funds than the panelists, which might result in

monthly fees higher than the $4.95 or $5.00 mentioned by the

panelists; considered whether reliance on third-party vendors for

components of a program would increase the costs; and urged the

panelists to share substantive cost analyses of the safe accouni

with the FDIC's research staff.

The Committee members then asked Mr. Nguyen to expand upon

the challenges BAC encountered with its "no overdraft" approach

in the context of point-of-sale arrangements. Mr. Nguyen advised

that, with respect to operational implementation of the "no

overdraft" approach, BAC had not encountered problems. Although

some customers were chagrined when an attempted point-of-sale

transaction was denied (even though the denial meant the customer

avoided overdraft fees), most customers found it preferable to

avoid going into overdraft status even if the attempted point-ofsale acquisition failed.

The Committee also discussed, in turn, the success of the

"BankOn" program a program offering services to unbanked and

underbanked households; the large percentage of consumers who are

unbanked because they are in ChexSystems; and consumer education.

With respect to education, the Committee members expressed

concern that consumers are unfamiliar with safe accounts. Mr.

Nguyen agreed that outreach and engagement are essential, advised

that the educational program developed with the Kahn Academy is

called "Better Money Habits" at bettermoneyhabits.com, and that

BAC strives to help customers find the product that is bestsuited to their needs. Mr. LaCruz concurred, noting that Union

Bank spent significant time with consumers in their homes in an

effort to learn what would be most helpful and found that

education is essential.

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Chairman Gruenberg advised that the meeting would continuewith Keith Ernst, Associate Director for Consumer Research, DCP,

moderating the second panel.

Mr. Ernst first described the context of the white paper on

Mobile Financial Services ("MFS") and the progress made on the

paper since the last Committee meeting. He then explained that

the paper applies a three-part analytical framework for

evaluating MFS' impact on economic inclusion and also identifies

seven broad takeaways that will increase the economic inclusion

potential of MFS. Mr. Ernst explained that the paper examines

how technology may increase access for the underbanked as well as

present opportunities for growth. He stated that the paper also

explores the opportunities and challenges presented by the

current technologies, regulatory requirements, and business

environment.

Mr. Ernst then advised that Susan Burhouse, Senior Consumer

Researcher, DCP, would discuss some of the challenges to economic

inclusion, define the technology, and share data on the public's

use of MFS, after which Yazmin Osaki, Senior Consumer Research

Associate, DCP, would provide additional details about the

specific analytical framework described in the paper. He stated

that Matt Homer, Policy Analyst, DCP, would conclude the

presentation with a discussion of the takeaways from the white

paper.

Ms. Burhouse stated that, although the use of MFS has become

more widespread, it is not always designed for use in ways that

increase economic inclusion. Ms. Burhouse emphasized that the

FDIC's research suggests that opportunities exist to fine-tune

MFS offerings to better assist the underserved. Next, Ms.

Burhouse explained that profitability and fraud issues present

broader challenges to economic inclusion efforts. Ms. Burhouse

also noted that some bankers perceive the regulatory environment

and customer identification requirements as additional

challenges. She stated that customer awareness regarding product

availability is another concern for institutions. Recalling that

many of the small dollar loan and safe account pilot banks have

struggled with targeting products and disseminating information

to the unbanked and underbanked consumers, Ms. Burhouse suggested

that improvements in marketing methods might resolve some of the

issues related to customer awareness.

Ms. Burhouse then reiterated that challenges with mainstream

banking cause some consumers to resort to alternative financial

services ("AFS") instead of banks. Citing a 2011 study by Pew

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that surveyed workers who are paid in cash only, Ms. Burhouse

pointed out that even the method through which consumers receive

their income is influential on banking status. Likewise, she

explained that convenient banking hours and branch location are

important to consumers. Ms. Burhouse further noted that all

consumers, the underserved included, value transparency and

predictability with regard to the prices of financial services.

Additionally, Ms. Burhouse pointed out that since many households

cycle in and out of the banking system, according to the 2011

FDIC National Survey of Unbanked and Underbanked Households, it

is also important to consider the sustainability of banking

relationships.

Next, Ms. Burhouse defined MFS as a set of technologies that

enable consumers to access and use financial services on their

mobile devices at any time and any place. She specifically noted

that MFS is a channel and not a product in and of itself. Ms.

Burhouse then stressed the importance of ensuring that

underserved customers are brought into good, safe, and affordable

underlying accounts and products. She pointed out that some MFS

functions are accessible through any type of mobile phone while

there are other functions, such as remote deposit capture

("ROC"), which are accessible only through smartphones and

cameras. Closing out her discussion on MFS concepts, Ms.

Burhouse noted that the white paper focused only on banksponsored MFS functions such as transferring funds or making

payments and not non-bank products that support functions such as

mobile commerce.

Continuing her presentation, Ms. Burhouse addressed the

potential benefits of MFS. She pointed out that MFS has the

potential to meet many of the most common concerns of the

underserved. However, Ms. Burhouse cautioned that some issues

such as those related to identification or income required to

open a bank account cannot easily be addressed by MFS. She also

mentioned that because MFS is widely used already, it will be

easier to develop future offerings that will benefit the

underserved population. For the purposes of demonstrating the

rates of household access to mobile and smartphones, Ms. Burhouse

presented some preliminary data gathered from the 2013 FDIC

National Survey of Unbanked and Underbanked Households ("2013

Household Survey"). Ms. Burhouse stated that overall access to

mobile phones and smartphones is widespread, especially among

underbanked households. She reported that, as demonstrated by

the survey, ninety percent of underbanked households have mobile

phones with seventy-one percent of these being smartphones; that

two-thirds of unbanked households have mobile phones with just

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under half of these being smartphones; that approximately fiftytwo to fifty-five percent of Black, Hispanic, and White

households have smartphones with relatively little difference in

smartphone ownership by race. With regard to smartphone

ownership patterns by age and income, Ms. Burhouse recounted that

three-quarters of households under age forty-four own

smartphones; that nearly ninety percent of households earning

more than $75,000 own smartphones; and that in those households

where income is less than $15,000 per year, only one-third of

those households own a smart phone but seventy percent of those

same households have access to at least a basic mobile phone.

