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) International Remittance Network (IRnet)
website. IRnet is a platform to provide credit unions with a tool to reach and serve members and potential members around the world, providing them with access to safe and affordable international and domestic money transfers (remittances). The network was created to respond to an increased demand for money transfer services and high fees being charged to utilize such services.
9 A Report by the Isenberg School of Management, University of Massachusetts at Amherst Prepared by the Annie E. Casey Foundation “Low Cost Payday Loans: Opportunities and Obstacles.” dated June 2005,
11 “Step in the Right Direction: Recent Declines in Refund Loan Usage Among Low-Income Taxpayers”
by Alan Berube and Tracy Kornblatt released by the Brookings Institution dated April 1, 2005, Page 2.
All consumers, including those located in disadvantaged communities, want financial services and products that are affordable, accessible, and focused on their needs. The costs for transactional and short-term credit products from nontraditional financial sources are not affordable for low-income consumers and in many cases exacerbate their economic distress. The challenge for traditional financial institutions is to make these products accessible and affordable to low-income consumers.
II. NCUA and Industry Outreach Efforts
The NCUA and the credit union industry have historically devoted resources to addressing the needs of disadvantaged communities. The following are examples of those outreach efforts.
Low-Income Designation and Community Development Revolving Loan Fund (CDRLF)
A 1970 amendment to the FCU Act provided a framework for low-income designated credit unions. For the purpose of implementing the amendment, Congress specifically directed NCUA to define “low income.” NCUA’s definition of a low-income individual
is one who earns less than either 80% of the average for all wage earners, as established by the Bureau of Labor Statistics, or whose household income is at or below 80% of the median household income as established by the U.S. Census Bureau. The NCUA's 2007 National Median Household Income Standard is set at $39,858 and the NCUA's 2007 Wage Earner Standard for an individual is set at $23,857.
NCUA has made an aggressive effort to educate qualifying credit unions on the benefits of the low-income designation. As a result, the number of low-income designated credit unions (LICUs) increased from 645 credit unions at year-end 2000 to 1,053 credit unions as of December 31, 2006. These credit unions represent 12% of the total number of federally insured credit unions and held $23.6 billion in assets, or approximately 3.4% of the total assets in the credit union system. Low-income designated credit unions serve 4.4 million members.
NCUA has issued regulations implementing the statutory provisions to allow low-income designated credit unions to receive deposits from nonmembers, accept secondary capital accounts, provide exemption from the aggregate member business loan limit, and participate in the CDRLF program.
In 1979, Congress created the CDRLF to provide low interest loans and Technical Assistance Grants (TAGs) to low-income designated credit unions. The creation of this fund recognized the financial assistance some low-income designated credit unions required to be successful.
NCUA has administered the CDRLF since 1987. This program, which is available only to low-income designated credit unions, provides technical assistance grants and low-cost loans to those low-income designated credit unions interested in enhancing service to their membership. Since inception, the CDRLF granted 278 loans totaling $43.1 million and more than 2,100 grants totaling $6.9 million, as outlined in the following chart.
Fiscal Year Appropriations Approvals 1213 TAGs LoansTAGs Loans
1979 to 1996 $6,000,000 $0 $16,400,000 $ 696,000
1997 $1,000,000 $0 $ 2,261,000 $ 215,461
1998 $1,000,000 $0 $ 2,365,000 $ 357,224
1999 $2,000,000 $0 $ 1,900,000 $ 343,549
2000 $1,000,000 $0 $ 5,583,000 $ 292,729
2001 $650,000 $350,000 $ 2,657,000 $ 369,815
2002 $650,000 $350,000 $ 3,259,000 $ 668,044
2003 $700,000 $300,000 $ 1,004,997 $ 460,242
2004 $200,000 $1,000,000 $ 1,797,458 $1,225,565
2005 $200,000 $800,000 $ 1,669,000 $ 949,219
2006 $0 $950,000 $ 4,214,000 $1,371,130
Total $13,400,000 $3,750,000 $43,110,455 $6,948,978
The 2007 budget request for the CDRLF is $950,000 in TAGs. In 2006, NCUA approved $1.3 million in grants to 294 credit unions. These low-income designated credit unions used the grant and loan funds to touch the lives of the members of their communities by:
; Overcoming the language barrier with translated financial service materials;
; Offering free income tax return services;
; Opening offices to better serve their members;
; Providing financial education opportunities; and
; Providing loans to develop alternative loan programs to combat predatory lending.
Here are just a few specific examples of CDRLF fund use by low-income designated credit unions:
; Coastal Waters Federal Credit Union, a $7 million institution located in Alabama,
has a membership that includes the underserved community of Mobile,
Alabama. The credit union installed an ATM machine that charges no fees for
credit union members. This ATM and the credit union office are accessible to
residents using public transportation.
; Desert Sage Federal Credit Union, a $1.6 million institution, located in Idaho,
provides ATM/debit card services for members who are seasonal migrant workers.
