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

Accumulating savings and building assets is the precursor to going from just getting by to getting ahead. Unfortunately federal and state public benefit programs actually discourage and penalize applicants and recipients who try to save and become economically mobile. 

Most states impose both income and asset or resource tests to ensure that benefit programs serve only those who truly need them. Income and asset tests vary from program to program and from state to state, and few caseworkers, not to mention applicants or recipients, completely understand what is allowed and what is not.

In terms of public policy, asset tests send the wrong message—that having assets is a bad thing. Specifically, asset limits lower the net worth of potentially eligible low-income individuals and families and discourage savings, thus serving as a barrier to financial security and upward mobility. Imposing and administering asset tests to a group largely without assets is also a waste of state resources that could be better spent on expanding benefit amounts. Finally, asset tests are unfair in that they often treat similar types of assets differently. All states, for instance, exclude defined benefit retirement savings, but most do not exclude 401(k) plans or individual retirement accounts (IRAs), even though all are retirement savings. For these reasons, there is a growing push, through legislation or administrative rule changes, on both the federal and state level, to eliminate asset tests completely, raise the amount of permissible assets, and/or expand the categories of excluded assets. 

On the federal level, the United States Department of Agriculture recently issued proposed rules to exclude retirement and education accounts from countable resources under the Supplemental Nutrition Assistance (SNAP) program. Asset tests under the federal Supplemental Security Income (SSI) program have also been targeted for reform. Like most public benefit programs, SSI is limited to those who have no more than $2,000 in assets for an individual and $3,000 for a couple. All resources deemed accessible to an individual, including defined-contribution retirement accounts, such as 401(k)s and IRAs are counted. To address this situation, the proposed federal SSI Savers Act of 2011 would increase asset limits from $2,000 (single) and $3,000 (married) to $5,000 and $7,500 respectively, index those limits to inflation and for recipients younger than 65, and exclude retirement accounts, education savings, and individual development accounts from counting against the limit.

In terms of state initiatives, states have the authority to reform asset rules in state-administered assistance programs, including Temporary Assistance for Needy Families (TANF), SNAP, Medicaid, and the state’s children’s health insurance program (SCHIP), to make the rules simple, efficient, and fair, and to encourage saving and asset building. Thus, states may set their own asset limits, exempt categories of assets, or eliminate asset limits altogether, and an increasing number of states have utilized this authority. 

At least three states, Ohio, Louisiana, and Virginia, have eliminated asset tests entirely in their TANF programs. Ohio was the first state to abolish asset limits in TANF; it did so in 1997. Although Ohio budget analysts predicted a small increase in the TANF caseload as a result of eliminating the asset test, no caseload increase or political fallout occurred. In 2003, Virginia adopted administrative rules that eliminated asset limits in the TANF and family and child medical programs, evaluated only liquid assets in the Food Stamp Program, and eliminated the TANF lump-sum rule, which made recipients ineligible for cash assistance after receiving a lump-sum payment such as retroactive SSI benefits or a personal injury settlement. Even more states have eliminated asset limits in their SNAP and Medicaid programs.

Several states that have not eliminated asset tests have nonetheless reformed their asset rules by increasing the amount of cash resources that recipients are permitted to have and by exempting certain forms of assets entirely. In 2005, Illinois excluded retirement accounts from asset tests in TANF and General Assistance. In 2006, Colorado passed legislation that raised TANF asset limits from $2,000 to $15,000 and exempted retirement, education, and health savings accounts and one vehicle per household. California passed a law exempting retirement and educational accounts from consideration as assets for recipients (but not applicants) in CalWORKs (California Work Opportunity and Responsibility to Kids, the state’s TANF program) and recently introduced a bill to exclude the value of a licensed motor vehicle from consideration when determining or re-determining CalWORKs eligibility.

Abolishing asset limits sends a clear message that saving and building assets are encouraged. While complete elimination of asset rules may not always be politically feasible, advocates can pursue substantially raising asset ceilings and exempting additional categories of assets, with the ultimate goal of removing them entirely at a later date.

For more information about reforming asset limits read the Shriver Center’s article on “Reforming State Rules on Asset Limits: How to Remove Barriers to Saving and Asset Accumulation in Public Benefit Programs,” in the March-April 2007 issue of Clearinghouse Review.

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Wealth and assets are the building blocks of economic stability and mobility. Higher levels of wealth also benefit society as a whole. Unfortunately, wealth inequality in the United States is not only wide but growing — the wealthiest tenth of American households possess almost three-quarters of the country’s total net worth. The racial wealth gap is even worse. In less than a generation (from 1984 to 2007), the racial wealth gap has more than quadrupled, mostly as a result of rising white wealth. In terms of household net worth, for every dollar owned by a white household Latinos own twelve cents and African-American families own only ten cents.   In fact, the median net wealth of white households is 20 times that of black households and 18 times that of Hispanic households. These lopsided wealth ratios are the largest since the government began publishing this data a quarter century ago and roughly twice the size of the ratios that prevailed among these groups for the prior to the Great Recession.

Early evidence is that the great recession has already significantly increased the racial wealth gap because of catastrophic losses in wealth amongst minorities. A recent report by the Pew Research Center estimates that from 2005 to 2009 the racial wealth gap doubled – so that median white families currently have as much as 20 times the wealth of black families, and 18 times the wealth of Hispanic families. These racial wealth disparities will rise further as the after-effects of the Great Recession continue. Although the recession affected all U.S. households’ wealth, through unemployment, falling stock prices, and huge losses in home values, it affected minorities more. In fact, the foreclosure crisis has caused “the greatest loss of wealth for people of color in modern U.S. history.”

In order to understand the persistence of this discrepancy, one needs to examine the country’s historical and current discriminatory practices and policies. Even when characteristics such as income, education, and other demographics are equal, minorities continue to have less wealth than similarly situated whites. Historically, legal, or de jure, discrimination, both by the government and by private actors, increased the racial wealth gap and created the opportunity for whites to build assets at the expense of minorities. Additionally, and perhaps more importantly, other facially neutral policies of the U.S. government racialized wealth acquisition, including the government’s promotion of white land acquisition, home ownership, retirement, and education, without explicitly delineating opportunities along the lines of race. Today, although racial discrimination is no longer legal, de facto discrimination still exists in terms of government and social priorities, principles, social norms, and the actions of individuals. Housing discrimination, unequal educational systems, disparate treatment in the realm of criminal justice, and disparate employment opportunities all continue the current advantages that whites enjoy.

Two critical public policy strategies in reducing this gap is identifying and eradicating current discriminatory government policies, whether de jure or de facto, and assisting racial minorities in developing assets. As advocates in the asset building field have explained, “public policies have and continue to play a major role in creating and sustaining the racial wealth gap, and they must play a role in closing it.”

At the moment, however, the federal government is actually exacerbating the racial wealth gap.  Instead of subsidizing wealth creation mostly for the wealthy, the federal government must switch to supporting asset-building strategies for those who need it most. In 2009, the United States spent nearly $400 billion on asset building policies. These subsidies, however, overwhelmingly go to those who already have significant wealth. For example, those earning more than $160,000 received an average of $5,109 in tax breaks per taxpayer, while those earning less than $19,000 received an average of only $5 in tax credits in 2009. Shifting the government’s expenditures toward facilitating the asset-building of the poor and minorities would help alleviate the legacy of racial inequality and provide needed fiscal stimulus.

Multifaceted public policies and strategies to help individuals build their own assets are also needed. Specifically, we must identify strategies to (1) promote savings, (2) increase access to mainstream credit, and (3) improve and increase financial education. Only by acknowledging that the same social system that has, and continues, to foster the accumulation of private wealth for many whites while denying it to blacks and redirecting this focus will we, as a society, begin to decrease the wealth gap that has racially divided this country for centuries.

To read more about the causes of the racial wealth gap and asset building policy solutions to bridge this gap read the “Eliminating the Racial Wealth Gap: The Asset Perspective,” featured in the July-August 2011 issue of Clearinghouse Review.

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Among the many provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was one requiring the Federal Reserve Board to report annually on the prevalence of general-use prepaid cards in federal, state, and locally administered payment programs and the interchange transaction fees and cardholder fees charged with respect to the use of such general-use prepaid cards.

General-use prepaid card programs are used as a method for disbursing funds to individuals and allowing government agencies to make payment in the administration of government benefit, assistance, and other miscellaneous programs. The cards can be used to provide payments such as social security, veterans’, disability, unemployment, and other benefits. Government-administered programs that are funded and managed at the federal level largely comprise three Financial Management Services (FMS) programs: (1) Direct Express, (2) U.S. Debit Cards, and (3) Navy/Marine Cash Program. The Direct Express program is used to disburse federal benefits on behalf of several agencies, the largest percentage of which are social security and supplemental security income (SSI) payments. The U.S. Debit Card supports programs such as disaster relief payroll and petty cash, whereas the Navy/Marine cash cards are only issued to personnel who have been assigned to a ship. 

