The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

This year is providing a growing opportunity for mainstream financial institutions to offer affordable small-dollar loans while proving to be a difficult one for predatory lenders. First, Illinois passed legislation closing a gaping loophole in payday lending regulation. Now, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21st, has the potential to significantly increase the number of affordable small-dollar loans available to consumers. Title XII of the Act “encourage[s] initiatives for financial products and services that are appropriate and accessible for millions of Americans who are not fully incorporated into the financial mainstream.” Specifically, the Act will incentivize financial institutions to offer low-cost, small-dollar loans that serve as safe alternatives to payday loans.

Rather than regulating high-cost payday lenders, the Dodd-Frank Act seeks to provide financial incentives to institutions to offer more competitively priced small-dollar loan products through loan loss reserve funds, technical assistance funding, and other programs and grants to promote financial access and education. The Act authorizes the Secretary of the Treasury to establish grants to eligible entities to provide low-cost small-dollar loans. In this case, eligible entities include any federally insured depository institution, state, local or tribal government entities, community development financial institutions (CDFI) and 501(c)3 organizations. In order to receive a grant, the loan provider must offer financial literacy and educational opportunities to each small-dollar loan consumer.

The Act also includes several provisions that are exclusive to CDFIs. A CDFI is a financial institution that expands the availability of credit, investment capital, and financial services in economically distressed communities. The new legislation allows for the creation of loan loss reserve funds in order to help defray the costs of any defaults. Concerns regarding defaults are one of the primary obstacles cited by bankers who have expressed interest in starting a small-dollar loan program. However, after offering small-dollar loans for two years, the charge-off ratios were in line with industry standards for unsecured loans to individuals and charge-off rates compared favorably with credit cards. In order to qualify for the grant, the CDFI must offer a small-dollar loan program that offers loan amounts of $2,500 or less, to be repaid in installments with no pre-payment penalties, as well as any other requirements established by the fund administrator. As blogged previously, not all payday loan alternatives are created equal. Therefore, it is necessary to define the parameters of the eligible loan programs in a way that creates products that are truly safe, reasonable, appropriate, and accessible for consumers.

One tool to help create a consumer-friendly product is the template proposed in the FDIC’s Small-Dollar Loan Pilot Program. According to the FDIC, the essential elements of safe, affordable and feasible product design include:

• Loan amount of $2,500 or less;
  
• Term of 90 days or more;
  
• APR of 36% including fees;
  
• Streamlined underwriting with proof of identity and income;
  
• Credit report (but not necessarily score) to determine loan amount and repayment ability.
  

This two-year pilot program, completed in the fourth quarter of 2009, included 28 participating banks that made more than 34,400 small-dollar loans with a principal balance of over $40 million, all with an APR of 36% or below, including any fees.

Three banks headquartered in Illinois participated in the FDIC study: Community Bank – Wheaton/Glen Ellyn, Lake Forest Bank & Trust, and State Bank of Countryside. Lake Forest Bank was able to earn a small profit on the loans and intends to develop long-term relationships with performing borrowers. Losses on their small-dollar loan product were no higher than those on other consumer loans. Lake Forest Bank reported one of the most successful changes made to its program was reducing the minimum loan amount to $250 to accommodate borrowers who did not need large amounts of credit. Also on the state level, the Illinois Asset Building Group (IABG), a diverse statewide coalition invested in building the stability and strength of Illinois communities through increased asset ownership and asset protection, is working to promote alternative small-dollar loans in Illinois. For more information, see the IABG brief Alternative Small-Dollar Loans in Illinois: Creating Sound Financial Products Through Regulation and Innovation. With 2010 just half over, there are even more changes on the horizon for the alternative small dollar loan landscape. Stay tuned!

This article was coauthored by Hannah Weinberger-Divack.

