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

Urban Partnership, a new institution, bought out ShoreBank on Friday ending the bank’s 37 years of service and its title as the oldest and longest serving community development bank in the country. In a previous blog, the Shriver Center outlined the numerous opportunities ShoreBank offered to low-income communities, including underwriting homeownership loans for working families, providing alternative lending options to small businesses, and countless community development projects that improved low-income neighborhoods.

Recent reports have linked the failure of ShoreBank to the Obama Administration’s clear decision not to affiliate itself with any one bank or institution. Why did the White House push so hard for bailouts to Wall Street firms, the purveyors of the economic crisis, and not community banks, such as ShoreBank, the institutions hit hardest? Why did the White House bow to political pressure to avoid the impression that ShoreBank was only being saved because of its supposed ties to President Obama and other senior White House staff?  Why weren’t there lobbyists fighting on behalf of ShoreBank and others like it?

It is hard to understand how allowing the failure of ShoreBank fits into the administration’s promise to make the middle class a priority. What message is the government sending by allowing ShoreBank to fail, while allowing irresponsible banks like Wells Fargo and AIG, who shoulder a heavy proportion of blame for the current economic crisis, to come out ahead?

The reality is that community banks are coming under intense pressure from a crumbling commercial real estate market, a weak economy, and lop-sided competition with banking goliaths deemed too big to fail. Champion for working families, Elizabeth Warren agrees that small banks serve an important function in this economy and disproportionally lend the money to small businesses.

What those that opposed the bailout of ShoreBank failed to realize is that community banks are integral to the health and well being of our economy. Using large Wall Street banks as the only option not only ignores the needs of the small business community, but puts consumers at risk of a monopoly. In addition, if this trend continues, the needs of entrepreneurs and community rehabilitation projects may never see the light of day. It is widely known that small businesses are responsible for most of the net job creation in the United States, which makes it clear why we need community investment banks to remain alive and thrive.

Small banks need a different program than TARP if they are going to make it through this crisis. Small banks and big banks do not look like each other and certainly don’t act like each other. There needs to be differences in how they are treated, but these differences should not reward big banks over community banks, which have historically made significant strides in solving problems relevant to low-income families, blighted neighborhoods, and small businesses. One way to ensure that this occurs is to reform the Community Reinvestment Act (CRA) to reward community banks for their efforts while requiring big banks to do more. The recently introduced H.B. 1479 would do just that and should, therefore, be supported.  Additionally, the banking regulatory agencies recently held hearings to determine what updates are needed in the CRA regulations. These agencies should be encouraged to include these kinds of reforms.

Susan Ritacca coauthored this article.
 

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August 14, 2010, marked the 75th anniversary of Social Security. The social security system has helped reduce the rate of poverty among the elderly, but millions of seniors continue to face economic insecurity. Social Security alone cannot remedy the growing inadequate rate of Americans’ retirement savings and current pessimism about the security of such savings. In fact, Social Security was never intended to be the sole source of retirement income, but rather to provide seniors with a moderate standard of living. Yet, it has become an increasingly larger part of people’s retirement funds. Without Social Security, approximately 20 million Americans would fall below the poverty line, including more  than 13 million elderly and 1 million children.

According to the Social Security Administration, Social Security benefits constituted 50 to 90% of income for more than 33% of Social Security recipients, and 90 to 100% of income for more than 31% of recipients. Women, in particular, may be forced to over rely on their Social Security benefits. Social Security is virtually all of the money that more than 4 out of 10 single women over age 65 in will have. This highlights the need to put more policies like Universal Voluntary Retirement Accounts (UVRAs) in place to provide economic security for low- to moderate-income people.

UVRAs are a simple, easy way to encourage individual retirement savings. Generally, UVRAs are government-administered contribution retirement plans for those who lack access to an employer-sponsored plan. Under UVRA programs, employers that do not offer a retirement plan would be required to allow their workers to open and contribute to a UVRA account through regular payroll deductions. Through automatic enrollment with an opt-out option and a limited number of investment options, UVRAs can attain high participation rates. Additionally, by including a low default contribution rate, UVRAs alleviate potential burdens on low-income individuals while ensuring that they engage in at least minimal savings. Because UVRAs are paid through payroll deductions, they would be portable from job to job thereby encouraging continued savings behavior regardless of changes in employment.