According to the survey, in 2010 depository institutions provided cardholder use information for 90 federal, state and local programs operating in 36 states--five federally operated programs and 85 state and locally operated programs. These programs used 20 million cards (2 million for federal programs and 18 million for state and local programs), representing more than 1 billion transactions that were valued at $34.8 billion.

Recent initiatives of the U.S. Treasury Department will increase the usage of the Direct Express Program. In December of last year, Treasury issued a final rule to require anyone applying for benefits after May 2011 to receive payments electronically (either via direct deposit or a Direct Express prepaid card). Those already receiving benefits will be required to switch to electronic payment by March 2013. This is in addition to two pilot programs by the Treasury to expand prepaid card usage. One of the pilot programs offers taxpayers electronic delivery of their federal tax refunds via a MyAccount Card prepaid card and the other pilot encourages current and potential payroll card users to have their 2010 federal tax refunds deposited directly onto payroll cards. 

There were approximately 185.5 million ATM cash withdrawals, and the average withdrawal was $179.04 for federal programs and $130.68 for state and local programs.

In terms of interchange fees, which are the fees set by networks, charged to the merchant acquirer and received by issuers as part of the purchase transaction, the average interchange fee was lower for state and local programs than federal programs, but as a percentage of the transaction value, the average interchange fee for federal, state, and local programs was essentially the same. Generally, interchange fees for both signature based and PIN based networks are structured similarly to credit cards in that they include both an ad valorem and a fixed component. The average interchange fee was 30 cents or 1.1% of the transaction amount, which is lower than the 2009 average debit card interchange fee of 44 cents and the average 2009 prepaid card interchange fee of 40 cents. The reason for the disparity is that most government programs are PIN based, which have significantly lower fees than signature based programs. 

Cardholder fees averaged $9.69 per card in 2010, or 0.3% of the total amount disbursed to cards. Examples of cardholder fees include balance inquiries, penalty fees, card replacement fees, and statement request fees. Most respondents indicated that there are no monthly fees associated with the cards, that cardholders were allowed at least one free ATM withdrawal per disbursement period, and that most programs allow for more than one. The average ATM cash withdrawal fee was 47 cents or 0.3% of the amount withdrawn. Other fees included balance inquiry fees ranging from $0 to $2.95 per inquiry, penalty fees ranging from $0 to $20 per occurrence, and monthly fees from $0 to $2.25. Card issuers also charged from $0 to $1.75 per ATM cash withdrawals.

Unfortunately, the response rate to the survey was low, particularly from state governments, and many of the responses provided incomplete data, thus data does not provide information on the prevalence of use of general-use prepaid cards as a proportion of total payments disbursed through related government-administered programs. 

Nonetheless, the data that is reported shows that the use of such prepaid cards is on the rise. As a result it is more important than ever that government prepaid cards be afforded the same protections that are provided to other types of cards under the Electronic Funds Transfer Act. Specifically, these cards should have the same consumer protections and terms as other credit and debit cards.

The full report is available at the Federal Reserve’s website. More resources on prepaid cards and the consumer issues that arise from them are available on the Shriver Center’s website.

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As of April 2011, the savings rate in the U.S. was only 4.9%. Moreover, a 2009 Federal Deposit Insurance Corporation (FDIC) survey revealed that approximately 30 million American households are either unbanked or underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services. The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday loans, rent-to-own agreements, and pawn shops. Given the current economic climate, it is more important than ever for policy makers to concentrate their efforts on getting more people “banked” and saving.

One interesting proposal getting more people, particularly low-income consumers, saving are prize linked savings accounts. These accounts are bank accounts that allow savers to win cash prizes in proportion to how much they save. It is akin to buying a lottery ticket, except that one will always get back the money one has saved.

As some supporters of these types of accounts explain, if gamblers and lottery spenders allocated their funds to prize-linked savings instead, it would lead to increased aggregate savings. In 2007, U.S. residents spent around $90 billion on legalized forms of gambling. The appeal of participating in a lottery suggests that providing an incentive similar to lottery may be an effective tool to recruit more savers. Researchers including Peter Tufano of the Harvard Business School have shown that this program could work in the U.S. Tufano’s research in Indiana predicted that the unbanked would have the greatest interest in prize-linked savings. Following the study in Indiana, Tufano and his team at D2D Fund launched a larger scale prize-linked savings project in 2008 with the Michigan Credit Union League and the Filene Research Institute in Michigan. The product named “Save to Win” allowed savers the opportunity to win monthly cash prizes or a $100,000 grand prize at the end of a year for every $25 deposited. At the end of the pilot year, over 11,500 savers had saved over $8.5 million in Save to Win accounts.

While prize-linked saving programs are available in over twenty countries around the world, including the U.K., Sweden, and South Africa, they are not widely available in the U.S. due to state law and federal regulations. Current law in Michigan, Alaska, Georgia, and Arizona allow for savings promotion raffles, but options are limited in other states. That is because most states in the U.S. prohibit privately run lotteries, and prize-linked savings is considered illegal under such provision. In order to test this new idea to promote saving, Rhode Island, Maine, Maryland, Nebraska, Washington, and North Carolina have passed legislation to enable prize-linked savings programs. Although unsuccessful, legislators in Arkansas, Mississippi, Iowa, and New Mexico have also made similar attempts. However, federal law prohibiting non-credit unions from operating a prize-linked raffle complicates the legislative campaigns in various states.

Even though prize-linked savings may raise aggregate savings among low-to-moderate income families, they do not solve the problem of getting more people to use mainstream bank services that provide more protection for their funds. Moreover, we must keep in mind that one innovative idea alone will not solve the chronic problems of the U.S. economy.

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The Shriver Center has previously reported on federal and state efforts to crack down on the rapidly growing debt settlement industry, particularly the industry’s pervasive practice of taking advantage of desperate consumers’ fears and financial troubles. 

Last year, the Federal Trade Commission (FTC) established the Telemarketing Sales Rule which bans advance fees, requires disclosures, and prohibits misrepresentations by debt settlement companies. Since October 2010, for-profit companies that sell debt relief services over the telephone may not charge a fee before they settle or reduce a customer’s credit card or other unsecured debt. Companies must disclose fundamental aspects of their services, such as how long it will take for consumers to see results, how much it will cost and the potential negative consequences from using debt relief services, before the consumer signs up for any service.  The rule also covers calls consumers make to these firms in response to debt relief advertising.

Most recently, the FTC settled two actions charging debt settlement companies with fraudulent practices including deceptive telemarketing calls, calling consumers on the Do Not Call Registry and using illegal robocalls.

In the first case, the FTC charged Advanced Management Services NW LLC for calling consumers and claiming that they could negotiate with credit card issuers to substantially lower the consumers’ credit card interest rates. The defendants allegedly used prerecorded “robocalls” with messages urging consumers to “press one” to speak with someone, falsely leading many consumers to believe that the calls came from the credit card company. They also charged consumers up to $1,590 and promised a refund if they failed to save at least $2,500 in interest savings.  Instead of arranging for interest rate reductions, the companies merely advised consumers to pay down their credit card debts early to save money on interest. When refunds were requested, the companies either denied the requests or deducted a $199 “nonrefundable fee” from the refund.

The US District Court for the Eastern District of Washington’s settlement order against Advanced Management Services imposes an 8.1 million dollar judgment and prohibits them from engaging in marketing, advertising, promoting, offering for sale, or selling debt relief services. They are also banned from misrepresenting facts about any good or service, selling or using customers’ personal information. These monetary judgments, which represent the total amount consumers lost, will be suspended when the defendants surrender virtually all of their assets.

In another case, the FTC charged Dynamic Financial Group and other defendants with making false claims by offering debt relief services with an up-front fee of up to $1,995. The defendants claimed to help consumers pay off their debts faster and promised a full refund if a consumer did not save a “guaranteed” amount. 

The settlement order from the US District Court for the Northern District of Illinois Easter Division prohibits the defendants from misrepresenting material facts about any good or service, violating the Telemarketing Sales Rule, collecting payments from their debt relief consumers and using or selling customers’ information. In terms of monetary damages, the defendants must pay over 30 million dollars.

