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

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Access to mainstream financial institutions is essential for building assets and ensuring a stable financial future. Yet, according to the Federal Deposit Insurance Corporation, 25.6%, or approximately 30 million Americans, are unbanked, meaning they do not have a checking or savings account, or underbanked, meaning that although they have a checking or savings account, they rely mainly on alternative financial services. Low-income households, with incomes of $30,000 or less, constitute 71% of unbanked/underbanked households, and minorities (54% of African American and 43% of Hispanic households) are more likely to be unbanked/underbanked.

Over 66% of unbanked Americans use alternative financial services such as payday loans, non-bank money orders, check cashing, and other high-cost, predatory financial services. The alternative financial services industry clearly targets these low-income and minority communities. As result, those who can least afford it are forced to use high-cost alternative financial services. 

To address this situation, Rep. Joseph Baca (D-CA) recently introduced H.R. 1909, which would create a charter for Federal Financial Services and Credit Companies or FFSCCs. The supposed purpose of the bill is to establish a safe financial market and provide services to the unbanked and underbanked. To do this, the Office of the Comptroller of Currency (OCC), which charters and regulates national banks, would create a special charter for FFSCCs. Financial institutions that provide at least two of the following criteria are eligible for a charter: (1) have a history of providing unbanked persons with financial products and services; (2) extend credit to consumers in an amount for $10,000 or less; or (3) issue reloadable stored value cards to consumers or small businesses. For instance, entities that issue money orders, send and receive money orders, provide check cashing, bill payment and/or tax preparation services could all apply for a charter.

Although unbanked/underbanked populations clearly rely on these types of alternative financial services, the solution to this problem is not to encourage such use by legitimizing these companies, but rather to help the unbanked/underbanked gain access to the mainstream financial system.

In other words, if the purpose of the bill is to ensure banking and credit opportunities, then why not do this within the current banking structure? For example, mainstream banks could be required to provide more small-dollar loans as an alternative to payday lenders. Providing access to credit for the 50 to 70 million of Americans who have no credit scored or have a thin file, by reforming the current credit system to make it more transparent and researching whether or not reporting non-traditional data such as utility bills and rental payments would be beneficial to those with limited credit data, is another solution. Similarly, reforming the Community Reinvestment Act (CRA) to make CRA exams more stringent and the penalties for low CRA scores stiffer is another solution. Funding BankOn USA, as President Obama requested in his 2011 budget proposal, would also provide low cost, mainstream checking and savings accounts, as well as financial education to low- and moderate-income individuals. These and similar programs are what is truly needed to ensure that low- and moderate-income individuals and minority communities have sound financial options and not just “chartered” fringe lending options.

Simply legitimizing payday lenders and other fringe financial services without reforming their products will not provide safe and viable banking solutions to the unbanked/underbanked. If the reason for creating a FFSCCs charter is to provide the OCC with the authority to regulate their products that’s one thing. Capping interest rates on payday loans and limiting fees on check cashiers would be a legitimate and laudable goal. But there is nothing in the bill that suggests this would be the case. Instead, it appears that the bill would create a two tiered financial market—the mainstream one for the wealthy and the special one for those less well off. In addition to continuing to ostracize the poor by leaving them out of the mainstream, such action would put the nation back 100 years into the “separate, but equal” era. Given that the racial wealth gap has continued to grow—it doubled between 2005 and 2009 such that white families now have 20 times the wealth of black families and 18 times the wealth of Hispanic families—why would we want to create a charter that would continue financial discrimination when there are so many options for providing high-quality, low-cost banking solutions to all?

Or perhaps the purpose of the bill is simply to give the OCC back some of the regulatory power that it lost under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Yet, between 1995 and 2007 the OCC issued only one public enforcement action against a large bank, even though it was the only regulator to have jurisdiction over the largest national banks in the country. Clearly, it is a bad idea to provide the OCC with more powers since it didn’t use its previous powers to properly regulate banks the way it should have. As a result, tax payers paid $700 billion to bail out national banks who were allowed by their regulator, the OCC, to engage in subprime lending, risky mortgage-backed securities, and other costly, unsound business practices. The OCC’s recently released revised preemption rules, which completely ignored the changes required under Dodd-Frank, demonstrate that the OCC still does not intend to place consumers first. Section 1044 of Dodd-Frank allows the OCC to preempt state consumer protection laws only if (1) they discriminate against national banks; (2) they prevent or significantly interfere with the exercise by the national bank of its powers, as stated in the Barnett Bank case; or (3) the state law is preempted by another federal law. Yet, the OCC’s proposed regulations implementing these requirements would permit the OCC to preempt laws if they merely “obstruct, impair, or condition” bank operations—a standard that is clearly broader than Dodd-Frank allows.

The Consumer Financial Protection Bureau was created to ensure that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services be fair, transparent, and competitive. It already has the authority to regulate financial products such as check cashers, debt collectors, and others as well as. And 74% of voters polled say they support having a single entity with the mission of protecting consumers from deceptive practices. So if the institutions mentioned in the FFSCC Act fall under the jurisdiction of the CFPB, and the majority of Americans want one bureau to regulate banking institutions, and thus far, the OCC hasn’t done enough to regulate banks, why would we pass a bill giving them another charter to regulate and legitimize predatory lenders?

This blog post was co-authored by Ali Terkel.