Ms. Burhouse also reported that only one-quarter of mobile phone

users used mobile banking within the last year while nearly onethird of smart phone owners had done so and that forty-two percent

of underbanked smartphone owners used MFS in the last year

compared to thirty-four percent of fully banked households. She

noted that the data again demonstrated noticeable differences by

income and age stating that nearly half of the smartphone owners

aged thirty-four or younger use mobile banking but only fifteen

percent of smartphone owners aged sixty-five or above use mobile

banking. Similarly, Ms. Burhouse demonstrated that mobile

banking use ranges from about thirty percent of the lowest-income

households to almost forty percent of the higher income

households. Ms. Burhouse also pointed out that the use of mobile

banking is still not as widespread as other methods used for

account access. She stated that eighty percent of households

surveyed still visited a bank teller at least once in the past

year. Finally, she noted that twenty-nine percent of the

underbanked households used mobile banking while only twenty-two

percent of the fully banked households used mobile banking.

Next, Ms. Burhouse reviewed the framework developed in the

white paper. She mentioned that the paper focused on the issues

of access, which relates to bringing consumers into the banking

system; sustainability, which involves keeping people in the

banking system; and growth, which involves presenting

opportunities to promote consumers' financial capabilities and

deepen their banking relationships.

Ms. Osaki began her portion of the presentation by reviewing

the ways in which the three part framework evaluates the economic

inclusion potential of MFS. Ms. Osaki stated that the analysis

of access depends on whether MFS can bring bank consumers to the

financial mainstream by increasing the appeal of the banking

system or facilitating their account opening process so that

hurdles such as screen size for viewing disclosures are

minimized. Ms. Osaki also pointed out that many of the systems

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that banks use do not provide the flexibility to link to other

bank applications such as account opening. Ms. Osaki advised

that banks do not perceive that the demand for mobile bank

account opening is as great as the demand for services such_as

RDC.

Setting the context for the remainder of her remarks, Ms.

Osaki reiterated some of the data from the 2013 Household Survey

related to smartphone ownership amongst unbanked consumers. She

then noted several important considerations contributing to

access issues for the unbanked and underbanked. Ms. Osaki

advised that the first consideration relates to the presumption

that future smartphone ownership will be widespread among

unbanked consumers. Next, she noted that MFS alone is unlikely

to address economic and institutional reasons why unbanked

consumers do not have a bank account. Ms. Osaki then mentioned a

third consideration which requires evaluating the appeal of the

various types of features. Ms. Osaki summarized her points

related to MFS' potential to increase access by explaining that,

although MFS will likely have only a limited.role in facilitating

unbanked access to the financial mainstream in the short term, as

smartphone usage among banks expands, MFS could eventually playa

significant role in increasing access to the mainstream banking

system.

Next, Ms. Osaki discussed the importance of sustainable

banking relationships for underserved consumers. She indicated

that implementation of services which would allow for easier

access to timely and accurate available funds account information

as well as the implementation of RDC and mobile payment systems

would help to create sustainable relationships. She also pointed

out several challenges to offering these services. She stated

that one such challenge is the delay in processing of

transactions before posting to a customer's account. She advised

that it will be important for banks to set effective riskmanagement strategies that allow them to offer these types of

services with more attractive terms than non-bank providers. Ms.

Osaki then identified another challenge to sustainability in that

some mobile banking users may not be able to access the online

desktop mobile banking platform if they are only able to access

the internet on their mobile device. Ms. Osaki also noted that

the persistent need to make payments in cash or via paper

instruments is one that should not be minimized.

Ms. Osaki then went on to discuss the opportunities to

change the economics of serving underserved consumers through

MFS. She explained that, as consumers increase their usage of

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MFS, the need and cost of other channels such as bank tellers and

customer service calls will decrease, thus reducing the cost of

banking for underserved consumers. She reported that some banks

have experienced higher loyalty levels and increased retention of

mobile banking users, therefore increasing feasibility for the

financial institutions. Ms. Osaki stated that security concerns

could be addressed up front by implementing a fraud alert system,

image capture technology to validate identification, or the use

of fingerprints or voice recognition tools for authentication of

identification. With respect to the broader question of whether

MFS can assist financial institutions in serving consumers, Ms.

Osaki explained that short-term investment costs in the mobile

platform are currently additive as opposed to cost-saving for

banks. She pointed out that cost concerns coupled with concerns

related to security have caused many institutions to focus on

serving more well-established customers.

Moving to growth as the third and final dimension in the

economic inclusion framework, Ms. Osaki posed the question of

whether it is possible for MFS to help consumers improve their

financial capabilities. She described various methods by which

underserved consumers may take advantage of Mobile Personal

Financial Management ("MPFM") tools. She indicated that more

work needs to be done to identify exactly the type of MPFM tools

that would be most effective to the underserved. Ms. Osaki

summarized her presentation by explaining that MFS has the

potential to enhance banking relationships with underserved

consumers through increased access, sustainability, and growth.

She stated that improving the sustainability of banking

relationships seems the most achievable in the short-term. She

then advised that Mr. Homer would subsequently present seven

different takeaways that identify ways to fine-tune MFS

strategies along the three economic growth framework dimensions.

Mr. Homer first mentioned that as MFS becomes more

widespread, choices about what features to deploy would affect

how responsive MFS can be to the needs of the underserved. He

explained that although he would provide illustrative examples of

different MFS strategies, it still was too early to determine

which were the most effective. He then stated that the first

takeaway relates to the likelihood that MFS will be most

effective as an economic inclusion tool when it is part of a

larger economic inclusion strategy. He noted that utilizing

various approaches to address the access and growth dimensions of

the framework would be particularly important. Mr. Homer

suggested that creating partnerships with community organizations

to provide hands-on guidance as to how to properly use MFS

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features would resolve some of the access issues. He stated that

instructional, online videos could increase consumer familiarity

with MFS by showing customers how to use specific mobile

features.