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On June 30, the Senate passed the Wall Street Reform and Consumer Protection Act, which is designed to address the regulatory weaknesses blamed for the 2008 financial crisis and to protect consumers from future abuses by the financial services industry. The bill, popularly known as the Dodd-Frank bill, has finally made its way to President Obama’s desk after a year of debate, passing into law one of the largest financial reform overhauls in history since the Great Depression.

Ambitious in its scope, the 2,300 page bill will transform the way banks, credit rating agencies, and other financial institutions operate. Some of the major overhauls include: 

• Creating a financial oversight council that will monitor bank holding companies with assets over $50 billion, as well as non-bank financial companies the council deems a systemic risk to financial stability.
• Giving the Treasury Department authority to appoint the Federal Deposit Insurance Corporation (FDIC) as receiver of any financial company to deal with “too big to fail” entities.
• Merging the Office of Thrift Supervision (OTS) into the Office of the Comptroller of Currency (OCC).
• Requiring large hedge and private equity funds to register with the Securities and Exchange Commission (SEC), thus including them within federal oversight for the first time.
• Creating the Federal Insurance Office, which will monitor all aspects of the insurance industry and identify regulatory gaps that could lead to systemic risk for the industry and consumers.
• Changing the capitalization requirements of bank holding companies, including the establishment of counter-cyclical capital and leverage requirements so that the amount of capital required to be maintained by a company increases in times of economic expansion and decreases in times of economic contraction.
• Enacting rules to ban proprietary trading, holding or obtaining an interest in a hedge fund or private equity fund.
• Subjecting derivative markets to federal regulation and oversight for the first time.
• Requiring that every public company provide for non-binding shareholder votes on executive compensation.
• Authorizing the Treasury Department to establish progress standards for financial institutions that make an effort to provide alternatives to payday loans.
• Reducing the amount of the Troubled Asset Relief Program (TARP) from $700 billion to $475 billion.
• Enacting mortgage and anti-predatory lending reforms, including good-faith determination of a consumer’s ability to repay a loan, prohibition on steering incentives, limitations on high-cost mortgages, and appraisal requirements.
  

The centerpiece of the bill is the establishment of the new, independent Consumer Financial Protection Bureau (CFPB) with only one job: protecting consumers who buy financial products at banks and non-bank lenders, from mortgage companies to payday lenders.

The CFPB will have the authority to write and enforce consumer protection rules for banks and non-bank financial firms to ensure consumers are protected from unfair or abusive practices. Additionally, the CFPB will have the ability to examine banks and credit unions with greater than $10 billion in assets, all mortgage-related business (e.g., lenders, servicers, mortgage bankers) and large non-bank financial businesses (e.g., payday lenders, debt collectors and consumer reporting agencies).

This legislation is a victory for the Obama Administration and advocates for reform across the country, including the Shriver Center, who have been pushing for oversight since before the collapse of the housing market. Despite heavy lobbying from financial institutions against oversight and regulation, this bill demonstrates a commitment to protect Main Street from Wall Street abuses.These fundamental changes to the financial regulatory system, critical to protect Americans' financial well-being, will become law when the president signs the bill today. The Shriver Center applauds Congress and will continue working to help implement the new legislation. 

Susan Ritacca coauthored this article.

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Even as the home prices and rents decrease in the wake of the housing crisis and communities see more and more vacant units, American families increasingly need more affordable housing.

Last month, the Joint Center for Housing Studies of Harvard University released its “The State of the Nation’s Housing 2010” report. The report describes a housing market sputtering toward stabilization, but facing significant obstacles. 

Indeed, many aspects of the housing market continue to erode. The Joint Center reports that one in seven homeowners owed more on their mortgages than their homes were worth at the end of 2009. Similarly, foreclosures continue to rise; 2.1 million loans were in foreclosure during the first quarter of 2010. Nonetheless, 2009 saw an increase in home affordability and a surge in first-time homebuyers (due in large part to the first-time homebuyer tax credit). 