While the FTC Telemarketing Sales Rule increased regulation over debt settlement services marketing, it only covers calls consumers make to debt relief firms in response to their advertising. It does not, unfortunately, cover in-person or internet-only sales of debt settlement services. More federal measures are therefore necessary. For example, the Federal government could follow states’, such as Illinois’, examples and require written contracts prior to a debt settlement company receiving a fee. Illinois’ debt settlement law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. Most importantly, it caps the initial fee to $50 and forbids debt settlement companies from unfairly charging customers without having done any work. The settlement fee is capped at 15% of the savings and cannot be charged until the creditor has entered into a legally enforceable agreement with the consumer. Also, debt settlement service providers must warn consumers that debt settlement service is not suited for everyone and that it may have detrimental effects on the consumer’s credit history and credit score. Companies must provide detailed accounting reports, and consumers are entitled to cancel the contract and receive a refund.

 This blog post was coauthored by Ji Won Kim.

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The financial meltdown has led many people to rely on unemployment compensation (UC) more than ever. Only 54,000 jobs were created in May, and the unemployment rate remains high at 9.1%. In this volatile market, it is becoming increasingly important for the government to protect consumers who were hit hardest by the economic crisis – the unemployed.

Forty states including Illinois, California and New York have transitioned paying UC from paper checks to prepaid cards. A prepaid card is a network branded – VISA or MasterCard – card that can be used like a bank debit card without the individual bank account. Delivering UC benefits on prepaid cards allows: (a) state government agencies to eliminate the costs of issuing paper checks; and (b) recipients, who may prefer not to have their employment payments deposited to a bank account because of the problems with overdraft fees, garnishment by debt collectors among others.

While using these sorts of prepaid card systems may offer some benefits, effective consumer protection measures must be implemented to ensure that vulnerable unemployed individuals are protected. In particular, pre-paid card fees and other charges can quickly reduce the amount of UC payments. A study by the National Consumer Law Center (NCLC), found that the typical UC check is only $294 a week. This means that it is crucial for recipients to save every dollar and penny by avoiding unnecessary fees.

The U.S. Department of Labor (DOL) has issued guidance for UC cards which states that money drawn from the federal unemployment fund may not be used to cover a state’s administrative costs related to the payment of UC. 

Yet many UC card systems charge multiple fees, presumably to help defray the state’s administrative costs, in contravention of the DOL’s guidance.  Out of the forty UC prepaid cards currently offered by states:

• 22 cards charge fees at network automated teller machines (ATMs), and all charge out-of-network ATMs, on top of ATM surcharges;
• 24 cards charge ATM balance inquiry fees;
• 24 cards charge denied transaction fees;
• 5 cards charge $10 to $20 overdraft fees;
• 16 cards charge for calls to automated customer service menus; and
• 28 cards charge inactivity fees.

States need to eliminate or reduce these fees. Additionally, every state should offer direct deposit and checks, in case of hardship, as well as prepaid cards in order to allow consumers to choose their preferred method of payment and the types of associated fees that they wish to incur. Currently, only 3 states, Alaska, Florida and West Virginia, offer all three payment options. Perhaps most importantly, states must clearly disclose the fees associated with UC cards on their websites. Addressing these concerns will create a UC prepaid card system that benefits both a state and its unemployed workers.

Ji Won Kim coauthored this article.

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Electronic transfers have increasingly become the preferred method for administering financial services and products, including public benefits. Families who are eligible for public assistance can choose to have their monthly payments deposited directly into a bank account via Electronic Benefit Transfer (EBT). EBT systems have some advantages over traditional check payments because of reduced chances for theft or fraud, quicker availability of funds and the ability to avoid costly check cashing services. Despite the many advantages of EBT systems, there are disadvantages, including the vulnerability of these funds to garnishment as a result of debt collection.

Federal law prohibits creditors from seizing federal assistance payments for programs such as Social Security, Supplemental Income (SSI) and veterans benefits. These laws exist to protect the low-income individuals who desperately need this assistance, however, the unfortunate reality is that banks typically freeze any account for which they receive a garnishment order, even if the account contains funds from Social Security or SSI payments. As a result, many people are left without the ability to access the money they need to provide for basic necessities like food and shelter.

New federal regulations, which became effective May 1^st, will ensure that banks comply with these existing anti-garnishment laws. Under these regulations banks are now required to determine whether or not public assistance funds have been deposited into a beneficiary’s account and, if so, make sure that the account holder has access to those funds. Specifically, after receiving a garnishment order a bank must analyze the account and determine if any exempt funds had been deposited during the previous two months (i.e., a “look-back” period). If so, the bank is required to ensure that the account holder has “full and customary” access to the amount deemed exempt from collection.

Most of the people affected by the new regulations are surviving on minimal income, so it is essential that they be able to access whatever assistance they currently receive. The primary beneficiaries of the federal assistance programs that prohibit garnishment are senior citizens, retired federal employees, veterans, and individuals with disabilities. The new regulation does not cover state benefits such as unemployment insurance or Temporary Assistance for Needy Families (TANF).

The new garnishment regulations are a huge step in the right direction, but they could be strengthened to ensure the greatest protection for individuals by:

•  Defining the “look-back” period as a full sixty-five days instead of two months to account for months with different lengths and holidays;
• Clarifying the meaning of “full and customary” and explicitly stating that accounts with garnishment orders and exempt funds cannot be closed;
• Further protecting account holders from any bank fees triggered by a garnishment order; and
• Protecting funds in special purpose saving accounts such as 529 plans and Individual Development Accounts.

Another option to protect exempt assistance funds from garnishment would be for beneficiaries to participate in an electronic payment card (EPC) system. Different from EBT, EPC systems deposit funds into an account that beneficiaries can access with a branded plastic card. The accounts are not administered by a bank and therefore cannot be frozen for debt collection. Recipients of federal benefits can participate in an EPC program by having their assistance payments loaded on a Direct Express card. This card is branded with a MasterCard logo and can be used in the same ways any debit card could be used, including paying bills online. While the DirectExpress card is a safe, government sponsored card, other EPC systems do raise consumer protection concerns since the cards are not given some of the same legal protections as traditional credit cards. Consumer advocates and legislators alike are pushing for stronger safeguards to make sure that such cards are given full protections as well as ensuring that there are adequate disclosures and no excessive fees.

We applaud the efforts of the participating federal agencies in prioritizing the needs of low-income, elderly and disabled public assistance beneficiaries.

For more information on the EBT and EPC systems please visit The Next Frontier in Public Benefits: Electronic Payment Cards. On this page you will find many resources related to the electronic distribution of public benefits, including a webinar on the topic presented by the Shriver Center. Additional analysis of this topic can be found in the 2011 May/June issue of the Clearinghouse Review.

Kelly Ward coauthored this blog post.

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Congressman Tom Petri (R-WI) and Congresswoman Niki Tsongas (D-MA) introduced a bill that would reform asset limit tests in the Supplemental Security Income (SSI) program on June 2. HR 2103 would enable people with disabilities to open bank accounts, work, and save.

One of the most common policy barriers to asset building and self-sufficiency for people with disabilities are asset limit tests. In general, eligibility for SSI is limited to those who have no more than $2,000 in assets for an individual and $3,000 for a couple. This SSI asset test generally counts all resources deemed accessible to an individual, including defined-contribution retirement accounts, such as 401(k)s and IRAs.

Such asset limits are painfully low, and haven’t been raised since 1989. SSI beneficiaries are allowed little emergency savings, which leaves them vulnerable to predatory lenders and requires them to ultimately rely on greater government assistance. To address this situation the SSI Savers Act of 2011 would:

• Increase asset limits from $2,000 (single) and $3,000 (married) to $5,000 and $7,500 respectively, and index those limits to inflation;

• For recipients younger than 65, exclude retirement accounts, education savings, and individual development accounts from counting against the limit; and

• For recipients 65 and older, allow retirement accounts up to $50,000 (single) and $75,000 (married) and reduce SSI benefits accordingly instead of creating an immediate cut off.

The bill is similar to HR 4937 introduced last session by Representatives Petri and Tsongas.

Click here to take action and send a message to your legislators urging them to support SSI asset limit reform, then follow-up with a call. The switchboard's number is 202.224.3121. The operator can connect you to your legislator's office.

For more information on asset building for people with disabilities, please visit the Sargent Shriver National Center on Poverty Law’s web resource pages to review our webinar series on asset building for people with disabilities: Accessible Assets, Part 1 (November 2009) and Accessible Assets, Part 2 (February 2011).

This blog post was coauthored by Ji Won Kim.

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The Federal Deposit Insurance Corporation (FDIC) continues its campaign against refund anticipation loans (RALs). The agency recently took action against Republic Bank & Trust of Kentucky (Republic) for violating numerous consumer protection laws. Republic, which is the last RAL lender in the country, partners with Liberty Tax and Jackson Hewitt to provide the short-term, high interest loans.