Next, Mr. Homer indicated that the second takeaway focuses

on the importance of providing underserved consumers with the

opportunity for one-on-one interaction. Mr. Homer stated that

one MFS provider did this by partnering with a prepaid mobile

store so that the store clerks could demonstrate how to use MFS

features. He explained that the third takeaway relates to the

importance of the implementation of risk management strategies

that take into consideration the needs of the underserved

consumers. He cautioned banks against imposing restricted

eligibility standards or new fees which could prevent useful

features from becoming available to the underserved. Mr. Homer

emphasized that finding risk management approaches that help

institutions guard against risk but also preserve access for the

underserved is a key element of making MFS a tool of economic

inclusion.

Mr. Homer next stated that the fourth takeaway relates to

the incorporation of increased convenience and speed into MFS

features. Noting that increasing the speed of MFS probably

requires some significant changes to market-wide systems as well

as to individual bank infrastructure, Mr. Homer advised that

there are, however, some short term changes that banks could make

to increase the accuracy of information available to consumers.

He recommended the implementation of a real time alert system or

virtual check book that would allow customers to log payments

that have been initiated but not yet posted. Acknowledging that

MFS will not answer all challenges, Mr. Homer emphasized that in

order for MFS to be most effective, it must be as comprehensive

as possible in the features that it does offer.

Mr. Homer stated that the fifth takeaway suggests that banks

make MFS a more comprehensive tool by implementing features such

as standalone bill pay, alert management systems, and mobile

account-opening. Next, Mr. Homer explained that the sixth

takeaway calls upon stakeholders to identify and share case

studies of profitable and feasible MFS implementation strategies.

He acknowledged the upfront costs associated with MFS but also

stated that MFS has proven to be cheaper than other delivery

methods on a transaction basis, thus suggesting that cost savings

are likely to be realized over time. For the seventh and final

takeaway, Mr. Homer pointed out that there are many underserved

consumers who still rely on cash and other instruments to make

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payments. Because of this tendency, he recommended that banks

consider various ways to link traditional paper payment methods

to MFS offerings. In conclusion, Mr. Homer noted that there are

many ways in which MFS implementation could have a beneficial

economic inclusion impact.

In the discussion that followed, Committee members offered

a number of suggestions to the panel members. Mr. McDonald

briefly explained that the implementation of MFS at his

institution demonstrated promise with regard to cost control,

however, he also pointed out that compliance issues remain a

concern for community banks. Mr. McDonald recommended that the

FDIC examine compliance challenges, affecting cost and pricing,

as related to MFS and use this to guide policy-making in the

future. Lastly, Mr. McDonald suggested that upgrading the Money

Smart program so that instructional videos are included would be

helpful to the smaller banks. Mr. Ernst then asked the panelists

if their research suggested that compliance concerns related to

customer identification and fraud were amongst the most common

expressed by stakeholders. Ms. Burhouse responded that the

bankers also expressed concerns related to disclosures and

properly fitting the disclosure information on the small mobile

screens. Mr. McDonald suggested that a reduction of the amount

of information required in the disclosures might make it easier

to display on a mobile device.

Mr. Murphy then shared his experience at a larger bank where

mobile transactions will soon outnumber branch transactions.

Acknowledging that there are still challenges posed by moving

away from branches and towards MFS, he noted that community

education on MFS will be key to its successful implementation.

He stated that the consolidation of branches would affect one-onone relationships with customers as well.

Continuing the discussion, Ms. McCoy reiterated the

previously mentioned statistic that the underbanked use MFS more

than the fully banked. She suggested that Mr. Ernst focus on how

security issues may discourage both banks and customers from

using MFS. Ms. McCoy stated that both the consumers and the

banks are in need of additional legal and technological

protectLons. Ms. Levere, noting that a connection could be made

between the current panel discussion and the next panel

discussion, emphasized the importance of maintaining a pe~sonal

element while implementing MFS. Reverend Flake stated that his

youth population has begun to make significant tithes and

offerings as they are increasingly using the phone to make

payments.

April 24, 2014
370

Next, Mr. Eakes asked if the Federal Reserve had actually

promulgated a rule which would hold the first bank who accepts a

ROC responsible for any subsequent fraudulent redeposit of those

checks. Mr. Eakes then proposed the establishment of a national

check registry where one could verify if a check had already been

deposited. Mr. Ernst suggested that he consult the FDIC's Legal

Division regarding any of the Federal Reserve's specific ROC

rules and provide an answer later. Also responding to Mr. -Eakes'

question, Ms. Osaki pointed out that there is currently no

national database that tracks duplicate checks but that there are

some private initiatives in this area in development. Mr. Homer

stated that fraud with ROC has been less of an issue than

actually anticipated. Mr. Eakes insisted that once people

discover this unverified gap in the ROC system, the problem will

become more widely spread.

Mr. Barr next raised the issue of whether technologies used

in the non-bank sector could affect the current MFS technologies

used by banks. Ms. Osaki acknowledged that many of the non-bank

technologies do impact payment processing systems but that this

was outside of the scope of the FDIC paper. Mr. Ernst also posed

the question of whether differences in the technologies used by

the non-bank sector and the banking sector are due to differences

in regulation or differences in design. In response, Mr. Barr

stated that both regulation and design have affected the non-bank

sector technology. Mr. Barr then recommended an approach which

would harness innovation and create a safe regulatory space for

financial institutions. Mr. Boston pointed out that it is

important to examine the technology that all consumers use, not

just those used by LMI families. Mr. Boston also mentioned that

the increased use of tablets is another possible area for MFS

development as some people may feel more comfortable using

tablets than they do using cell phones.