The Automatic IRA Act of 2010, S. 3760, sponsored by Senator Jeff Bingaman (D-NM) and John Kerry (D-MA), would expand retirement savings coverage. Specifically, the bill, which is similar to the bill previously introduced into Congress in 2007, would amend the Internal Revenue Code to allow employees not covered by qualified retirement plans to save for retirement through automatic IRAs. Employers would be required to provide Automatic Individual Retirement Accounts (IRAs) to each qualifying employee. Several states have also introduced UVRA legislation in recent years, and the concept of UVRAs was proposed in President Obama’s 2010 budget. These repeated attempts to enact UVRA legislation demonstrate lawmakers' recognition of the growing retirement problem. In particular, the need to continue Social Security in order to lift millions of Americans out of poverty, while at the same time providing other retirement opportunities for those who do not currently have them or who are most vulnerable.

For more information on UVRAs, see “Universal Voluntary Retirement Accounts: A Financially Secure Retirement” in Clearinghouse Review and the archive of the Shriver Center’s recent webinar on UVRA.

Ji Won Kim coauthored this article.

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The Internal Revenue Service (IRS) announced last week that starting with the 2010 tax filing season they will no longer provide tax preparers with the mechanism they had been using to underwrite refund anticipation loans (RALs). Specifically, the IRS will no longer provide a “debt indicator” tool which gives tax preparers an indication of whether a client will have any portion of the refund offset for delinquent tax or other debts including unpaid child support or delinquent student loans. Preparers used this indication to decide whether or not to offer a customer a RAL as an incentive to immediately pay for the fees of tax preparation and get cash in hand.

RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and are heavily marketed and sold in low-income communities. RALs provide taxpayers an immediate advance on their anticipated tax refunds, yet at a cost of interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL.

Because refunds are now widely issued electronically within 10 days of filing, the IRS decided that there was no longer a need for the debt indicator or an instantaneous refund. As IRS Commissioner Doug Shulman explained: “Refund Anticipation Loans are often targeted at lower-income taxpayers. With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

To replace the debt indicator, the IRS will begin exploring the possibility of providing a new tool to tax preparation sites. Instant access to cash and the ability to immediately pay for tax preparation services with RALs have been major selling points for consumers. The IRS is, therefore, investigating cost-effective and secure alternative product s to RALs.

Legislators and advocates alike have praised the decision to no longer provide the debt indicator. These high-cost loans, which are targeted at low-income families and those eligible for the earned income tax credit who need money quickly, are irrelevant given the speed at which federal tax refunds are now delivered. In eliminating these loans, taxpayers will no longer spend millions of dollars for a 10-day loan when they can receive the cash for the refund in approximately the same time period.

In recent blogs, the Shriver Center reported on the negative impact RALs have on low-income communities and the measures being taken to eradicate these product s from the tax preparation industry and from financial institutions. The Office of the Comptroller of the Currency (OCC), reacting to consumer advocacy including efforts by the Shriver Center, issued new requirements for tax preparers’ advertisement and sale of such loans earlier this year. Similarly, the FDIC mandated at least one cease and desist order and several RAL provided voluntarily agreed to stop proving such loans. The IRS’ recent investigation into RALS and the task force which it convened on this topic lead to its decision to eliminate the debt indicator tool. This latest development could spell the end for RALs, and the Shriver Center applauds the IRS’ action in ending this abusive practice.

Susan Ritacca coauthored this article.

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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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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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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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Governor Quinn has closed a gaping loophole in the laws regulating payday loans by signing H.B. 537. Beginning in March, 2011 nearly every short-term credit product sold in the state of Illinois will be regulated.

Governor Quinn, Senator Lightford, Representative Lang, and the members of the Monsignor John Egan Campaign for Payday Loan Reform should be congratulated for the bill’s passage. In particular, the new regulations for loans with terms of six months or more will provide crucial protections for Illinois borrowers. However, the new law is not perfect. The 99% interest rate cap on some loans falls far short of the 36% that is considered safe for consumers. Even with the new protections, payday and consumer installment loans are still best used only as emergency loans of last resort.

As we have discussed in previous posts, H.B. 537 mandates significant reforms. Loans with terms of less than six months have rates capped at $15.50 per $100 borrowed every two weeks. Longer term loans over six months are capped at 99% APR for loans less than $4,000 and at 36% APR for loans more than $4,000. The rates will be calculated in accordance with federal Truth in Lending legislation that ensures lenders cannot use hidden fees to deceptively increase the cost of the loan.