On the rental front, the number of renter households grew by 800,000 in 2009. But, due to a combination of new multifamily completions and a jump in the number of existing homes for rent, vacancies continued to rise and rental prices correspondingly sagged. (For information regarding Chicago-area rents and vacancy data, see DePaul University's Institute for Housing Studies first-quarter 2010 Cook County Rent and Vacancy Report.)

Despite increased vacancies and lowering prices, housing continues to become less and less affordable for more families. There has been a significant increase in the number of households with a severe housing cost burden (more than 50% of income spent on housing) since 2000. As of 2008, one in four renter households and over 44 million Americans, of which nearly 14 million are children, are living within households with severe cost burdens. Over half of renter households spend over 30% of household income on housing. Of these households, low-income, single-parent, minority families are more likely to suffer from harsher cost burdens.

Amid the upheaval in the housing market, The State of the Nation’s Housing 2010 makes clear that the nation’s housing remains unaffordable for more and more low-income Americans--especially in light of the staggering rate of unemployment. Indeed, while the number of vacant rental units priced at $1,500 or above per month jumped 23 percent, the number of vacant rental units for less than $600 remained virtually the same as the year before. Exploring ways to increase the availability of housing that is affordable to American families is more important now than ever.

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This May, the Illinois Auditor General released an audit of the Covering All Kids Insurance Act expansion population of the All Kids program, Illinois’ comprehensive and affordable health insurance program for all uninsured children, which benefited over 1.67 million kids in 2009 and has garnered bi-partisan support in the state General Assembly over the last several years. The Sargent Shriver National Center on Poverty Law recently released a brief examining the scope of the audit and the conclusions made by the Auditor General. Instead of providing helpful information to Illinois legislators and citizens on the program’s expenditures of money and awards of contracts, as directed by the law authorizing the audit, it overreaches into policy issues beyond its legislative authority and unwisely recommends changes to the All Kids program that, if implemented, would contradict health policy experts and jeopardize billions of federal Medicaid match dollars. 

The legislative purpose of the audit was to monitor expenditures of money and awards of contracts under the program, not to evaluate public policy. However, the Auditor General chose to focus the overwhelming majority of his attention on the public policy behind the Covering All Kids Insurance Act (to cover all children) and the carefully researched administrative policies regarding enrollment and retention in the program that have been adopted by the Department of Healthcare and Family Services (DHFS). It is unclear why the Auditor General assumes that the General Assembly was inviting an audit of its own public policy choices, and by doing so, second guesses the implementation choices made by DHFS experts on these matters. Moreover, the requirement of an annual audit for a subset of a state Medicaid program is unusual, administratively costly, and not supported by any data or legislative finding. The Covering All Kids Insurance Act—which provides coverage to less than 6% of the total All Kids population—was unjustifiably singled out for this scrutiny.

The Auditor General’s critique of Illinois’ use of passive renewal and 12-month continuous eligibility, and his other recommended changes to the enrollment procedures contradict national health policy experts and federal health leaders. If implemented, these recommendations could result in eligible kids being dropped from coverage, leaving them less likely to receive treatment for chronic conditions such as diabetes and asthma, and more likely to have poorer health, greater rates of avoidable hospitalizations, higher mortality rates, delays in necessary care, and unfilled prescriptions. At the same time, many of these recommendations, if implemented, could jeopardize federal Medicaid match money under the maintenance of efforts requirements of the stimulus law and federal health reform--at a loss of billions of dollars for Illinois.

The audit spends much time complaining about the lack of documentation in case files differentiating the types of immigrant children covered by the program, because, according to the audit, the correct documentation would entitle the state to federal matching funds that Illinois would otherwise forego. However, the difference in documentation among immigrant children did not become relevant to federal financing until Congress passed CHIPRA in January 2009 allowing federal matching funds for certain immigrant children for the first time. The Auditor General paid insufficient attention to the fact that DHFS can retroactively obtain the documentation needed to maximize and claim these federal funds for the time period in question. Similarly, the Auditor General failed to mention that the expansion population of the Covering All Kids Insurance Act has been entirely paid for by offsetting spending reductions elsewhere in the state’s medical assistance programs, as intended by the General Assembly when it passed the law.