Next, Mr. Annibale emphasized the importance of gathering

data on the timing and accuracy of information supplied to the

consumers from the banks. He also mentioned that the research

should be applied internationally and that some of the

information contained within the paper might be relevant to the

United Kingdom. Additionally, Mr. Annibale pointed out that the

opening of more mobile bank accounts raises some Community

Reinvestment Act ("CRA") concerns such as those related to the

base locations of the mobile accounts. Mr. Annibale emphasized

the relevance of a bank-sponsored parallel payments platform to

the MFS discussion. Mr. Annibale attributed the increased use of

payment systems to the ease of use and lighter regulation.

April 24, 2014
371

Concluding the panel, Chairman Gruenberg thanked the staff

for laying a foundation for the MFS data. He also suggested

that, for the next committee meeting, the staff develop an action

plan of steps required for implementation of some of the ideas

presented in the paper. Chairman Gruenberg recommended that the

action plan include an examination of non-bank activity and its

relation to the potential in banking sector.

Elizabeth Ortiz, Deputy Director, DCP, began the next panel

by introducing herself. Ms. Ortiz recalled that, during the last

meeting, the panel explored ways that the FDIC and CFPB could

help young people obtain financial management skills. Ms. Ortiz

reported that the CFPB and FDIC recently signed a Memorandum of

Understanding establishing a multi-year strategic partnership

that applies each agency's strengths to the task of improving

financial management amongst American youth. Ms. Ortiz explained

that some of the goals of the collaboration include enhancing the

available resources as well as providing support to parents and

teachers so that they can better assist young people.

Providing background information on the Financial Literacy

and Education Commission ("FLEC"), Ms. Ortiz explained that it

consists of twenty-two federal agencies, including the FDIC and

CFPB, collaborating to promote financial literacy among American

youth through FLEC's Starting Early for Financial Success

Initiative. Next, Ms. Ortiz reported that the FDIC and CFPB will

work together to provide teachers with resources needed to teach

financial education with confidence; empower parents and

caregivers with tools to discuss financial topics with children;

and encourage experiential learning of financial concepts. She

stated that the CFPB and FDIC would do this by working on the

ground with financial institutions, schools, and community

partners to engage in experiential approaches, such as youth

savings programs. Pointing out that the development of new

resources is only one answer to financial education challenges,

Ms. Ortiz stated that another goal of the partnership is to look

for new ways to link Money Smart and other resources to community

partners that are similarly committed to fostering economic

inclusion.

Introducing the other members of the panel, Ms. Ortiz

explained that Camille Busette, Assistant Director, Office of

Financial Education of the CFPB would discuss the FDIC and CFPB's

plan for reaching out to teachers and parents while Luke

Reynolds, Chief, Office of Outreach and Program Development

Section, DCP, would discuss a program which could be used to

promote experiential learning involving schools and financial

April 24, 2014
372

institutions. She stated that Louisa Quittman, Director of the

Financial Education Office of Consumer Policy at the Department

of Treasury also would report on findings from the Department of

Treasury's study entitled "Assessing Financial Capability

Outcomes."

Ms. Busette reminded the Committee that at the last meeting

she discussed the CFPB's ongoing efforts to improve the financial

literacy of .all Americans through partnership with other federal

agencies. She recalled four areas on which the CFPB's Office of

Financial Education focuses including outreach, resources,

research, and innovation. Ms. Busette noted that with regard to

outreach, the CFPB focuses on forming sustainable partnerships

that serve all Americans. She also underscored the importance of

engaging in activities that benefit the LMI community.

Elaborating on these activities, she mentioned a program where

various libraries across the nation serve as community centers

for financial education. Next, she described the CFPB's

multilingual and multiplatform campaign to promote the CFPB's new

remittance rule. Ms. Busette stated that the CFPB has been

working both independently and also with the FLEC and the FDIC to

promote financial education in the K-through-12 space. She then

described efforts underway to expand the FDIC and CFPB's Money

Smart program for older Americans to those who work with the

youth population. She mentioned that the Money Smart youth

curriculum is a stand-alone program which can be used in

extracurricular activities while the new parent program will

build upon the information in the youth Money Smart program. Ms.

Busette also explained that the CFPB plans to coordinate with

intermediaries to hold focus groups that will promote their

programs to parents and caregivers. Ms. Busette mentioned that

the CFPB would solicit the teachers' feedback on materials and

resources and then create an online resource center for them by

the beginning of the upcoming school year.

Concluding her presentation, Ms. Busette stated that

economic inclusion efforts should start with young people. She

mentioned that the awareness campaign for parents and teachers as

well as the partnership with the FDIC would allow for the

promotion of financial literacy for a broad sector of the

population.

Next, Mr. Reynolds began his presentation by reiterating

research shared at the last Committee meeting indicating that

school-based financial education programs appear to have longterm positive impacts when paired with experiential-based

programs. He pointed out that, while the institutions do view

April 24, 2014
373

the programs as beneficial, they also believe that they pose

regulatory or cost challenges. Mr. Reynolds stated that banks

may have this perception because they are not aware of other

available options for school-based savings programs.

Mr. Reynolds then explained that the FDIC has developed a

pilot program for financial institutions with the goal of

increasing awareness and fostering development of new programs.

Describing the pilot program in more detail, Mr. Reynolds stated

that the FDIC, working with partners, would solicit institutions

to apply for a pilot. He indicated that a small group of

institutions and the operation of their school-based savings

programs would be selected and monitored over a one to two year

period. Mr. Reynolds emphasized that the pilot programs would be

mutually beneficial in that the FDIC would learn from these

programs but the institutions and their partners would benefit

from their access to FDIC resources. Mr. Reynolds next advised

that, using the information gained from the pilot programs, the

FDIC would develop a report setting out a plan for the

establishment of additional school savings programs. He stressed

the importance of collaboration between schools, community-based

organizations, and financial institutions in this effort.