In the midst of the 2011 tax season, FDIC examiners visited 250 tax preparation sites offering Republic backed RALS in 36 different states and found almost half of preparers to be in violation of at least three different consumer protection laws. According to the FDIC, Republic has violated the Truth-in-Lending Act, Gramm-Leach Bliley Act, Federal Trade Commission Act and the Equal Credit Opportunity Act. Specifically the investigation revealed that Republic failed to meet basic lending standards such as properly disclosing the terms of loans and having safeguards in place to protect consumers’ confidential information. Additionally, Republic is being charged with engaging in deceptive and discriminatory practices.

These charges, along with a fine of $2 million in civil penalties, comes after a previous cease and desist order that was filed against Republic by the FDIC earlier this year. This order was filed because the FDIC found RALs to be unsafe and unsound given the Internal Revenue Service’s elimination of the Debt Indicator, a tool lenders used to estimate whether or not a tax filer would receive a refund or have their returns directed toward outstanding debt.

RALs are very profitable for lenders, so Republic is sure to put up a fight. It is our hope that this latest action by the FDIC will be the final nail in the coffin of refund anticipation loans and eliminate these predatory products altogether.

To read more about RALs visit the Shriver Center’s blog, the Shriver Brief.

This blog post was coauthored by Kelly Ward.

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Wider Opportunities for Women (WOW) is hoping to change the way we think about economic security for families. Through its Basic Economic Security Tables (BEST), WOW has created a more accurate poverty measure. 

It is widely agreed that the traditional method for calculating poverty, namely the federal poverty measure, no longer provides an accurate assessment of poverty nor is it relevant to the particular constructs and circumstances of today’s families. The federal poverty measure is a decades-old relic that is based on the price of food. At the time the measure was developed, families of three or more persons spent about 1/3 of their after-tax income on food. However, currently food is only 1/7 of a family's budget, while the costs of housing, child care, and health care, none of which are taken into consideration in the federal poverty measure, have all risen disproportionately to the cost of food. Additionally, the current federal poverty measure uses pre-tax income, but the federal poverty thresholds were established using after-tax income, so while a family may not be officially “poor” they may actually fall below the federal poverty threshold once they pay taxes on their income.

The BEST tables include basic living costs, such as the costs of housing, utilities, child care, food, health care, transportation, personal and household items, and taxes into its calculations for determining its self-sufficiency or poverty thresholds. BEST does not provide for entertainment costs, like cable television or movie tickets, or other “middle-class amenities” like family vacations and dining at restaurants that so many Americans take for granted. WOW also took into consideration different household sizes and types and is working to create measurements that will reflect regional differences in the cost of living. For example, a household without small children will not have to pay for child care, and someone living in an urban community may pay more for housing but less for transportation.

WOW’s goal with BEST is to accurately reflect the particular circumstances of families across the country, something the federal poverty measure fails to do.

Based on BEST’s calculations, a family of four (two adults and two small children) needs to be earning almost $68,000 annually to make ends meet. That means that each worker in the family has to make $16.00 an hour, more than twice the federal minimum hourly wage of $7.25. The federal poverty threshold is far below the BEST calculation at $22,312 annually for a family of four. What makes WOW’s BEST self-sufficiency calculations different than other poverty measures is that it includes savings. Monthly allotments for both retirement and emergency savings are included in its formula so that economic security becomes more than just basic survival. According to WOW, a family of four should be saving about $226 each month ($170 for emergencies and $56 retirement). As WOW correctly notes, true economic stability occurs when families have some savings to support themselves during financial setbacks and to provide for themselves later in life. Building assets, such as savings, is essential to intergenerational security and is the only way families can move up the socioeconomic ladder and break the cycle of poverty.

WOW’s report is just one of the ways in which advocates and policymakers have begun to move toward anti-poverty strategies that are comprehensive and not singularly focused on income. The United States has also been experimenting with alternative methods to measure poverty. The Census Bureau’s Annual Social and Economic Supplement and the newly created  Supplemental Poverty Measure are both used to paint a more accurate picture of poverty in the U.S. but neither have been adopted officially by any federal agencies.

The United Kingdom and other European Union countries take a different approach to economic stability that is based on social inclusion. Social inclusion is a way of addressing poverty beyond the traditional discussion of how much income a person needs to get by. For example, in the U.K. an individual is considered to be “poor” if the individual’s income is below a certain percentage of median income, not if his or her income is below some artificially calculated threshold. Proponents of social inclusion claim that this approach addresses the multiple barriers that prevent many individuals from participating fully in society.

No matter the measurement, calculation, or definition used, poverty and lack of economic opportunity are serious problems in the United States and around the world. By including realistic analysis of current costs and including savings, anti-poverty advocates and researchers, like those at WOW, are providing innovative and useful ways to discuss poverty and develop solutions.

Kelly Ward coauthored this blog post.

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As millions of consumers struggle through one of the most difficult financial times in American history, debt collectors continue to expand their traps. Previously, the Shriver Center reported on the use of fake courts by debt collection companies to highlight the industry’s fraudulent and abusive practices. The latest fraudulent debt collection practice is the repeated reselling of debt that has already been collected upon. 

Consumers Union and the East Bay Community Law Center’s February report on the debt buying industry revealed that debt collection abuses are on the rise. More debt is being bought and sold—industry estimates suggest that in 2005, debt buyers purchased debt portfolios valued at $110 billion, a dramatic increase from just $6 billion in 1993. There has also been an exponential growth of lawsuits against debtors. Debt collection agencies file thousands of lawsuits each month using automated software. Encore Capital Group, one of the largest debt buyers in the nation, filed 245,000 lawsuits in 2009 alone. In New York City, more than 450,000 debt-collection affidavits were filed by debt buyers from January 2007 to July 2008, resulting in over $1.1 billion in judgments and settlements.

Many of these lawsuits are filed without any proof to back up the debt collection company’s claims. Frequently, loan or other debt documentation is lost in during the passage of debts from one seller to another, and debt collectors take advantage of such situations to profit. Some debt collection agencies therefore use “robo-signers” who sign affidavits swearing that they have personally reviewed and verified the debtor’s records without actually having done so. This allows debt collectors to sue on debts that they claim are too old to verify.

Moreover, consumers rarely receive timely notice that they have been sued, which prohibits them from defending themselves. Even with appropriate notice, many of these individuals do not know their rights nor can they afford an attorney to argue on their behalf.

In fact, the Federal Trade Commission (FTC) received more complaints from consumers about debt collectors than about any other industry in 2009. Nearly half of those complaints involved debts that were not owed, amounts in excess of what was actually owed, debts that had been discharged in bankruptcy, or impermissible fees, interests, or expenses.

In its 2011 Fair Debt Collection Practices Act Report, the FTC reported receiving 140,036 debt collection complaints in 2010, an increase from the 119,609 complaints received in 2009. The top three categories of complaints were:

• calling repeatedly or continuously;
• misrepresenting the character, amount, or status of the debt (including demanding a larger payment than is permitted by law); and
• failing to send consumers a statutorily required written notice about the debt and their rights.

The FTC is investigating the debt buying industry and will issue a report with its findings and recommendations. The Consumer Financial Protection Bureau, will also need to utilize is authority to issue rules under the Fair Debt Collection Practice Act (FDCPA) to continue to rein in abusive debt collection practices.

The FTC’s animated video explaining consumer rights regarding debt collection is available on the agency's website and on YouTube.

This blog post was coauthored by Ji Won Kim.

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JPMorgan Chase may begin capping debit card purchases at $100 or even $50. Chase stopped issuing new debit reward cards in November of last year and recently announced that it will end the reward program for existing customers as well. Chase is also testing monthly fees on debit cards and checking accounts in select states. These are just some of the ways that banks and credit card issuers are responding to proposed regulations on interchange fees.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Federal Reserve the authority to regulate the amount of interchange or swipe fees (i.e., the fees that a card issuer can charge retailers for transactions involving their cards) to ensure that they are “reasonable and proportional” to card issuers’ costs. About $16 billion in interchange or “swipe” fees were collected in 2009; averaging around 44 cents per transaction. However, a report issued by the Federal Reserve (Fed) found that the median total processing cost for debit and prepaid card transactions is 11.9 cents per transaction.

Using its new authority, the Fed has proposed rules that would cap interchange fees at 12 cents, starting in July. Since such caps could cost card issuers billions, they are examining potential sources of new revenue. For instance, a cap on interchange fees could cost Chase over $1 billion a year. In addition to getting rid of rewards programs, banks are considering “unbundling,” (i.e., dividing debit card services into components and charging for each of them separately). Some banks are also considering limiting the amount of debit card transactions.