Hard working Illinois families know far too well today’s economic reality and the importance of their children’s health insurance. We owe Illinois families a complete, accurate picture of the All Kids program, including a thoughtful real-world analysis of how over 1.6 million Illinois children and their families would be affected by implementation of the auditor’s recommendations. The full brief on the All Kids program is available on the Shriver Center's website.

 

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The American Recovery and Reinvestment Act of 2009 (ARRA), otherwise known as President Obama’s economic stimulus plan, included a small funding stream that states can use to create a subsidized jobs program for parents in low-income families who have been displaced from employment by the recession or otherwise are in need of employment. This spring, the Illinois Department of Human Services (IDHS) produced a plan to utilize these stimulus dollars and received immediate federal approval of its plan. IDHS dubbed its new jobs program “Put Illinois to Work.”

Three months have now passed since the Put Illinois to Work program began in early April, and it’s fair to say that it has been a monumental success in helping to solve our state’s #1 problem--getting people in Illinois back to work. It has done so at little cost to the state by creatively harnessing the federal funding stream created by ARRA. Illinois has done what the anti-government chorus considers the impossible, working closely with the private sector to get a large-scale government program that produces jobs up and running quickly and efficiently. 

Put Illinois to Work provides jobs that pay $10 per hour for 30-40 hours per week of work. As of today, there are over 18,000 people in Put Illinois to Work jobs. Employers have created 35,000 work slots, more than double the state’s original goal of 15,000. The program has been so popular that with over 60,000 job applicants, IDHS has had to close intake to the program.

The state has invested $10 million to leverage a federal investment of $200 million--a $20 return on every $1. Employers’ training and supervision expenses are considered an in-kind contribution under federal law so these workers come at no cost to the employer. In addition to earning badly needed income, workers with thin employment histories are building up their job skills and resumes. IDHS anticipates that thousands of Put Illinois to Work participants will receive continuing offers of employment when the program’s funding runs out.

The Temporary Assistance for Needy Families (TANF) emergency contingency fund (ECF)--the federal fund that pays for Put Illinois to Work--expires on September 30, 2010.  State subsidized employment programs like Put Illinois to Work enjoy wide bipartisan support in the United State Congress (a rare thing these days). The U.S. House of Representatives has already passed a one-year extension of the TANF ECF. A similar measure was uncontroversial in the U.S. Senate but was included as part of the unemployment extension legislation that recently failed to get the 60 votes needed to advance in the Senate. 

The Shriver Center and many other advocates are undertaking intensive efforts to get Congress to find another way to extend the TANF ECF for one year beyond September 30, 2010. For the sake of the tens of thousands of low-income Illinoisans who need and want to keep these $10 per hour jobs, let’s hope that these efforts are successful.   

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House and Senate negotiators have finally agreed to language for the Dodd-Frank bill, now headed back to both chambers for approval. Of the many reforms that the bill’s passage would initiate, one change of particular interest to consumers, which is receiving little attention, is the credit score access provision.

While consumers are entitled to one free credit report per year from each of the big three agencies, there currently are no mechanisms for receiving a copy of your credit score, the number that is meant to represent credit worthiness, at no cost. The Dodd-Frank bill would allow consumers free access to their credit score if their score negatively affects them in a financial transaction or a hiring decision. In particular, the law would allow consumers to request credit score disclosures as part of receiving an adverse action or risk-based pricing notice.

This is a good start, but there is another bill that would provide even stronger protections. H.R. 2374 would amend the Fair Credit Reporting Act to make credit scores available to consumers once each year free of charge and allow consumers to see the credit score used in connection with any of the lending or credit decisions made on their behalf. This would expand access to credit scores to all transactions, rather than limiting it to those transactions in which a person was negatively affected by their score.