Further detailing the technical aspects of the pilot

programs, Mr. Reynolds stated that the FDIC would monitor between

five to twenty programs with a specific focus on programs in

markets that present unbanked and underbanked concerns as well as

those where a bank's involvement may be CRA qualified. He

explained that the FDIC would require banks to, first, apply in

partnership with a school or other community entity and second,

demonstrate its plan for managing the relationship with the

school or community partner. In conclusion, Mr. Reynolds

solicited input from Committee members on the pilot program plan.

Setting the stage for her remarks, Ms. Quittman stated that

she would share findings from a recent study completed for the

Department of Treasury and also provide suggestions on how to use

this research to promote the financial capability of youth. She

explained that the Department of Treasury commissioned the

Assessing Financial Capability Outcome Pilot to examine the

combined impact of classroom financial education and the presence

of a bank or credit union at the school on the building of

financial knowledge of young students. Next, Ms. Quittman

described four different research issues addressed in the study

including the amount of knowledge students gain by participating

in financial education in the classroom; whether they gain more

knowledge when they also attend a school with a bank or credit

April 24, 2014
374

union branch in it; whether students are more likely to open a

savings account or make deposits in such account if they are

participating in financial education; and, finally, whether

students have better attitudes towards savings if they have

access to a school branch. Explaining the methodology of the

study, she stated that the programs were monitored for either one

or two year periods with fourth and fifth graders in Wisconsin

and Texas. She pointed out that the monitoring of the site in

Amarillo, Texas also provided the opportunity to examine the

effect of the implementation of new state financial literacy

standards in math.

She then explained that six, forty-five minute lessons on

financial education were taught over a five or six week period.

She further stated that teachers received training on the

curriculum which included lessons on savings account usage, wants

versus needs, as well as interest and income. She noted that the

students mainly opened joint ownership savings accounts for

children that could be set up online, at a branch, or through the

school. Ms. Quittman also described the various methods used to

promote the bank days including posters, announcements,

newsletters, and posting on the school's website.

Next, she identified knowledge, attitude, and account

activity as the categories of data examined in the study. Ms.

Quittman pointed out that the researchers used a pre- and posttest survey to assess the students' knowledge and attitudes. Ms.

Quittman then stated that the data gathered from the observation

of the 1400 students over the two sites demonstrated that

financial education had a significant effect on the knowledge

category. She also mentioned that the study did not demonstrate

that the presence of a branch in the school led to an increase in

financial knowledge but did impact the students' attitudes about

savings and banks. Noting higher program participation in

schools with more economically-distressed students, Ms. Quittman

attributed this to the engagement of the parents, bank staff, and

the school staff at those sites. She, then, advised the

Committee members that the full report had been provided to them

and also was available on the Department of Treasury website.

Turning to future research possibilities, Ms. Quittman

stated that areas for future research include tracking long-term

impacts on students, implementing methods to teach financial

education effectively, analyzing connections between financial

education and academic performance, and studying the effects of

the school's culture of savings on students' attitudes. Ms.

Quittman also advised that the Department of Treasury's new

April 24, 2014
375

Financial Empowerment Innovation Fund would soon be used to test

and assess concepts such as mobile banking tools and their impact

on the financial well-being of low income individuals. She then

expressed interest in receiving feedback from the Committee

related to other types of innovations and concepts that the

Department of Treasury should study through the Financial

Empowerment Innovation Fund.

Next, Ms. Quittman reiterated a few policy and practical

considerations including the effect of classroom-based financial

education on students' knowledge and the impact of school banking

access on attitudes about financial institutions. She then

described a few other observations such as the need for better

guidance to financial institutions on the children's savings

marketplace. Ms. Quittman emphasized that school support for the

program was vital to its success. She also pointed out that the

recently established President's Advisory Council on the

Financial Capability of Young Americans ("the Advisory Council"),

which provides advice to the President and Secretary of the

Department of Treasury, would address some of the private

sector's concerns and thoughts on ways that the government and

community-based organizations can most effectively support their

work to promote the financial capability of young people.

Next, Ms. Quittman elaborated on the FLEC, which Ms. Ortiz

mentioned earlier, by describing how it seeks to help students

make informed decisions related to managing the cost of higher

education and also provides workplace guidance on managing debt

and expenses. Highlighting the FDIC and CFPB's collaborative

effort in this area, she underscored the importance of working

through existing federal programs and channels to improve

resources available to young people and their families.

During the ensuing discussion, Committee members presented a

number of questions and suggestions, with Professor Barr first

raising the issue of teacher and administrator buy-in for these

types of programs. Ms. Quittman responded by explaining that

active participation of teachers and administrators, who value

the development of life skills in their students, could be

achieved by providing resources and training which make it easy

for them to teach and promote these financial education lessons.

Ms. Quittman also pointed out the importance and benefit of

having a well-known financial institution partner at both pilot

sites. Mr. Beck, expanding on Ms. Quittman's statements, stated

that active engagement from both school administrators and

community leaders is important. He explained that teachers and

the school system are more likely to support an established

April 24, 2014
376

program that addresses common issues rather than just pointing

out problems. Mr. Beck also emphasized that collaborative

programs, such as the CFPB and FDIC program, make it easier for

teachers to decide which curriculum they would like to use.

Mr. Cisneros noting that, in San Francisco, a children's

savings account program already exists where every child receives

a college savings account after entering the public school

system, acknowledged that the panel's work would be helpful in

implementing San Francisco's next phase of the program requiring

linkage of those accounts to in classroom financial education.

Mr. Cisneros then mentioned that programs such as the summer

youth jobs programs provide opportunities outside of the

classroom to reach out to youth. Ms. Levere pointed out that

there is a need for regulators to develop policy which will

promote children's savings skills. Noting the moral aspects

related to inequality issues, Ms. Levere suggested that while

children's savings accounts are one way to address these issues,

parental involvement is also important towards the development of

financial well-being. She lastly encouraged Committee members to

attend the Children's Savings Account Conference. Referencing

the success seen in San Francisco in the KIPP schools, Mr.