Just as importantly, the new law prohibits balloon payments for all consumer credit products, regardless of the term. With a balloon payment structure, a borrower is typically not allowed to make a partial payment and must either pay the loan in its entirety at the end of the term or, as is often the case, roll the loan over and continue paying interest. Soon all short-term consumer loans in Illinois will allow borrowers to make equal payments over the term of the loan, paying down the principal over time, so that consumers are debt-free at the end of the term.

Lenders will also have to consider a consumer’s ability to repay the loan before extending credit. Monthly payments will be limited to between 22.5% and 25% of a borrower’s gross monthly income. Lending money without taking into account an individual’s ability to repay is a hallmark of predatory lending practices. Finally, and because these regulations will be meaningless if they are not enforced, H.B. 537 creates a consumer reporting service to ensure that lenders comply with all consumer protections.

The hard work of the Monsignor John Egan Campaign for Payday Loan Reform has finally paid off for Illinois consumers.

Hannah Weinberger-Divack co-authored this article.

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Illinois came one step closer to reforming its payday lending laws this week with the passage of H.B. 537. 

Currently, Illinois law has a toxic loophole as big as the fissure gushing at the bottom of the Gulf, which payday lenders have used to avoid consumer protections. Previous attempts to reform payday lending in 2005 imposed a cap on interest rates for loans less of than 120 days and restricted the number of loans a borrower could take out to two per year. Payday lenders evaded these restrictions by simply increasing the term of their loans. 

Payday loans are predatory short-term, high-interest loans that allow an individual to use a post-dated personal check as collateral. Payday lending is a growing problem; in the mid-1990s there were only a few hundred payday lending stores in the country, and by 2009 over 20,000 payday lending stores were opened in neighborhoods across the U.S.

Measures to limit the cycle of debt that traps many payday loan consumers are sorely needed. An informative and entertaining report from NPR’s Planet Money estimated that 60% of payday lenders’ revenue comes from repeat customers who continuously rollover their loans and rack up huge fees in the process.

On Wednesday, May 26th, a law to close this loophole, H.B. 537, was passed by both houses of the Illinois General Assembly with just one "no" vote. This piece of compromise legislation will overhaul two state laws, the Consumer Installment Loan Act and the Payday Loan Reform Act, to provide strong consumer protections for high-cost installment loans.

H.B. 537 would close the loophole because it:

• Ensures reasonable rates of 36% for installment loans over $4,000, 99% for small consumer loans, and maintains the current rate of no more than $15.50 per $100 per two weeks for payday loans. 
• Limits the cycle of debt by ensuring that lenders cannot make a payday loan to a consumer that would result in more than 180 days of continuous indebtedness. 
• Establishes a consumer reporting database to ensure that consumer protections for payday loans and small consumer loans are enforced.

Illinois has the chance to correct this mistake and finally rein in the predatory lenders. Consumers should urge Governor Quinn to immediately sign H.B. 537. 

This post was co-authored by Hannah Weinberger-Divack.

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The Sargent Shriver Center on Poverty Law joins advocates across the country in celebrating Chase Bank’s recent announcement that it will exit the Refund Anticipation Loan (RAL) industry.  Chase Bank was the largest provider of short-term, high-interest-rate bank loans, or RALs, contracting with over 13,000 independent tax preparers nationwide.  According to the Woodstock Institute, Chase provided 1.5 million RALs annually based on expected income tax refunds. 

As discussed in our previous blog, the Internal Revenue Service (IRS) is currently creating a task force to review RAL loans issued by tax preparation sites in order to regulate the industry.  While no rules, regulations, or recommendations have been issued yet, the formation of the task force and the increased scrutiny of such products by regulators appear to be having the intended effects. The Office of the Comptroller of the Currency (OCC) also issued new guidance on the delivery of RALs earlier this year.

Chase joins other banks and financial institutions that have recently left the market; Jackson Hewitt agreed to stop selling RALs to its customers, Santa Barbara Bank stopped the sale of all RALs, and the Federal Deposit Insurance Corporation (FDIC) mandated a cease and desist order for Republic Bank & Trust’s RAL program until reforms were implemented.

Despite their history in the RAL industry, Chase claimed that its sale of RALs was no longer a “strategic fit” for their business model, and cited increased scrutiny and additional regulations as part of its decision to leave the market.  While we applaud Chase Bank for being responsible and exiting the RAL industry, its actions were the direct result of constant pressure from community organizations and consumer advocates, including the Shriver Center. In sum, Chase was forced to comply with the new OCC guidelines, or exit the RAL industry.  This withdrawal is another victory for working families and may mark the beginning of the end for refund anticipation loans.

This post was coauthored by Susan Ritacca.
 