; Houston Teamsters Federal Credit Union partnered with TransUnion and the Gulf
Coast Community Services Association to create a Credit Score Enhancement
Program. This program provides a process for community residents to receive
12 The Community Development Credit Union Transfer Act (of 1986) transferred the CDRLF’s
administration to NCUA. The program was dormant prior to the transfer.
13 NCUA started the TAG program in 1993.
their personal credit score, advice on how to improve their score, automated home
valuations and auto pricing reports.
NCUA Outreach Efforts
Over the years, NCUA initiated a number of programs focused on assisting low-income designated credit unions. These initiatives provide increased opportunities for FCUs to diversify their membership profile and to assist low-income designated and small credit unions as they manage their operations in accordance with ever increasing and complex laws and regulations. The ultimate objective is to increase the number of low-income individuals joining credit unions and receiving valuable, affordable services. This process is made more difficult because credit unions that typically attempt to serve this population are themselves small and possess minimal resources.
The Access Across America initiative, announced in February 2002, incorporated the agency’s activities for low-income designated and small credit unions, as well as federal credit unions expanding into underserved areas. The program has been designed to partner with federal government agencies and other organizations to identify and facilitate the use of resources available for credit unions to assist in their efforts to serve individuals in underserved areas. Workshops continue to provide partnering opportunities with federal government agencies, as well as non-profit and private organizations.
NCUA specifically promotes financial education initiatives in the Access Across America program, an ongoing effort by the NCUA to encourage credit unions to proactively work with a wide array of federal programs in an effort to improve service to members, particularly in low-income and underserved areas. Access Across America is emblematic of NCUA’s commitment to fostering economic empowerment through credit union membership, and in over a dozen programs in every region of the United States, credit unions have received practical, useful information on how to reach more low-income consumers. The next Access Across America Summit, to be held March 6, 2007, in Tampa, Florida, will focus on the Volunteer Income Tax Assistance (VITA) program, as well as alternatives to payday lenders and high-cost check cashers.
As an adjunct to the Access Across America initiative, the Partnering and Leadership Successes (PALS) program was introduced in 2003 to provide best practices in serving members and marketing to potential members in underserved areas and
communities. The agency coordinated widely attended workshops where a mix of credit unions presented programs focused on serving those in the lower economic strata. These programs included partnering opportunities with the Neighborhood Reinvestment Corporation, Latino outreach, and micro-business lending opportunities with the Small Business Administration. NCUA has incorporated the most successful aspects of PALs into the Access Across America programs and plans to continue to offer these valuable efforts in the future.
In 1993, NCUA created the Office of Community Development Credit Unions dedicated to ensuring the long-term viability of small and low-income designated credit unions. Today this activity is handled by the Office of Small Credit Union Initiatives
(OSCUI), which has expanded from a staff of six and a budget of $756,000 in 2004, to 24 staff and a $3.9 million budget in 2007.
OSCUI conducts regional and national training workshops on a variety of topics to help small and low-income designated credit unions succeed. For example, in 2006, OSCUI held 20 national workshops covering subjects such as establishing financial literacy programs, disaster recovery planning, and compliance with the Bank Secrecy Act. Approximately 1,900 credit union representatives from 1,060 credit unions attended these workshops. NCUA has scheduled another 20 workshops in 2007. Marketing to potential members and developing products designed for low- to moderate-income members will be discussed at this year’s workshops.
Additionally, OSCUI coordinates with NCUA’s regional offices to conduct smaller roundtable training sessions focused on the needs of small and low-income designated officials. More than 2,000 credit union officials received training at these OSCUI events nationwide last year.
Finally, OSCUI’s 15 economic development specialists (specialists) provide one-on-one
direct assistance and training to officials of small and low-income designated credit unions around the country. The specialists assist with areas such as strategic planning, adding new products and services, board and supervisory committee training, policy development, and grant writing. They also facilitate partnerships within the credit union system. For example, a specialist facilitated a partnership between low-income designated NCP Community Development FCU in Norfolk, VA, and ABNB FCU in which ABNB is providing back office operational support, as well as financial counselors and other services to NCP members.
Office of Economic Opportunity (OEO) Initiative
Although credit unions have been and continue to be very successful in helping their traditional membership base to secure and enjoy the benefits of fairly-priced financial services delivered in a cooperative structure, a concerted effort to specifically deploy credit unions to alleviate poverty ended with indifferent results. In the 1960s, as part of President Lyndon Johnson’s “War on Poverty,” a new type of credit union was
established specifically to serve identified low-income groups. The Bureau of Federal Credit Unions (NCUA’s predecessor agency) set up over 700 credit unions, with assistance from the Office of Economic Opportunity (OEO), to serve fields of membership comprised exclusively of low-income groups.