At the same time, banks are also challenging the proposed regulations. TCF filed a lawsuit against the Fed claiming that the proposed regulations are unconstitutional because (1) they apply only to 1% of U.S. banks with assets of $10 billion or more and (2) they constitute an unlawful taking by the government of TCF’s property (i.e., debit card income). Although the U.S. Justice Department sought to dismiss the lawsuit the judge denied this motion.

In Congress, legislators are also concerned and have taken action to delay the proposed rules. Senator Jon Tester (D-MT) introduced the Debit Interchange Fee Act of 2011 (S. 575) and Representative Shelley Capito (R-WV) introduced the Consumer Payment System Protection Act (H.R. 1081). Sen. Tester’s bill would place a two-year delay on the implementation of any regulations and require a study examining the debit interchange payment system, including the costs and benefits of electronic debit card transactions and alternative forms of payment, the structure of the current debit interchange system, and the impact of the proposed rule reducing debit card interchange fees. Rep. Capito’s bill calls for a one-year implementation delay and a study of the various categories of all costs and investments associated with debit card transactions and the impact of any proposed rules. On the other hand, the Oregon State Legislature introduced a Senate joint memorial (SJM 18) urging Congress to proceed with interchange fee limits.

While consumer groups agree that swipe fees should be regulated, they are somewhat divided on how to achieve these objectives. Consumer advocates such as U.S. PIRG, Public Citizen and the Hispanic Institute support the new rule while the Consumer Federation of America has expressed concerns and has asked the Fed to increase the proposed rate cap.

For more information on interchange fees including other countries’ experience with similar debates, see the American Antitrust Institute (AAI)'s March 2010 report, “Electronic Payment Systems and Interchange Fees: Breaking the Log Jam on Solutions to Market Power” by Albert A. Foer.

For more information on the proposed regulations and the potential impact on consumers, see the resource page of the Sargent Shriver National Center on Poverty Law’s recent webinar, The Next Frontier in Public Benefits: Electronic Benefit Cards.

This blog post was coauthored by Ji Won Kim.

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Recently, credit conditions have sparked interest in the concept of state-owned banks. The only state-owned bank in the nation, the Bank of North Dakota or BND, was created almost 100 years ago. But the idea is just now catching on. So far in 2011, Oregon, Washington, and Maryland have introduced bills to allow state-owned banks, joining Illinois, Virginia, Massachusetts and Hawaii, each of which introduced such legislation last year.

Most state and municipal governments have assets in rainy day funds earning interest in Wall Street banks. They also borrow from Wall Street at high interest rates when necessary. In contrast, BND, as the depository for all state tax collections and fees, allows the State of North Dakota to leverage its own funds to finance its operations. In addition to providing interest-free government financing, BND invests strategically in areas that commercial banks avoid, earning a return for the state’s general fund while financing projects believed to be crucial to the state’s economic development. It also acts as a bankers’ bank, providing check-clearing and liquidity services for commercial banks in the state. Instead of being insured by the Federal Deposit Insurance Corporation (FDIC), deposits are guaranteed by the general fund of the State of North Dakota itself and the state’s taxpayers. 

There is a fine line between competing and partnering with private banks. States considering opening state-owned banks would have to wrestle their state funds, which have already been deposited in commercial financial institutions, away from the private sector to capitalize the new state-owned bank. To avoid crowding out the private banking sector, BND was designed to partner with commercial institutions rather than compete with them. For example, BND partners with commercial banks by guaranteeing student loans, business development loans, and local bonds. Loans are typically initiated by a local bank, and BND’s role is to share the risk of the loan and buy down the commercial bank’s interest rate. So far, these types of partnerships have been very successful. According to the Public Banking Institute, North Dakota has more community banks per capita than any other state, suggesting that the presence of a state-owned bank could actually help local community banks. Through such risk-sharing arrangements with the state’s bank, community banks can compete with large multi-state banks.

In hopes of securing affordable financing, small business owners have responded positively to the establishment of state-owned banks similar to BND. According to the Seattle Times, 79% of business owners surveyed by the Main Street Alliance of Washington supported Washington’s bill to allow state-owned banks. In fact, over 35% of the businesses surveyed said they could create additional jobs if their credit needs were met.

Considering North Dakota’s economic performance, especially in recent years, it’s easy to see why other states are thinking about opening state-run banks. Last year, North Dakota boasted the lowest unemployment rate in the country, at 3.8% according to the Bureau of Labor Statistics, and the lowest default rate in the country according to the Public Banking Institute. Since 2000, North Dakota’s economy has grown 56%, over 15% faster than the Gross National Product as a whole. While North Dakota’s relative prosperity cannot be linked either directly or only to BND’s impact, there is something to be said about investing taxpayer money in the public good. Unlike commercial banks whose top priority is to maximize shareholder returns, a state-owned bank can concentrate on financing those endeavors that maximize the returns gained by society as a whole. In this era of justified resentment and hostility toward big banks, state-owned banks may be another part of reforming the U.S.’s financial system.

Melanie Jacobs co-authored this blog post.

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Given the recession, it is not surprising that the number of bank branches in the United States decreased for the first time in 15 years last year. Closures have been particularly prevalent in low-income neighborhoods. As banks closed branches in poorer areas in response to shrinking profit margins, they opened new branches in wealthier ones. Between 2008 and 2010, the number of branches in areas with median household incomes below $50,000 fell by 396. During the same period, 82 new branches were added in neighborhoods where household income was above $100,000. Although the American Bankers’ Association has disputed the statistical significance of this data, citing the fact that there are over 95,000 bank branches nationwide, this does not disprove that there is a pattern.  

For example, Birmingham-based Regions Financial, with a pool of only 2,000 branches, closed 107 branches in low- and moderate-income neighborhoods between 2008 and 2010, but closed only one in a high-income neighborhood. Similarly, Bank of America closed 25 branches in lower-income areas while opening 14 in wealthier areas. Citigroup also closed two branches in the poorest areas they served and opened three in the wealthiest. In fact, Citigroup has made very little effort to hide its intention to focus on wealthy markets. At a Wall Street investor conference last November, Manuel Medina-Mora, head of Global Consumer Business, revealed that Citigroup would expand its retail banking primarily in “affluent segments in major cities.”

Branch closures have been more prevalent in low income neighborhoods despite Community Reinvestment Act regulations in place since 1977, requiring financial institutions to serve poor and middle-class credit markets. These regulations also require financial institutions to notify regulators of branch closings. Federal regulators, however, seem to have turned a blind eye to bank branch closure patterns. 

According to John Taylor, President of the National Community Reinvestment Coalition, “You don’t have to be a statistician to see that there’s a dual financial system in America, one for essentially middle- and high-income consumers, and another one for the people that can least afford it.” If bank branches continue to close in low-income neighborhoods, the options available to low-income families will continue to dwindle.

Even after the economy improves and the consequences of the mortgage bust subside, closures are likely to continue in the long run due to increased use of online and automated banking systems. Bank branches in lower-income neighborhoods will be at particular risk because new regulations, including those limiting overdraft fees, have stripped banks of major revenue sources earned from products marketed towards low-income clients. Without brick-and-mortar branches, efforts to foster a “culture of savings” in low-income neighborhoods may have very little impact. Additionally, bank closures in poor areas will most likely increase the use of predatory lenders (check-cashing centers, payday loan providers and pawnshops).

Thus, if regulators continue to be too timid to confront those banks violating the Community Reinvestment Act, if not in fact, then in spirit, access to mainstream credit will continue to be an uphill battle for poor families.

This post was coauthored by Melanie Jacobs.

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Retail giants such as Wal-Mart, Kmart, and Best Buy are jumping on the bandwagon to provide financial services in their stores to millions of unbanked Americans. These retailers are bringing a $320 billion industry of alternative financial services out of the shadow of the formal bank system under the radar of federal regulators.

A 2009 Federal Deposit Insurance Corporation (FDIC) survey revealed that approximately 30 million American households are either unbanked or underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services. The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops. Susan Ehrlich, President of Financial Services for Kmart, who was recently named to the Federal Reserve’s Consumer Advisory Board, explained that, “if the only viable alternatives for so many consumers are payday lenders and cash-checking operations, there is a lot of room for a national retailer to step in and help them manage their money.” While this seems to be part of the reason why these retail giants are entering the market to provide check cashing services, the main incentive seems to be the hopes that the customer will use some of the cash in the store.

Kmart, for example, is piloting financial centers where consumers can cash checks and pay bills in 23 Kmart stores in Illinois, Los Angeles, Puerto Rico, and Wisconsin. At the beginning of the recession, Kmart reintroduced a layaway program in its stores at Christmastime, and the program was so successful that Kmart began offering it year-round.