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In the last 25 years, credit has taken on an increasingly important role in our economy. Yet, an estimated 50 to 70 million Americans remain un-scored or have a thin credit file, meaning that the big three U.S. credit bureaus (TransUnion, Experian and Equifax) do not have enough information about these individuals' finances to assign them a credit score, whether good or bad. Accumulating assets is necessary for low-income families to move out of asset poverty and become financially secure. 

Without a credit history, it is difficult, if not impossible, to qualify for a mortgage, obtain a credit card, buy a car, or finance a small business. Increasingly, even employment and rental housing decisions hinge on a credit score. These computer-generated scores have, in just a couple of decades, become the benchmark for lending. Banks use credit scores to determine eligibility and pricing for loans. Although banks argue that standardization of credit scoring has enabled millions of consumers to get loans quickly and at a low price, without regard to race, gender, or residence, estimates indicate that 32 million consumers have credit files that are too thin to score, and 22 million have no files at all. Many of the “un” or “under” scored are minorities, young adults, and women.

Most credit scores are based on some variation of Fair Isaac's FICO score, which ranges from 300 to 850. The lower the score, the greater the risk. The main factors used in a FICO score are payment history for credit cards, mortgages, and other retail accounts, the amount a consumer owes, the length of time he or she has held credit, and the amount of recently opened credit cards. In order to increase access to credit, some advocates are calling for the inclusion of  alternative data in credit reporting.

A 2006 study indicated that an overwhelming majority of lenders believe that increasing numbers of individuals could borrow money if nontraditional data were incorporated into lending decisions. In fact, half of the lenders interviewed in this study said that they were already using or evaluating the use of alternative data sources. Yet, a closer look at the credit reporting system seems appropriate before incorporating such data. 

If, as some claim, the current credit system’s lack of transparency and inaccuracy already discriminates against low-income families, should we first work on making the credit bureaus accountable and transparent before adding more information into a seemingly vacuous and obscure system? If a new reporting system is needed, how should it be constructed so that minorities and low-income workers do not become even more vulnerable?

Moreover, not all alternate credit reporting and scoring methodologies are created equal. What types of data predict creditworthiness and should therefore be reported? Should it be limited to data such as rent, telecom, and utility payments? Should alternative data reporting also include things such as child care, medical, and other payments not currently or routinely examined by the large credit-reporting agencies? As part of incorporating such alternative data, should the reporting process be adjusted to provide an opt-in for those who want it, rather than automatic reporting for all? Or should extra weight be given to payments, such as child support, thereby making credit scoring not only a predictor of creditworthiness, but also a basis for social policy?

The Shriver Center is hosting a webinar to explore the effect alternative data reporting will have on low-income families. Join us on May 27th at 1 p.m. CDT to learn about current research on the impact of alternative data reporting based on firms that already report both on-time and late payment, including full data reporting of NICOR and DTE customers; current gas and electric utility credit and collection data from states around the country; the National Credit Reporting Association’s perspective on alternative credit reporting, and proposed legislative amendments to the Fair Credit Reporting Act.

This article was coauthored by Susan Ritacca.

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In 2009, the Federal Deposit Insurance Corporation (FDIC) announced it was taking over First Bank of Oak Park (FBOP) Corporation, a privately held bank holding company. A few months later, Park National Bank, a community branch of FBOP, was sold by the FDIC to U.S. Bank. Although these types of transactions happen every day in the corporate banking world, it’s important to understand the national implications this has on community banking.

Park National Bank was a staple to both Oak Park and Chicago’s Austin neighborhood. Known as one of the most philanthropic banks in the Chicago area, Park National successfully offered banking services to low-income families and gave them an alternative to payday lenders, currency exchanges and subprime loans. Its accomplishments included bottomless funding for local nonprofits and social service agencies, underwriting costs for new schools, donations to community causes, rehabilitation of countless foreclosed homes that were sold back to residents at affordable rates, a lead role in neighborhood revitalization and economic growth, and countless small dollar loans to help fund local entrepreneurs. For 30 years, Park National Bank provided an infusion of projects, cash, jobs and morale to the community it served.

In 2008, when the government seized Fannie and Freddie Mac, FBOP took a loss of $855 million because of the loans it had underwritten. Initially FBOP was approved for Troubled Asset Relief Program (TARP) funding to help it recapitalize, however, it never received any money because no guidelines for TARP funding of small, privately held banks were ever created. Then Chase bank, which had been lending money to FBOP for years, decided not to extend FBOP’s line of credit and sued them for $246 million.  