Unfortunately, credit unions established in low-income areas, solely dependent on self-generated capital, proved less viable as a financial cooperative. Virtually all of these credit unions were closed or merged out of existence. This experience demonstrated the difficulty of sustaining a credit union structure in which the membership consists exclusively of low-income individuals.
NCUA concluded from this initiative that a financially diverse membership provides a much better opportunity for success in serving low income individuals.
Credit Union Outreach Efforts
Credit unions provide services and products that are affordable, accessible and are focused on the needs of their own membership. In addition, many credit unions voluntarily assume additional responsibilities by partnering with community organizations and other credit unions to provide financial education, and other forms of outreach focused on specific needs of low-income or foreign-born members.
; The S.C. State Credit Union, a $382 million institution, provides financial
counseling for individuals who seek assistance with everyday budgeting or who
may be experiencing difficulty paying their creditors. Eight hundred sessions are
held each year with 300 members counseled annually. The debt management
program enrolls nearly 700 members each year and has paid over $2 million to
creditors during its six-year life span.
; A partnership between the Internal Revenue Service’s Community Coalition
program and 65 credit unions implements outreach, tax preparation, and asset
building strategies (e.g., Earned Income Tax Credit (EITC), Individual
Development Accounts and financial education) for low- and moderate-income
persons. The credit unions are limited by their field of membership to offer
financial services and reasonably priced RALs only to their members.
; The New York City Financial Network Action Consortium (consisting of Lower
East Side People’s FCU, Union Settlement FCU and Brooklyn Cooperative FCU)
is part of the New York City EITC Coalition. The Coalition’s outreach campaign
is provided in 11 languages on public transportation and in fast-food restaurants.
The Coalition hosts 45 VITA sites, with a minimum of eight volunteers at all
times, which are open days, evenings and weekends. In 2006, the Coalition
prepared 65,325 returns and helped consumers apply for nearly $100 million in
EITC. The Lower East Side People’s FCU and Harlem’s Foodchange process
Individual Taxpayer Identification Number applications and offer Individual
Development Accounts (IDAs) in conjunction with financial literacy training with
the Foodchange’s site in Harlem touted as the nation’s busiest civilian-based free
tax preparation site.
In addition to the financial education efforts and coalitions, credit unions form partnerships and operate programs designed specifically for members in disadvantaged communities. Particularly noteworthy examples are:
; Fort Campbell Federal Credit Union, a $231 million financial institution, created
the Home Front Mortgage Program to help active duty military personnel
stationed at Fort Campbell buy houses in Tennessee or Kentucky by eliminating
down payments. First-time home-buyers attend homeownership counseling
provided by a non-profit housing organization.
; Bull’s Eye Credit Union, a $106 million institution located in Wisconsin, has
senior staff personally visit an assisted living facility to cash checks for the
residents at an assisted living facility. Many of the residents do not drive and the
convenience of cashing a check assists this underserved membership.
; The Founders Federal Credit Union, a $1 billion institution located in South
Carolina, serves several underserved areas. The credit union developed new
products to better serve the Hispanic market that includes bilingual marketing
materials, free money transfers, Spanish Call 24 (account access by telephone),
Spanish ATMs, Spanish Founders Online and a Spanish Visa Helpline.
; Hawthorne Credit Union, a $157 million institution located in Illinois, employs
bilingual staff in every member contact area. In fact, the credit union can
converse with members in more than seven languages. In 2003, they expanded
their services to the Hispanic community by offering a bilingual website, financial
education, and audio response programs.
; Northeast Community Federal Credit Union in San Francisco, CA works with the
Mayor’s Office of Business and Economic Development to deliver targeted small
business technical assistance to an underserved low income Asian American
community focused on starting or expanding small businesses.
; W.C.T.A. Federal Credit Union partnered with the State of New York Mortgage
Agency (SONYMA) to offer affordable mortgage loans to first-time home buyers.
The SONYMA Partnership Program offers low down payment requirements,
flexible underwriting requirements, interest rate lock-in periods that are longer
than conventional lock-in periods, and closing cost assistance. As part of this
program, the member is required to complete a financial education course through
a SONYMA approved source.
; Less than a year after converting to a community charter in 2005 American
Heritage Federal Credit Union opened a state-of-the-art branch in the Hunting
Park neighborhood of Philadelphia. The new branch has attracted 150 new
members each month and over $2 million in new deposits
from the underserved area.
Financial Literacy: An Ounce of Prevention
NCUA has identified one obvious area of improvement that could assist all consumers in improving their overall economic health: financial literacy.
By providing basic information about wise use of credit and the advantages of prudent money management, financial education fosters financial stability for individuals and entire communities. The more consumers know about credit and financial services, the more likely they are to increase savings, become homeowners, and improve their financial position. A white paper prepared by the U.S. Department of Treasury’s Office
of Financial Education released October 2002 found that “four in ten Americans admit that they are living beyond their means primarily because of the misuse and