What makes access to a credit score at no-cost so important? Since credit scores have become vital to accessing the credit necessary to build assets, people should have easy access to their scores before they apply for a loan or credit card. Fees for accessing credit scores are a burden that falls disproportionately on lower-income families. Knowing a score beforehand can help consumers plan for the annual percentage rate (APR) they will likely be eligible for, take steps to repair their score if necessary, and avoid unnecessarily high interest rates. Freddie Mac estimated that more than 20% of people who received sub-prime loans could have qualified for less-expensive prime loans.

Access to a no-cost annual credit score is not a silver bullet. It does not address the needs of the nearly 70 million people who have no credit scores or a thin file score. Attention still needs to be paid to how to bring this population into the mainstream credit market, whether through alternative data reporting or other means. In the meantime, this is at least a step toward making the credit reporting system more accessible and transparent.
 

Hannah Weinberger-Divack coauthored this post.

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Yesterday, Governor Quinn signed into law the bills that amount to the Illinois state budget for fiscal year 2011. These are the bills the General Assembly sent him, together with roughly half of the money needed to pay for them. The Governor made some alterations and revealed a host of decisions around the funding for agencies and programs. The budget includes cuts of over $240 million for elementary and secondary education, $100 million for higher education, and $312 million for human services. Ninety percent of Illinois general fund spending is aimed at education, health care, human services, and public safety. It follows that those are the vital things being cut, like it or not.

Governor Quinn and his Administration made it clear that they are not happy with these cuts, necessitated by the failure of the General Assembly to produce sufficient revenue to responsibly fund the government. The Governor himself has repeatedly explained the need for and expressed support for the significant new revenues needed to sustain Illinois financially. He has been criticized for failing to engineer support for those revenues from the General Assembly, but he at least was clear about the need and his own position. 

Interest groups, representatives of needy populations, and others will be making specific points about the decisions and priorities in the Governor’s actions to implement this budget. Those are important debates and worth close attention. Yet they have the feel of a desperate squabble over scraps. 

Most of the cuts in this budget are harmful and unwise. They are not driven by policy considerations or evidence-based program evaluations, but by the brutal calculus of the state’s fiscal default. These are the kinds of sorry, no-win decisions that must be made when the Legislature hands the Governor a budget with a shortfall that is HALF of the needed money. The truth is that the budget does not contain the resources to ensure that the items not being cut will in fact be paid for. Some will, some will not. All will have to wait far too long. 

The bigger picture here is that the crisis cries out for responsible leadership and a comprehensive solution that includes adequate new revenues. An election season is not the time to hide from responsibility, take shelter behind a self-justifying poll (“my poll says my constituents do not want to pay higher taxes”), or blithely assert with no specifics that there is a magic way the crisis can be solved without new revenues. It is the time to tell the truth, to teach the constituency what is needed to solve a historic crisis, and then to lead the effort to win it. Illinois voters are capable of adult decisions--nobody wants to pay higher taxes, but most will understand the need. A comprehensive solution is one that puts in place the revenue infrastructure to navigate through the crisis over at least two years. A comprehensive solution will include pain--we have that part already--but it must also avoid making unwise and harmful cuts to essential services. And it must have adequate new revenues to back up strategic borrowing that is also needed to get through the crisis.

For now, we have the embarrassing and sad spectacle of the distribution of scraps and the dismantling of important policies and programs by default. Illinois needs a responsible budget that stops cutting vital programs, meets the state’s needs, keeps the state’s promises, and pays the state’s bills.   

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Among the many uncertainties relating to the fallout of the BP oil spill in April off the Louisiana coast, there is at least one certainty: poor people and communities will be especially hard hit—their livelihoods, their homes, and their health, to name a few.  An “explosion” of poverty is expected in the Gulf Coast area, according to one advocate participating in the June 22, 2010, Clearinghouse Review readers’ conference call, on which 19 advocates representing nine states discussed the oil spill, state budget cuts, foreclosures, health care reform, and other legal topics.

