THE HONORABLE JOANN M. JOHNSON
NATIONAL CREDIT UNION ADMINISTRATION
“FINANCIAL SERVICES FOR DISADVANTAGED COMMUNITIES”
APPROPRIATIONS SUBCOMMITTEE ON FINANCIAL SERVICES
AND GENERAL GOVERNMENT
U.S. HOUSE OF REPRESENTATIVES
THURSDAY, MARCH 1, 2007
On behalf of the National Credit Union Administration (NCUA), I am pleased to offer testimony on the subject of “Financial Services for Disadvantaged Communities.” This
is an important public policy topic that Congress should explore, and I commend Chairman Serrano, Ranking Member Regula and the other members of the Subcommittee for your active interest in learning more about the parameters of the problems facing these communities, as well as some of the steps that are being taken, and should be taken, to mitigate the situation.
The NCUA is the independent federal agency that charters and regulates federal credit unions and insures accounts in federal and the overwhelming majority of state-chartered credit unions across the country through the National Credit Union Share Insurance Fund (NCUSIF). NCUA receives no operating appropriations from Congress, and is funded by credit union fees.
A credit union is a member-owned, not-for-profit cooperative financial institution. There are 8,462 federally insured credit unions, which hold $701 billion in assets, as of December 31, 2006. There are approximately 87 million credit union members in the United States.
I. Disadvantaged Communities
Consumers in disadvantaged communities can be described by law and regulation in various ways. For the purpose of this testimony, the term “low income” will be used to describe consumers in these communities and shall be considered synonymous with the terms “unbanked”, “underbanked”, “distressed”, and “underserved”. NCUA describes
“low-income” as members who make less than 80% of the average for all wage earners as established by the Bureau of Labor Statistics; or whose annual household income falls at or below 80% of the median household income for the nation as established by the U.S. 1 Census Bureau.
The Center for Financial Services Innovation (CFSI), an affiliate of the ShoreBank Corporation, a Chicago institution whose mission is to encourage financial services industry efforts to serve un-and underbanked consumers, reported to NCUA in August 2006 that as many as 28 million people are “unbanked.” Another 45 million people or
19.4% of all U.S. households have an account relationship with a traditional financial institution (for the purpose of this testimony we are defining traditional financial institutions as credit unions, banks, and thrifts), but continue to use a broad array of
1 The Office of the Comptroller of the Currency uses a similar standard to determine the needs of the “unbanked” in the study, “The Role of Banks and Nonbanks in Serving Low- and Moderate-Income
Communities” that was presented to the Federal Reserve System Conference “Changing Financial Markets & Community Development” held on April 5-6, 2001, in Washington, DC.
2 These nontraditional financial nontraditional financial services to meet their needs.
services are accessible, but are usually provided at a higher cost to the consumers.
A 2005 study, “Banking the Unbanked: Helping Low-Income Families Build Financial Assets,” delineated the reasons consumers use nontraditional services or remain “unbanked.” Those reasons include: limited traditional financial institution options; desire for immediate access to financial services; reluctance to maintain a stipulated balance in a depository account; lack of information regarding access to a traditional financial institution; distrust of mainstream financial institutions; inability to understand the costs or evaluate options; belief that evidence of asset accumulation may negatively impact eligibility for public assistance; and difficulty in managing debt. A strategy identified by this report to encourage low-income consumer use of traditional banking services entailed basic financial education accompanied by information regarding the benefits of using mainstream financial institutions, tailored to specific consumer needs 3 (e.g., cultural and language-sensitivity).
Financial Service Options in Disadvantaged Communities
While the above-referenced barriers and disincentives facing consumers in disadvantaged communities have resulted in lower participation in traditional financial institutions, the financial service needs are essentially similar if not identical to those in non-disadvantaged communities. Financial education, transactional services, depository services, short-term credit, business lending, and homeownership products are examples of the types of financial service offerings consumers expect regardless of their income level or net worth.
In particular, low-income consumers most commonly use transactional and short-term 4credit products to address their immediate financial needs. Transactional
products/services include check-cashing, money orders, electronic money transfers, and stored value cards. These services are available from a variety of outlets including nontraditional financial institutions, places of employment, supermarkets, currency exchanges, post offices, and check-cashing outlets. The fee to cash a payroll or
2 Director Jennifer Tescher’s “Credit Unions and the Underserved: Opportunity and Innovation” presentation [slide 6], August 30, 2006, NCUA Regional Conference.
3 “Banking the Unbanked – Helping Low-Income Families Build Financial Assets” by Pamela Friedman
released by The Finance Project on September 2005. Findings and strategies mentioned throughout the report. The Finance Project was founded in 1994 with support from a consortium of national foundations interested in ensuring the viability and sustainability of promising initiatives that contribute to better futures for children, families, and communities. Their mission is to support decision-making that produces and sustains good results for children, families, and communities. The Finance Project develops and disseminates research, information, tools, and technical assistance for improved polices, programs, and financing strategies.
4 “Banking the Poor” by Michael S. Barr, University of Michigan Law School – A Working Paper Prepared
for The Brookings Institution Center on Urban and Metropolitan Policy dated July 2003 page 6.
5 Personal checks are government check varies from no cost to 3% of the check amount.6cashed at an average cost of 15% of the amount of the instrument. It is significant to
note that traditional financial institutions generally do not charge account holders fees for cashing checks.
Additionally, non-traditional financial service providers typically charge high fees for 7 money orders and electronic money transfer services.On the other hand, NCUA is 8aware of numerous credit unions offering free or low cost money transfers.
Another type of short-term credit product is primarily known as a “payday loan.” A 2005
study indicated that the cost of payday loans typically ranges from $15 to $22 per $100 9for a two-week loan, an annualized 391% to 572% interest rate. 10In 2004, there were 22,000 payday loan stores extending about $40 billion in loans.
Other examples are “rent to own” credit products, which allow consumers to acquire
goods by installment, and tax refund anticipation loans (RALs), which are short-term cash advances against a customer’s anticipated income tax refund. The Brookings
Institute reports that the rate of interest on these RALs generally exceeds 200%, and can 11be higher in some cases. It is important to note that the Federal Credit Union Act (FCU Act) imposes an 18% usury ceiling, which limits the rate federal credit unions can charge on loans.
5 “The Role of Banks and Nonbanks in Serving Low- and Moderate-Income Communities” presented to the
Federal Reserve System Conference “Changing Financial Markets & Community Development” held in Washington, DC on April 5/6, 2001, by Constance R. Dunham, Senior Financial Economist of the Office of the Comptroller of the Currency.
6 “Banking the Underbanked Helping Low-Income Families Build Financial Assets” by Pamela Friedman,
September 2005, Page 3.
7 “Distributing Prepaid Cards through Worker Centers: A Gateway for Asset Building for Low-Income
Households” by The Center for Financial Services Innovation by Janice Fine, Lauren Leimbach, and Katy Jacob dated October 2006, Page 17. Amounts were reduced to reflect current fees as reflected by providers. 8 Found at the World Council of Credit Unions, Inc.’s (WOCCU) Internati