In 2009, regulators told FBOP that it needed to raise between $500 million and $1 billion to recapitalize. Mike Kelly, the owner of FBOP, raised $600 million just a week shy of the deadline. Nevertheless, federal regulators seized FBOP's nine banks in four states, descended on FBOP’s headquarters, declared it insolvent, and announced its assets were being transferred to U.S. Bank. In a clear case of the right hand not knowing what the left hand was doing, on the very same morning that the FDIC seized Park National’s assets, U.S. Treasury Secretary Timothy Geithner was in Chicago presenting $50 million in federal tax credits to Park National for its community development projects.

Historically, U.S. Bank’s community efforts have paled in comparison to Park National’s. Twenty-eight percent of Park National’s profits went to community causes compared to less than 1% by U.S. Bank. Oak Park’s Wednesday Journal has reported that U.S. Bank already has plans for massive layoffs at FBOP banks, yet claims to be giving notices for “positions” not “people.”

This issue strikes at the heart of Americans' mistrust of corporations and commercial banks. Americans calling for banking reform and bailouts for Main Street have been following the thread about Park National Bank. Public outrage is clear: why aren’t community banks considered as important as large banks to receive federal assistance? In protest, Oak Park and River Forest High School closed two student accounts at U.S. Bank, totaling $300,000, and transferred the funds to the Community Bank of Oak Park River Forest. School representatives say if U.S. Bank hesitates to make the same community commitments Park National made, they will remove their remaining funds. Others are calling for a review of how FBOP was treated by the federal government during the takeover and asking regulators to individually assess each bank’s overall value to the surrounding neighborhood, including its knowledge of the community, as well as its record of commitment to investing and supporting its neighbors.

Since Park National was sold, busloads of Chicago residents traveled to Washington, D.C., to support Mike Kelly as he testified before a House finance subcommittee. Kelly argued that, in the future, the federal government shouldn’t treat other community banks the same way as Park National. New legislation has also been introduced in Congress. Senators Merkley (D-OR) and Boxer (D-CA) have proposed the Bank on Our Communities Act, which would allocate TARP funds to community banks. This bill is currently being reviewed in the Committee on Banking, Housing and Urban Affairs. Although it’s too late for Park National, enactment of this bill will ensure that such a travesty doesn’t happen to other community banks.

For more information contact the Shriver Center’s Community Investment Unit.

This article was co-authored by Susan Ritacca.

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What are RALs?

The dreaded tax season is back and so are notorious refund anticipation loans (RALs). RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like H&R Block and Liberty Tax. The problem with RALs, in part, is how they are advertised. To the consumer it appears that the refund is a service of the tax preparer rather than a loan from the bank. Yet, in actuality Chase Bank is the largest provider of RALs in the country and contracts with 13,000 independent tax preparers to supply RAL products. Following close behind is HSBC, provider to H&R Block; and Pacific Capital Bank, provider to Liberty Tax Service.

The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. However, customers are often not aware of the usuriously high interest rates and hidden fees associated with the loan. Triple digit interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL are not unheard of.

High Costs to Low-Income Families

RALs are particularly toxic because they are heavily marketed in low-income neighborhoods. According to a recent report by the National Consumer Law Center, recipients of Earned Income Tax Credits (EITC), the government’s largest anti-poverty program, constituted 63% of the 8.76 million Americans who took out RALs in 2007. EITC recipients receive an average credit of $1,600, yet they often spend $500 or more in interest, typically a third of their refund for RALs.

A separate report from the Woodstock Institute states RALs pose a threat to the opportunity of wealth building among EITC recipients. According to Woodstock, EITC recipients are driven to high cost tax preparation sites because of the complexity of filing for EITC and they purchase RALs to pay for the upfront costs of such tax preparation.

Reforming RALs

On the state level, New York, Arkansas, and Maine have enacted laws prohibiting tax sites from charging add-on fees to RAL products, while Michigan mandates specific disclosure requirements for RALs. Sixteen other states are regulating RALs through their general consumer protection laws. In Illinois, the law actually prohibits consumer installment lenders, or payday lenders, from originating RALs.