Legal aid advocates and volunteers in the Gulf Coast communities are gearing up to assist clients with employment, housing, tax, and language access issues and claims. For example, they are compiling helpful resources on LawHelp, Louisiana’s online guide to free legal help, administered by Southeast Louisiana Legal Services, and on ProBonoNet. Already overloaded and underfunded, legal aid programs in the Gulf Coast are working together to figure out what their role is in the aftermath of this unnatural disaster and how to most effectively assist the expected surge of clients.

Conference call participants from other parts of the country discussed how state budget cuts are affecting their clients, ideas for establishing and preserving utility assistance for poor people, questions about working with the Social Security Administration on overpayment issues, the need for achieving relief in mold cases, and the challenges of accessing benefits in an era of web-based applications and declining access to public libraries’ computers, among others. Which of these topics would you most like to see covered in Clearinghouse Review? Vote now in a new two-question survey.

The discussion was part of a regular conference call series hosted by Clearinghouse Review: Journal of Poverty Law and Policy, a publication of the Sargent Shriver National Center on Poverty Law. Want to share your advocacy stories and article suggestions? Clearinghouse Review will host another conference call in October, tentatively scheduled for October 26. For more information, contact Shriver Center staff attorney–legal editor Catherine Dorn Schreiber.

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ShoreBank, a staple of the Chicago Community, may be in jeopardy of seizure if it does not receive TARP funds from the Federal Reserve Bank. Unfortunately, as a recent article in the Chicago Tribune noted, current political jockeying around more bank bailouts has ShoreBank in the eye of the storm.

In 2008, the largest banks in the country received up to $25 billion in taxpayer funds. According to CNN, these banks included Wells Fargo, Citigroup and JP Morgan Chase. Even though many argued that Wells Fargo was particularly guilty of the worst subprime lending abuses against working families, support for its bailout was bipartisan. Congress was convinced that the government needed to step in or risk a major financial calamity. Yet a year and a half after the Wall Street bailout, Republicans are beginning to question the value of smaller, community banks such as ShoreBank, the very banks that are addressing the needs of working families and underwriting community investment projects.

Since its inception in 1973, ShoreBank has been a model bank committed to social justice.  ShoreBank’s mission has been to develop a triple bottom line of social responsibility, environmental responsibility and profitability, or “people, planet, profit.” ShoreBank’s website describes it as, “America's first community development bank.”

ShoreBank is not the only community bank to come under attack by Congress. The Shriver Center recently blogged about Park National Bank, another community bank with an outstanding community service record that was allowed to fail by the federal government. In particular, Park National was seized on the same day that U.S. Treasury Secretary Timothy Geithner presented Park National with $50 million in federal tax credits for its community development projects.

The failure of Park National, and now the potential failure of ShoreBank, raises grave concerns. It appears that large “too big to fail” banks which caused irreparable harm contributing to both the housing and economic crisis, should be bailed out, but the smaller, community banks which have been meeting the needs of low-income neighborhoods for decades should be allowed to fail. This is just another indication of how heavy lobbying by the financial industry has swayed Congress to put the needs of working families aside in exchange for campaign contributions and cash.

This time, however, things are not going unnoticed. The Coalition to Save Community Banking, a group of concerned neighbors and activists formed on Chicago’s Westside when rumors arose about the possible take-over of Park National by US Bank, another financial institution which received billions from TARP. Members of the coalition traveled from Chicago to D.C. to support then Park National CEO Mike Kelly. Today they are rallying to promote the interest of local banking including supporting bailouts for banks that help the community, as opposed to banks that suck money from working families giving little to nothing in return. We cannot afford to let ShoreBank fail the same way that Park National was allowed to fail. It’s time to tell the regulators that too important to fail should also include small, community focused banks. Chicagoans should be outraged by threats of another assault on our community and demand action from their congressperson to ensure ShoreBank and others like it remain protected in our state and in our country.

Susan Ritacca coauthored this article.

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