Annibale stressed the importance of collaboration with the school

systems. Mr. Annibale likewise acknowledged that schools are

important intermediaries as they are already recognized by the

state and can readily identify the students within its system,

thus facilitating these types of programs quickly and on a larger

scale.

Chairman Gruenberg then announced that the meeting would

recess for lunch. Accordingly, at 12:48 p.m., the meeting stood

in recess.

* * * * * * *

The meeting reconvened at 2:07 p.m. that same day, at which

time Chairman Gruenberg introduced Mark Pearce, Director, DCP,

moderator for the panel discussion on "Consumer Demand for SmallDollar Credit."

At its first meeting in 2007, Mr. Pearce recalled, the

Committee discussed the pros and cons of initiating a pilot

program to review small-dollar loan programs in financial

institutions; in 2008 the FDIC established a two-year pilot

program involving 28 institutions ranging in size from $28

million to $10 billion in assets; those institutions made 34,000

loans that were safe, affordable, and feasible, and extended

April 24, 2014

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377

approximately $40 million in credit. Moreover, the FDIC found in

its National Survey of Banks' Efforts to Serve the Unbanked and

Underbanked, that eight out of ten banks reported offering smalldollar loans with two-thirds indicating those loans were

consistent with the 2007 Affordable Small-Dollar Loan Guidelines

and template. Households need consumer credit but too often they

reject the mainstream financial system and turn to alternative

products, such as payday lenders, pawn shops, rent-to-own stores,

and refund anticipation loans, Mr. Pearce reported. Recent

research has enhanced our understanding of payday loan borrowers,

he advised: they are not monolithic. Building on this research,

the final panel would focus on consumer demand for small-dollar

credit. Mr. Pearce then introduced Jeanne Hogarth, Vice

President, Policy, Center for Financial Services Innovation

("CFSI"), Compass Principles on Small-Dollar Lending; Nick

Bourke, Director, Small-Dollar Lending Research Project, Pew;

Jeremy Tobacman, Assistant Professor of Business Economics and

Public Policy, The Wharton School at the University of

Pennsylvania.

Ms. Hogarth opened her comments by outlining some of the

scenarios that push consumers into the small-dollar credit

market. Thirty-two percent faced unanticipated emergencies (such

as burst-pipe repairs); thirty-two percent needed help with

income-smoothing, that is, cash income and cash outgo balance

over time but at any given point may be misaligned due to income

volatility; nine percent had planned purchases but did not have

all of the money immediately needed to make the purchase; and

thirty percent never had their income and expenses in alignment

their income was consistently less than expenses. She explained

that the data derived from two CFSI datasets: a quantitative

survey consisting of about 1,100 people of whom 900 used smalldollar credit, and a series of qualitative interviews. In

addition, CFSI issued a number of profiles and briefs on the U.S.

Financial Diaries website where readers can dig deeper into the

lives of the households interviewed by CFSI. Overall, CFSI

research shows there is a $21 billion demand for very short-term

credit, a $49 billion demand for other kinds of short-term credit

(such as buy here/pay here auto loans and subprime auto loans),

as well as a demand for subprime credit cards, rent-to-own, title

and pawn loans, and short-term installment loans. Thus, Ms.

Hogarth suggested, the small-dollar credit market is in the $70

billion range.

Ms. Hogarth then turned to the "Compass Principles":

embrace inclusion, build trust, promote success, and create

opportunity. Using these principles as the starting point, CFSI

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378

recently issued a "Compass Guide to Small-Dollar Credit" setting

forth the following guidelines: (1) high confidence in the

borrower's ability to repay; (2) structured to support repayment;

(3) priced to align profitability for the provider with success

for the consumer; (4) create opportunities for upward mobility

and greater financial health; (5) transparent marketing,

communications, and disclosures; (6) accessible and convenient;

and (7) with rights and support for borrowers. CFSI is about to

launch a project to design, test, and evaluate products for the

small-dollar credit market based on these guidelines, she

advised. At Professor Swagel's request, Ms. Hogarth clarified

that the principle "create opportunity" contemplates

opportunities for upward mobility. For example, she said,

consumers should receive credit for paying off small-dollar

credit loans on their credit reports and, in turn, small-dollar

lenders may need access to the credit-reporting system.

Mr. Bourke opened his presentation by stating that Pew is

one of the country's largest independent, nonprofit

organizations; when Pew began its Small-Dollar Lending Research

Project, its goal was to review small dollar lending, especially

payday lending, in order to gather the information needed to

develop better policies in this area; his work has therefore

focused on issues involving family economic security and he has

been leading the small-dollar loans project for the past threeand-a-half years; Pew has published three reports in their Payday

Lending in America Series to date; and the reports are available

at pewtrusts.org/small-Ioans. He then posed the following

questions for discussion: "Why do people use payday loans? What

are the outcomes?"

By way of background he explained that payday loans are

small loans (usually a few hundred dollars) packaged as shortterm loans for temporary needs; they are available from

storefronts and online; there is little to no underwriting

involved; lenders who operate in the payday loans business are

given special exemptions to various laws with the result that

they are not required to do "ability-to-repay" underwriting but

they still have the ability to collateralize the borrower's

checking account. Consequently, the payday lender has the right,

through a postdated check or through an electronic authorization,

to take payment on the loan immediately when the borrower is

paid. The payment period is short and tied to the borrower's

payment cycle, usually every two weeks, with an average loan size

of $375.00 for a $55.00 fee at a payday loan store. As a result,

if you take out a $375.00 loan today, $420.00 will be due in two

weeks. Researchers have assembled rich demographic data drawn

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379

from in-depth interviews with pay-day borrowers, he noted. This

data shows people from all walks of life use payday loans. What

binds them together is that they routinely have trouble paying

bills. Overall, there are about 12 million payday loan borrowers

per year; they spend approximately $7.5 billion on finance ..

charges for these loans; they have income, on average, of

$30,000.00 a year. Payday borrowers are not striving to get into

the mainstream credit market. Rather, they are falling out of

it. Moreover, payday borrowers have a checking account; they are

bank customers. The fact that they have checking accounts is the

linchpin to making this business model work, reported Mr. Bourke.