Nationally, the IRS is in the process of creating a task force to review loans issued by tax preparation sites in order to regulate the industry. No rules, regulations, or recommendations have been issued yet. Meanwhile, in 2007 the Office of the Comptroller of the Currency (OCC) acknowledged that RALs posed a considerable threat to consumers and therefore established banking requirements to monitor tax preparers’ advertisement and sale of such loans.  Monitoring by consumer advocates from 2007-2010, however, revealed that bank compliance with these OCC guidelines was negligible. Pressure from community organizations and consumer advocates, including the Shriver Center, recently resulted in the OCC issuing new guidance on the delivery of RALs in February of this year. As a result major banks and providers have revised their RAL programs: Jackson Hewitt agreed to stop selling RALs to its customers, Santa Barbara Bank stopped the sale of all RALs, and the FDIC mandated a cease and desist order for Republic Bank & Trust’s RAL program until reforms were implemented.

While the IRS, OCC, and FDIC should be applauded for these efforts, continued monitoring must occur. If no action is taken, RALs will continue to pose a threat to taxpayers and particularly diminish the possibility for low income families to save and pay down debt.

For more contact the Shriver Center’s Community Investment Unit.

This article was co-authored by Susan Ritacca.

 

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Compared to their parents and grandparents, today’s families are experiencing a transformation in how they navigate work and caregiving responsibilities. This change has profound implications for what the government and business must do to respond to the needs of workers, particularly female workers, and their families.

The recently issued Shriver Report: A Woman’s Nation Changes Everything, a study by Maria Shriver and the Center for American Progress,* contributes to the ongoing national discussion about the current state of women in the United States. Among the findings is that although women have made strides in the workforce, more can and should be done to increase these achievements.

According to the report, although many women have always worked, women now, for the first time, make up half (49.9 percent as of July 2009) of all workers on U.S. payrolls. This is a dramatic change from just over a generation ago: in 1969, women made up only a third of the workforce (35.3 percent). Women are also increasingly taking on the dual roles of breadwinner and caregiver: nearly four in ten (39.3 percent) mothers are primary breadwinners, bringing home the majority of the family’s earnings, and an additional quarter (24 percent) of mothers are co-breadwinners, brining home at least 25 percent of the family’s earnings. The recession is accelerating these trends by leading to massive job losses, especially within male-dominated industries, with men accounting for three out of every four jobs lost (73.6 percent).

The report recognizes that while the composition of the national labor force has shifted and the typical family structure has changed, government and business institutions have failed to catch up with these realities. As a nation where both men and women generally work outside the home, our country’s workplace policies and social safety net must be updated to reflect the current realities of today’s workers. The report calls on policymakers to reform government incentives and requirements for employers to ensure equality for women workers and to support employees’ dual work and care responsibilities by addressing these issues:

• Equal Pay: Although women make up half of the labor force, they have not achieved equality in pay. The typical full-time, full-year female worker brings home 77 cents for every dollar earned by her male colleagues. And, for specific groups of women—including women of color and disabled workers—the wage gap is even larger.
   
• Equal Opportunity: Continued sex segregation in employment has prevented women from accessing higher paying jobs in nontraditional fields. Low-income women in particular need access to job training that will lead to career pathways with family-sustaining wages and benefits.
   
• Anti-Discrimination: Anti-discrimination laws, including Title VII and the Pregnancy Discrimination Act, must be reformed so that employers cannot disproportionately exclude women from workplace benefits.
   
• Family and Sick Leave and Social Security: Our social insurance system needs to be modernized to include paid family and sick leave as well as social security retirement benefits that take into account time spent out of the workforce caring for children and other relatives.
   
• Child and Elder Care: Workers need better support from the government with direct subsidies for child care, early education, and elder care to help them cope with their family and work responsibilities.
   
• Flexible and Predictable Schedules: More flexible and predictable work schedules are needed to help employees balance work and family more efficiently.

The Sargent Shriver National Center on Poverty Law’s Women’s Law and Policy Project and Community Investment Unit continue to work on issues of employment, education and skill development, and financial opportunities with the goal of promoting women’s economic progress and achieving gender equity in the workplace.   Eliminating sex-based discrimination and establishing policies that recognize the everyday reality of workers’ caregiving responsibilities are necessary for ensuring the economic security of women and their families. Better training and educational opportunities, stricter enforcement of fair employment laws, and the creation of policy where fair employment protections do not exist are all imperative in empowering women to increase their earning power, develop economic self-sufficiency, and support their families’ well-being. 

For more information about the Shriver Center work contact Wendy Pollack, director of the Women’s Law and Policy Project at wendypollack@povertylaw.org, or Karen Harris, supervising attorney of the Community Investment Unit at karenharris@povertylaw.org.

*Please note that the Sargent Shriver National Center on Poverty Law is named in honor of Maria Shirver’s father, Sargent Shriver, but is not the author of the report.

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