Another retailer, Best Buy, has also entered this market, launching a bill-payment service in a handful of markets. According to the FDIC’s survey, while many of the unbanked think that they don't make enough money to warrant a bank account, others simply don't trust banks or come from cash-based cultures. Best Buy’s bill-payment kiosks, operated by Tio Networks, cater to Hispanic shoppers who are often wary of banks. Despite this, many are willing to sign up for complicated cell phone plans at Best Buy, and executives say it was a short step to paying the bills in the store as well.

The biggest player of all retailers offering financial services is Wal-Mart. According to a September 2010 US Banker story, Wal-Mart has MoneyCenters in about 40% of its nearly 3,000 SuperCenters. Through economies of scale, Wal-Mart is able to offer lower fees—$3 for check cashing and another $3 for prepaid cards—than other smaller players that have dominated the market in the past.

Wal-Mart’s presence in financial services is not limited to its own stores. The company’s Sam’s Club subsidiary has a partnership with Superior Financial Group, a nonbank lender, to offer online loans of up to $25,000 to small-business owners at a 7.5% interest rate over 10 years. Moreover, Wal-Mart recently acquired an equity interest in Green Dot, a marketer of prepaid cards that filed an application to be a bank holding company after acquiring Bonneville Bancorp of Provo, Utah. Wal-Mart is also partnering with Jackson Hewitt to offer tax filing advice to in-store consumers.

As more and more retailers are attempting to take advantage of the number of unbanked and underbanked consumers, it is important to note that, while these retailers may offer less expensive, convenient alternatives to check cashiers and payday lenders, ultimately these services will not bring such consumers into the mainstream financial services industry. Instead, programs and products such as Bank On are required. Bank On San Francisco—the first of its kind in America—brought together city leaders, local community organizations, and 15 banks and credit unions to promote available financial products and services to bank the unbanked. As a result, it brought more than 70,000 previously unbanked San Franciscans to the financial mainstream within five years. Now nearly 70 cities/states/municipalities use the Bank On model to provide access to mainstream financial services for low-income consumers. Moreover, the President’s FY 2011 budget proposal included funding for a Bank On USA Initiative, which the U.S. Treasury has begun to develop. This initiative would promote access to affordable and appropriate financial services and basic consumer credit products for underserved households. To ensure that such access occurs we must talk to Congress and ask them to include funding for the Bank On USA initiative in FY 2011.

This article was coauthored by Ji Won Kim.

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In the midst of this year’s tax season, the Federal Deposit Insurance Corporation (FDIC) ordered Republic Bank to stop providing refund anticipation loans (RALs). Republic Bank funds RALs for Jackson Hewitt, the second largest RAL provider in the U.S., as well as Liberty Tax.

2010 was bad year for RALs and 2011 isn’t looking any better. Last May, JPMorgan Chase voluntarily left the RAL market due to concerns with growing regulation and scrutiny and stigma associated with RALs. In August, the Internal Revenue Service announced that it would stop providing tax preparation sites with debt indicators, the tool used to determine whether consumers would be receiving a refund, which RAL providers use to underwrite the loans. Then in December, the Office of the Comptroller of the Currency prohibited H&R Block’s lending partner, HSBC, from providing RALs, knocking H&R Block out of the 2011 RAL tax season.

Jackson Hewitt’s stock jumped when its major competitor, H&R Block was knocked out of the market, however, its stock dropped when the FDIC’s cease-and-desist order against its bank partner was issued.

A report recently released by the U.S. Department of the Treasury confirmed what consumer advocates have known all along: the primary markets for RALs are impoverished communities. RALs are concentrated in the country’s poorest areas, with 46.8 percent of RALs in only 10 percent of the nation’s zip codes. The majority of RAL users can be classified as “working poor,” with median adjusted gross income for RAL users at less than $20,000.

Republic has the right to request an administrative hearing to contest the FDIC’s orders in the next 60 days, and a final notice, if reached, would not be issued until 90 days after the administrative hearing. With the FDIC’s action against Republic Bank, the two remaining RAL lenders, Ohio Valley Bancorp and River City Bancorp, are undoubtedly fearful for their future. They, as well as consumer advocates, working to end these types of abusive loans will be watching to see what Republic does next.

This post was coauthored by Kelly Ward.

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People with disabilities have lower employment levels, report lower levels of savings, and are more likely to experience poverty than those without disabilities. The inextricable connection between disability and poverty requires special attention to developing policies and programs to give people the ability to save, acquire assets, and permanently escape poverty.

An important part of understanding the link between disability and poverty is looking at employment issues. Among working-age people with a disability, just under half reported being employed at some time in 2005. Employment drops as the severity of the disability increases.

Lack of employment and underemployment mean that people with disabilities are more likely to experience income poverty. In “Long-Term Poverty and Disability Among Working-Age Adults,” Peiyun She and Gina A. Livermore report that almost half of adults living below the poverty line have a disability. People with disabilities account for a larger share of those experiencing income poverty than people in any single minority or ethnic group, or all of those groups combined. Of course, people of all racial and ethnic groups experience disability; the point is that disparities between those with disabilities and those without deserve the same kind of attention as other forms of inequality, especially in antipoverty advocacy.

One of the most common and effective asset building programs is Individual Development Accounts (or IDAs). An IDA is a matched savings account that allows low income families to save and build assets. IDAs that are federally funded through the Assets for Independence Program (AFI) can be used to save for a home, education or start a small business. Though funded by the government, AFI IDAs are administered by local nonprofits who partner with financial institutions to actually deliver the program. These IDAs are a powerful tool for people with disabilities because people who receive Supplemental Security Income (SSI) can participate in IDA programs without losing their benefits.

It should be noted, however, that AFI IDAs have their limitations. For example, often times IDA programs have an “earned” income requirement from employment. So a person whose only income is from SSI could not save into an IDA since they would not meet the earned income requirement. Another limitation of AFI IDAs is that assistive technology purchases are not considered a “qualified” purpose.

In order to address these shortcomings, the Assets for Independence Reauthorization Act of 2010 (H.R. 6354) was introduced last year. This legislation proposed reauthorizing the Assets for Independence Act to provide for operating new programs and renewing existing programs, and enhancing program flexibility. In addition to raising the authorization limit from $25 million to $75 million, it aimed to expand eligible education costs to include costs of preparatory courses for professional licensing or education examination, and room and board and transportation costs including commuting expenses, necessary to enable attendance. It also proposed reforming the adjusted gross income test by expanding eligibility standards to include 80% of the median area income.

Despite the failure to pass H.R. 6354, advocates are developing various methods to create a better environment for people with disabilities to build assets and achieve self-sufficiency. In November 2009, the Shriver Center hosted its first webinar on bringing together the disability and asset-building communities. Moreover, the Shriver Center published an article by Karen K. Harris and Hannah Weinberger-Divack in Clearinghouse Review, Accessible Assets: Bringing Together the Disability and Asset-Building Communities,  that examines the barriers and reformative measures necessary to improve asset building for people with disabilities.

On February 17, 2011, the Shriver Center and the Abilities Fund will host a free follow-up webinar on recent asset development strategies for people with disabilities. Register here to learn about asset development strategies and innovative new programs for people with disabilities.

This article was coauthored by Ji Won Kim.

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Experian aims to bring millions of Americans into the mainstream credit market by incorporating rental data into credit reports. RentBureau, which Experian acquired last June, is the largest collector of rental payment data. It collects and reports rental data from property management companies nationwide so lessors can screen potential tenants. Experian’s announcement earlier this month that it will include positive rental data is being billed as a new way for the estimated 50 million unbanked consumers to build credit. 

Credit scores have increasingly become a key factor in families’ ability to acquire assets. Credit scores are used to determine whether or not a family can get a loan to buy a home or a car, start a business, fund post-secondary education, or even obtain a credit card. Employers are also starting to use credit scores in the hiring process to screen applicants. Thus, a thin credit file or a low credit score can prevent families from acquiring the assets that lead to economic mobility.

For these reasons, consumer advocates, credit analysts, and lenders have been exploring different options for calculating credit-worthiness. The reporting of nontraditional or alternative credit data has frequently been suggested as one of these options. Since traditional data, such as credit cards, mortgages, and student loans, are not typically available for lower income families, the use of nontraditional data, such as utility bills, mobile phone bills, and rental payments, is viewed as a means of incorporating these individuals into the credit reporting industry. For example, one third of people in the United States are renters and now, like mortgage owners, their payment histories will affect their credit scores.

Yet, there is much debate as to whether the inclusion of nontraditional credit data will be helpful or harmful to low-income and credit-thin families. Some argue that such reporting will catapult previously excluded families into the mainstream lending market, allowing them to access the credit needed to build assets. Others argue that alternative reporting could prove to be harmful and be used to further marginalize low-income families. If, for example, a family must choose between paying for groceries or paying the light bill most families will choose groceries, thereby negatively affecting their credit scores. The Shriver Center addressed this issue in-depth in the Clearinghouse Review article,Alternative Credit Data: To Report or Not to Report, That is the Question, and facilitated a discussion of industry experts in a webinar, Credit Scoring and the Un-Scored: Alternative Credit Data.