Payday lenders need access to a borrower's checking account so

they can get paid first. Mr. Bourke then summarized data

regarding the borrower's ability to repay, noting that consumers

who are persistently having trouble paying their bills have debt

other than the payday loan and, when the full amount is due two

weeks later, plus a sizable finance charge, and using the

previous example of $420.00 due, the amount owed equals thirtysix percent of the average borrower's pre-tax paycheck. Imagine

having a third of your paycheck taken away from you on your next

payday, Mr. Bourke said, and you can see that payday loans harm a

borrower's ability to repay. Pew found most borrowers cannot

afford to relinquish more than five percent of their paycheck;

this is an important benchmark, Mr. Bourke cautioned. Mr. Bourke

then illustrated the "decision-making mismatch" using the example

of a consumer who believes he/she can afford the bi-weekly $55.00

fixed-fee but not the $430.00 lump-sum payment and so decides to

renew the loan. When loans exceed borrower capacity in this way,

Pew research shows the average borrower is in debt for five

months during the year and pays $520.00 in fees during the year.

Many who take out payday loans are responding to the fixed-fee

nature of the loan, Mr. Bourke observed; borrowers feel they have

more control with fixed-fees. He then directed the Committee's

attention to measures of "need" and warned that measures such as

volume and renewal are not good measures of need. In fact,

nearly all payday loans go to repeat borrowers; consecutive usage

is the norm. Once a consumer gets a payday loan, they are

typically in debt sequentially for a long period so if you look

at the number of loans and volume of credit, you will find that

eighty percent is driven by churn and that the true, underlying

need is closer to twenty percent of the volume; simply counting

the number of loans overinflates the measure of need.

Mr. Bourke summarized the "lessons learned" from the Pew

data as follows: borrowers have other options; when consumers

get a payday loan, they are not shopping for credit or trying to

reach a goal; consumers are responding to an urgent situation

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380

where they are having trouble paying their bills; the decision to

use payday loans is driven by unrealistic expectations in the

sense that the payday loan looks like a fixed-fee product that

the consumer can get out of quickly; the decision is also driven

by desperation, with thirty-seven percent of borrowers saying

they were in such poor financial circumstances that they would

take any loan on any terms. Next, Mr. Bourke touched upon the

issue of overdrafts, noting that payday loans do not eliminate

the risk of overdraft. In fact, fifty-two percent of payday

borrowers had overdrafts in the past year. He noted that payday

borrowers themselves had a number of suggestions to improve

payday loans, including reducing the amount of each payment due,

additional time to pay, and permitting installment payments. He

closed his presentation by saying the research is inconclusive as

to whether high-cost credit is ultimately helpful or harmful but,

if it is to be helpful, it must give consumers a chance to payoff

the loans and get back on their feet.

Next, Professor Tobacman discussed the "Behavioral Welfare

Economics of Consumer Credit." On April 2, 2014, Professor

Tobacman published a paper entitled "Payday Loan Choices and

Consequences," with Neil Bhutta and Paige Marta Skiba. During

his presentation before the Committee, Professor Tobacman

referred to the datasets considered and methodologies used for

purposes of that paper, and summarized the insights reported in

the paper.

Professor Tobacman first outlined a framework for discussing

the meaning of "demand" in the consumer credit realm. When we

think about consumer credit transactions, he suggested, we

typically think about the initial borrowing decision (immediate

benefits) and then the delayed costs (repayment, interest, fees,

cost of possible default). Recent studies present useful data to

help guide our analysis of initial benefits and delayed costs and

complement prior research, he advised. The data indicates, for

example, that prior to defaulting, many consumers service their

payday loans; consumers are choosing to pay a great deal of

interest prior to defaulting. Many of the costs associated with

defaulting on a payday loan arrive when the check bounces; that

is, when the bank and lender impose bounced check fees, the

psychological costs of being pressured to repay kick-in. Thus,

data focusing on the distribution of pre-insufficient-fund fees

shows that over half of the borrowers in the example have a

bounced check on a payday loan within a year of their first loan;

and forty-one percent incurred pre-bounced-check finance charges

that were greater than the initial loan amount. Data regarding

defaults (over and above bounced checks) show that over forty-six

April 24, 2014
381

percent incurred pre-default finance charges that were greater

than the initial loan amount. Professor Tobacman noted that

these loans illustrate the observation made by psychologist

Daniel Kahneman that, "Decision utility is about wanting;

experienced utility is about enjoyment," and this, he explained,

is a key distinction in thinking about "demand" and how it

relates to policy choices. The experienced utility of borrowing

would be the benefit minus the cost when there is a true cost of

repayment but, he cautioned, the crucial distinction that

Kahneman and others have drawn is that the decision utility (the

utility that is relevant for choice) involves a distortion of

these costs. In other words, consumers might be overly

optimistic or excessively pessimistic about the probability of

repayments; consumers might be aware or unaware of subsequent

fees or the type of collection efforts that will be pursued. To

the extent that these things are not fully appreciated, the

consumer's decisions will not fully reflect the consumer's wellbeing.

Expanding upon this theme, Professor Tobacman explained that

we ordinarily think that markets react to decision utility;

decision utility governs voluntary choice; consumers will choose

to borrow if the benefits are greater than the perceived costs;

and when a consumer walks away from a payday lender with funds

in-hand, the consumer believes he/she understands the

arrangement. In fact, however, the costs are delayed and the

consumer may not fully understand the costs. Some observers

therefore contend that governments should craft policy based on

experienced utility because it actually measures consumer

welfare; it measures the consequences that arise from payday

loans. The fact that consumers are paying large amounts of

interest and then defaulting suggests that consumers

underestimate borrowing costs, that experienced costs are high,

and that payday loans might exploit overly optimistic consumers.