Although, Experian’s announcement highlights the fact that its use of positive rental data in its calculation of consumers’ FICO scores “will … help many renters who are looking for ways to rebuild their credit scores due to financial hardships such as a foreclosure or a bankruptcy,” it omits the fact that in 2012 Experian will also begin reporting negative data (i.e., missed payments). Reporting such negative data will most certainly push those same families struggling to recover from foreclosure and bankruptcy out of their rental homes.

To be financially stable members of the U.S. economy, families must have access to credit. It remains to be seen whether reporting alternative data is the appropriate way to ensure low-income and asset-poor families’ successful entry into the mainstream credit industry. One thing for certain is that Experian’s so-called concern for those ”recovering from financial hardship” is not all that it seems. 

Kelly Ward coauthored this blog post.

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Over the past 20 years, electronic deposit and electronic benefit transfers (EBT) have replaced paper checks for the delivery of public assistance benefits. EBT systems deliver government benefits by allowing recipients to use a plastic card to access their benefits through ATMs and point of sale (POS) devices located in select retail outlets (e.g., the LINK card in Illinois is the card for SNAP funds). Recently, more and more states are transitioning away from EBTs and toward the use of electronic payment cards (EPCs) – i.e., prepaid Visa or MasterCard branded cards. In 2008, The U.S. Government Accountability Office (GAO) released a report to highlight this trend. In addition, the U.S. Treasury recently finalized a new regulation that requires federal public benefit payments to be delivered via direct deposit or Direct Express Debit MasterCard, a form of EPC.

Both EBT and EPC systems provide improved delivery in that they avoid delays due to slow mail, mail theft and long waiting lines to pick up benefit checks. Using EPCs particularly decreases the stigma associated with being recognized as a public assistance beneficiary because EPCs have the appearance of commercially recognized credit cards. Moreover, transitioning to an EPC system allows beneficiaries to use their cards virtually anywhere that a MasterCard or VISA logo is displayed.

Although EPC systems appear to be an effective and efficient way to distribute benefits, there are potential negative ramifications for low-income families. For instance, mandatory use of EPCs, while easing benefit delivery, may pose difficulties for people with special needs. It also requires regulations to limit associated fees and education and training on the use of EPCs for the beneficiaries unfamiliar with debit card systems. Most importantly, effective consumer protection measures must be implemented because benefit recipients are more likely than general consumers to need basic consumer protections. Public benefit recipients are already living at the margins and cannot afford to suffer out-of-pocket losses from potential consumer fraud or other problems that may arise under the EPC systems.  

In particular, the Electronic Funds Transfer Act and Regulations (Regulation E), which provide several consumer protections through error resolution and disclosure regulations, do not cover state-based EPC programs and privately issued prepaid cards receiving benefits through direct deposit. In order to address this lack of sufficient consumer protections, Congressman Sandy Levin and Congressman Jim McDermott introduced a Benefit Card Fairness Act (H.B. 4552) last year. This bill will be reintroduced in the new session in attempt to repeal the exemption of electronic benefit transfer systems established by a government agency.

Last month, Treasury also announced the interim final rule on the Federal Government Participation on the Automated Clearing House. This rule permits the delivery of federal payments to prepaid cards that meet particular standards and extends Regulation E coverage from payroll prepaid cards to other prepaid cards. It also prohibits card issuers from offering line of credits or loan features that trigger automatic repayment from the prepaid card account. Because using government issued cards such as the Direct Express card is different than using direct deposit to general prepaid cards, beneficiaries must be aware of the consumer protection issues that arise with respect to prepaid cards.

On February 3, 2011, the Shriver Center, the National Consumer Law Center (NCLC) and Consumers Union will host a free webinar to discuss the differences between various electronic benefit payment methods and investigate the implications of the new trend toward electronic payment cards (EPCs) for low-income families. Readers are encouraged to learn more and join an in-depth discussion of the new regulation and the consumer protection issues surrounding electronic benefit cards, by attending the upcoming webinar.

Ji Won Kim co-authored this post.

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This tax season one of the largest tax preparation sites, H&R Block, will not be offering refund anticipation loans (RALs) thanks to the Office of Comptroller of the Currency (OCC). The OCC has prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever.

H&R Block was the leader in providing these loans, and in 2010 H&R Block collected about $146 million in loan related fees from tax payers. Until recently HSBC Bank has been the financial backer for the H&R Block RALs. In August of last year, however, the Internal Revenue Service (IRS) announced that it would no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to underwrite RALs. As a result, HSBC, which began exiting the RAL business in 2007, attempted to break its long-term 2005 contract with H&R Block, its only remaining RAL customer.

H&R Block, on the other hand, contended that RALs can be done without the IRS debt indicator and filed suit against HSBC seeking to require the bank to perform its contractual obligations. Although the parties reached an agreement wherein HSBC would provide the loans for one more year, the OCC intervened and issued a regulatory directive prohibiting HSBC from funding the loans, leaving H&R Block with no financial partner to provide both RALs and some of its refund anticipation checks, "RACs." H&R Block shares also went down 7% as a result of this news.

Last tax season, H&R Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner. In December 2010, Jackson Hewitt reached agreement with Republic Bank & Trust Co., a unit of Republic Bancorp Inc. to back some, but not all, of its RAL program. Upon this announcement Jackson Hewitt shares went up 35%.

H&R Block will continue to offer RACs which, though not an instant refund, provide a check to the tax filer in 7 to 10 days. In the meantime, its competitor, Jackson Hewitt, will be seeking to lure former H&R Block customers away. 

As discussed in previous Shriver blogs, this is just the latest RAL repercussion. It seems that consumer advocates’ and financial regulators’ continual push for stricter guidelines and policies regarding RALs have paid off. Today, with quick turnaround from electronic filing and direct deposit, many taxpayers can likely receive their tax returns within ten business days, reducing the need for RALs. Now is the time to demand that the OCC protect low=income families and prohibit all RALs.

This article was coauthored by Kelly Ward.

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The number of people living in poverty in 2009 was the largest in the 51 years for which poverty estimates are available. There were 43.6 million people in poverty in 2009, up from 39.8 million in 2008, and the nation's official poverty rate in 2009 was 14.3 percent, up from 13.2 percent in 2008. And the number of people experiencing asset poverty is likely much higher.

The federal government uses tax policy as one tool to encourage American families to build assets, such as savings and business ownership, that help families survive financial crises and strengthen the national economy. The U.S.’s current asset-building strategy focuses heavily on tax incentives. In 2009, close to $400 billion were spent on promoting asset growth, with the vast majority being through tax expenditures. Only $37 billion were spent on direct budget outlays, meaning that less than one percent of overall federal expenditures went to directly subsidize asset-building activities. Unfortunately, this tax-based approach to asset building disproportionately benefits individuals who already own significant assets.

A recent study of asset-building expenditures for 2009, Upside Down by the Corporation for Enterprise Development (CFED), reveals that America’s current asset-building strategy does little to help low-income families build assets. According to the CFED study, families that make less than $19,000 a year received only 0.04 percent of the benefits from asset-building tax expenditures in 2009, averaging out to about $5 per taxpayer. In contrast, those with incomes higher than $160,000 received an average of $5,109 per taxpayer. In order to reduce the number of Americans in poverty, federal and state asset-building tax policies need to target those most in need, not those who already have.

Take for example policies aimed at promoting homeownership. The federal government directly spends less than 1percent of the money used to encourage homeownership on financial support for housing subsidies and assistance, but spends 99 percent on tax expenditures that overwhelmingly benefit individuals with higher incomes. In 2009, 80 percent of the value of mortgage and property tax deductions went to individuals earning more than $80,000 a year. In fact, the government actually ends up discouraging low-income families from owning homes by making rental assistance more available than mortgage assistance.

The current debate over tax cuts for the wealthiest taxpayers is another reflection of tax expenditures that are upside down. As Congress seeks to reach compromise over these tax policies, we as Americans need to call attention to the fact that a continuation of current policies will further increase the ever-widening wealth gap in the United States. At some point a more equitable distribution of tax expenditures is needed to ensure that low- and middle-income families are not left in poverty while the more affluent continue to accumulate more and more benefits. 

This article was coauthored by Kelly Ward.

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As if debt collectors preying on desperate consumers’ fears and financial troubles were not enough, debt collection companies have begun to actually take the law into their own hands. 