The central implication, suggested Professor Tobacman, is that

observed demand is not always a good guide to consumer welfare;

additional data on forecasts, intentions, and aggregate outcomes

could help clarify our understanding of consumer behavior.

Professor Tobacman concluded his formal remarks by

discussing the vulnerabilities of these consumers, as further

detailed in his paper, "Payday Loan Choices and Consequences."

Payday applicants appeared to be having major financial

difficulties; their average credit scores remained extremely low

for an extended period and this was true whether or not they got

the loan; they were rarely able to accumulate savings and were

persistently short of cash; very few could borrow on credit

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cards; and in fact, only fifty-nine percent of payday loan

applicants have a general-purpose credit card but, even so,

little credit ($100.00) remains available on the card for most

applicants. Overall, Professor Tobacman advised, payday loan

applicants have limited access to mainstream credit, and the

needs of this population seem to go substantially beyond the

products offered by payday lenders.

Mr. Swagel opened the discussion by asking if there were

competing datasets and asking how a reader should balance

divergent perspectives of paternalism versus useful borrowing.

He suggested that borrowers in the study presumably knew of

alternatives but still chose payday lenders. Ms. Hogarth

responded that many small-dollar credit products are available

but payday loans receive all the media attention. Adding to the

puzzle, she said, is the fact that many consumers using payday

loans have savings accounts but, instead of tapping into their

savings, they get a payday loan. Mr. Tobacman observed that we

do not know the universe of alternatives and innovations that

might rise if payday loans are restricted. Mr. Pearce added that

consumers borrow for different reasons and thus the question

might be, how should financial institutions cater to these

different needs? Mr. Bourke countered that he did not see a

reaso~ why the products would differ in that the fundamentals

would be the same whether a consumer had a car breakdown or had

trouble paying ongoing bills; he suggested that consumers seeking

small-dollar loans are dealing with a finite need and do not have

the immediate capacity to fill that need. Thus, Mr. Bourke

concluded, the solution must tie to the consumer's capacity to

payoff over time. He reminded the participants that the paydayrevenue stream is derived from consumers who obtain extended

renewals and so they drive the business model.

Mr. Barr asked whether the discussion was framed too

narrowly; and whether, the conversation should extend beyond

payday loans and small-dollar loans and, instead, encompass

household financial well-being and a "household stability plan."

Ms. LeVere agreed, indicating that the focus may need to be on

building short-term and long-term savings. Mr. Annibale agreed

that it was essential to engage consumers earlier in the process

because, once they fell into payday loans, it is difficult to

know how the loans can be refinanced since there is almost no

debt reduction. Ms. McCoy concurred, noting that the intractable

proof is the fact that expenses exceed their income on a regular

basis. She then asked Mr. Bourke if his datasets distinguish

between those who are so desperately poor that they cannot pay

for simple necessities versus those who have discretionary income

April 24, 2014
383

but are not using it wisely. Mr. Bourke responded that a segment

of consumers are bouncing off of some kind of a bottom where

desperation is driving their decision-making. Even though usage

of payday loans skews toward lower-income level consumers, these

consumers by-and-large have jobs and checking accounts; they are

essentially mainstream working poor people. So, while they have

resources, they are over-indebted, Mr. Bourke observed and,

ironically, they pay an amount of money down towards a loan,

carry it for a while, and at the end of five or six months when

they still owe the entire lump-sum, they realize they can no

longer pay and massive default rates kick-in. Ms. Hogarth

observed that CFSI's research suggested consumers use an array of

products and, she said, in those states where payday loans were

restricted, more consumers turned to pawn shops.

Mr. Eakes observed that a consumer's ability to repay should

be a key measure when evaluating any product. He advised the

Committee that his organization, the Center for Responsible

Lending, has worked in approximately three dozen states to

curtail payday lending because the Center believes the business

model is broken; when North Carolina prohibited payday lending,

the Center saw a jump of almost $60 million in outstanding loans

by finance companies the next year but, on the positive side,

finance-company loans were loans that were regulated and had less

than a thirty percent interest rate; and the migration from

payday loans to finance companies was beneficial for consumers

who could afford to repay the loan, he said. Mr. Eakes also

pointed out that payday lenders prefer to focus discussions on

"the average borrower" but, in Mr. Eakes' view, it is essential

to focus on "the average transaction" so as not to skew the data.

When the data is scrubbed, he suggested, you will see as Mr.

Bourke explained, that the payday lending model is premised on

grabbing a large number of repeat fees during the year. The

actual cost of a payday loan ends up being greater than the

anticipated benefits in almost every case, indicting that this

model presents serious dangers to consumers.

Chairman Gruenberg then observed that the presentations and

Committee member comments and suggestions had been very helpful.

He suggested that at future Committee meetings staff would follow

up on the mobile banking discussion. In addition, staff would

continue to provide progress reports to the Committee regarding

development of model transaction accounts. Chairman Gruenberg

assured the Committee members that staff would continue their

efforts to promote financial education and keep the Committee

apprised of their efforts. Finally, he advised that the

development of small-dollar products would continue to be an

April 24, 2014
384

issue on future agendas. He again thanked the Committee members

for devoting their time to working on these important financial

issues.

There being no further business, the meeting was adjourned

at 3:23 p.m.

Ro~ldman

Executive Secretary

dfL

Federal Deposit Insurance Corporation

And Committee Management Officer

FDIC Advisory Committee on Economic

Inclusion

April 24, 2014
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

April 24, 2014 9:04 A.M.

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

minutes are accurate and complete.

::::::::uL~~

Chairman

Board of Directors

Federal Deposit Insurance Corporation

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