Unicredit, a debt collection company in Erie, Pennsylvania, used fake court proceedings to deceive, mislead or frighten consumers into making payments or surrendering valuables without following the lawful procedures for debt collection. Although there have been cases in which debt collectors threatened arrests if debtors fail to pay their debt, this might be the first time a debt collection company has been accused of setting up a phony court.

First, Unicredit filed legal judgments against debtors in improper venues. Although Pennsylvania rules require judgments to be filed in the debtor’s district court or where the debt was incurred, Unicredit filed many of its cases at District Judge DiPaolo’s Office, located in the same office complex as Unicredit.

Next, according to Pennsylvania’s Attorney General, consumers received letters that were often hand-delivered by individuals dressed like sheriff deputies, implying that consumers would be taken into custody if they failed to appear at the fake court. Specifically, these subpoenas summoned consumers to an office in Erie, which included a room referred by Unicredit employees as “the courtroom.” 

The “court room” was located at the Unicredit “Debt Resolution Center.” This space was equipped with furniture and decorations similar to those used in actual court offices, including “a raised bench area where a judge would be seated; two tables and chairs in front of the ‘bench’ for attorneys and defendants; a simulated witness stand; seating for spectators; and legal books on bookshelves.” It is reported that during some proceedings, an individual dressed in black was seated where one would expect to see a judge. These bogus court proceedings were used to intimidate consumers into providing their bank account information and giving up vehicle titles and other assets.

The Pennsylvania Attorney General’s Office spokesman said that 370 affected consumers have been identified in Erie County Court records thus far. Two lawyers are believed to have been involved in these fraudulent, misleading practices. Erie County Chief Deputy Sheriff Jon Habursky told AOL News that Unicredit seems to have targeted the elderly and the sickly.

In October, the Attorney General’s Bureau of Consumer Protection filed a lawsuit against Unicredit America, Inc., and a petition for special and preliminary injunction, asking the court to prohibit the company from engaging in any debt collection and immediately stop all fake hearings or depositions.

At the first hearing, Unicredit agreed to put an end the tactics at the center of the government’s complaint and to stop sending letters threatening consumers with arrest. Judge Michael E. Dunlavey also ordered the mock courtroom to be torn down within 30 days. At the second hearing the judge ordered the entire Unicredit operation closed in order to reinforce the actions of the Attorney General’s office.

As discussed in a previous blog, Illinois recently passed the Debt Settlement Consumer Protection Act (Public Act 96-1420). The new law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. The Illinois Department of Financial and Professional Regulation has accepted public comments on proposed rules implementing the law and is expected to announce the final rule within the next few months. This law will help protect Illinois residents as they consider whether or not to utilize a debt settlement company and does not include any new protections for consumers regarding debt collection practices. Given, however, the new debt collectors’ new schemes, it may be time to consider more regulation in this area as well.

This article was coauthored by Ji Won Kim.

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On October 6^th the Office of Thrift Supervision (OTS) issued a supervisory directive to Iowa-based MetaBank Financial stating that because the bank was guilty of engaging in unfair and deceptive practices it will be required to obtain written approval to enter into any new third-party relationship agreements.

Last tax season, MetaBank began issuing refund anticipation loans (RALs) for Jackson Hewitt. RALs are short-term, high-interest-rate bank loans sold through tax preparation sites like Jackson Hewitt that are heavily marketed and sold in low-income communities. RALs provide taxpayers an immediate advance on their anticipated tax refund, however, they have interest rates ranging from 50% for a $10,000 RAL to 500% for a $300 RAL. As discussed in previous blogs, these loans are particularly toxic since they are targeted to low-income and minority communities.

Under the OTS directive, MetaBank will need prior written approval to:

• Enter into any new third party relationship agreements for any credit product, deposit product (including prepaid access), or automatic teller machine or to materially amend any existing agreements or publicly announce any new third party relationship agreements;
• Originate, directly or through a third party, income tax refund anticipation loans or other loans where the expected source of repayment is a tax refund; and
• Offer an income tax refund transfer processing service directly or through any third party during the 2011 tax season.

This action is the latest in a series of regulatory agencies’ actions against RALs. In 2008, the Internal Revenue Service (IRS) and the U.S. Treasury Department issued an advance notice of proposed rulemaking regarding the marketing of RALs. Although no final rules were issued at that time, in January of this year the IRS announced it was creating a Task Force to study RALs.  

In February the Office of the Comptroller of the Currency (OCC) issued new guidance on the delivery of RALs. In addition to this new guidance, both the OCC and the Federal Deposit Insurance Corporation have recently issued cease and desist orders to a few banks funding RALs. Finally, in August, the IRS announced that it would no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to underwrite RALs. As the IRS correctly noted, “refund anticipation loans are often targeted at lower-income taxpayers ... [but] with e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.” 

This recent IRS decision may be one reason why some banks are refusing to fund RALs despite the fact that they have existing contracts to fund them. In October H&R Block filed suit against HSBC for breach of contract after HSBC stopped funding H&R Block’s RAL product. HSBC cited the IRS decision to eliminate the debt indicator as the purported reason for breaching the contract. If HSBC wins, then other banks may follow suit and withdraw from the market using the IRS’ decision as justification.

The Shriver Center applauds the OTS for its action; however, while RALs still remain in the marketplace, we concur with consumer advocates calling for supervised banks to underwrite RALs based on the borrower’s ability to repay the loan taking into consideration their income, assets, and debt-to-income ratio. Actions such as these by the FDIC, OTS, OCC and the IRS signify that regulators are attuned to the dangers of RALs and are moving closer to banning the product entirely. We can hardly wait for that day.

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The recent economic crisis has placed numerous Americans in vulnerable positions and consumer debt has risen to historic levels. As a result, deep concerns have arisen about the rapidly growing debt settlement services industry, particularly the industry’s pervasive practice of taking advantage of desperate consumers’ fears and financial troubles.

Debt settlement companies claim that they will negotiate with consumers’ creditors to drastically cut down their debts and lift them out of despair. In reality, however, enrolling in a debt settlement service often leaves consumers owing more than before, facing bankruptcy, and with ruined credit scores. These flawed practices are even more damaging to people on the lower rungs of the economic ladder, which are the very people that debt settlement services target. The National Consumer Law Center reports that certain companies work only with “insolvent customers.”

The Government Accountability Office's (GAO’s) recent investigation of the debt settlement industry revealed the appalling situations consumers face. GAO posed as fictitious customers and approached 20 companies across America. Seventeen of the companies said they collect upfront fees, and nearly all of them advised consumers to stop paying their creditors. Furthermore, some companies engaged in fraudulent practices such as claiming high success rates--despite the fact that the Federal Trade Commission (FTC) found that less than 10 percent of consumers successfully complete debt settlement programs.  

Many states across the country are taking action against debt settlement services that trick vulnerable consumers into unfair arrangements. Some states have implemented their own laws in response to the lack of federal initiative. Virginia enacted legislation that provides detailed requirements for debt settlement operations, and Arkansas and Wyoming chose to prohibit for-profit debt settlement companies in their states altogether.

Illinois has recently joined the ranks of other forward-minded states by passing the Debt Settlement Consumer Protection Act (Public Act 96-1420) this summer. The new law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. Most importantly, the new law caps the initial fee to $50 and forbids debt settlement companies from unfairly charging customers without having done any work. The settlement fee is capped at 15% of the savings and cannot be charged until the creditor has entered into a legally enforceable agreement with the consumer. Also, debt settlement service providers must warn consumers that debt settlement service is not suited for everyone and that it may have detrimental effects on the consumer’s credit history and credit score. Finally, companies must provide detailed accounting reports, and consumers are entitled to cancel the contract and receive a refund. The Illinois Department of Financial and Professional Regulation has accepted public comments on proposed rules implementing the law and is expected to announce the final rule within the next few months.

In addition to the independent state efforts, 41 state attorneys general teamed up to support the FTC’s new rule governing the debt relief industry. In July 2010, the FTC announced the final Telemarketing Sales Rule.The new rule includes important provisions that ban advance fees, require disclosures, and prohibit misrepresentations. The advance fee ban provision will go into effect on October 27, 2010, and all other provisions went into effect last week on September 27, 2010.

While the new FTC regulation covers calls consumers make to the debt relief service firms in response to their advertising, it unfortunately does not cover in-person or internet-only sales of debt settlement services. Therefore, more federal measures are necessary, including passage of the Debt Settlement Protection Act (H.R. 5387 and S. 3264). It is time for more action in Washington to save countless American consumers from suffering from consumer debt settlement companies.

This article was coauthored by Ji Won Kim.

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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 lost its RAL partner when Santa Barbara Bank & Trust was forced to stop selling 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 lost its RAL partner when Santa Barbara Bank & Trust was forced to stop selling 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.

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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