The Secure Choice Savings Program (SB 2758): Ensuring All Illinoisans Retire in Dignity

Piggy bankDuring the State of the Union address last week, President Obama raised the profile of the nation’s looming retirement insecurity crisis with the announcement of a new starter retirement savings account: the myRA. Nationally, 38 million working-age households (45%) do not own any retirement account assets

Treasury Initiative--myRA

The myRA program is designed for savers who either do not have access to an employer-sponsored retirement savings plan or are looking to supplement a current plan. The Roth IRA product will be offered on a pilot basis through the Treasury Department. Employers will have the option to provide myRAs to employees, and employees must opt-in through an online account. On payday, employers will send a direct deposit to each participating employee’s myRa. The myRa will offer a very modest variable rate of interest (currently less than three percent) tied to the Government Securities Investment Fund in the Thrift Savings Plan rate and will be guaranteed against loss of principal by the government. There is no choice of other investment options, and participants will be required to roll over the myRA into a private market Roth IRA once they accumulate $15,000 or after 30 years. MyRAs can be used at multiple employers and are portable. Learn more at www.treasurydirect.gov/readysavegrow or (800) 553-2663.

While the myRA program is a welcome first step in acknowledging the widespread problem of unequal access to employer-based retirement tools, the President realizes that much more needs to be done to ensure universal access to retirement savings tools for all workers and for those with poor financial literacy. That is why in addition to introducing the myRA product, the President also called on Congress to act to “offer every American access to an automatic IRA on the job, so they can save at work just like everybody in this chamber can.” President Obama has consistently included in his yearly budget a program that would require employers in business for at least two years that have more than 10 employees to offer an automatic IRA option to employees.

Illinois’s Solution--The Secure Choice Savings Program

The President’s State of the Union endorsement of employer-based automatic enrollment IRAs came just as Illinois advocates and Senator Daniel Biss filed a bill for a statewide automatic retirement savings plan, the Secure Choice Savings Program (SB 2758). The program gives every worker in Illinois access to a portable retirement savings account through his or her employer and the opportunity to build a financially secure future.

The Secure Choice Savings Program is a safe, easy, and affordable way to help hardworking Illinoisans save for retirement—and it’s sorely needed. According to a report by the Illinois Asset Building Group and Woodstock Institute, 2.5 million Illinoisans and 43.8% of private sector Illinois workers do not have access to an employment-based retirement plan. As a result, across age groups, the median amount of money in retirement savings accounts is only $3,000. That means more than one-third of all Illinois households will rely on Social Security benefits, which average only $1,152 a month, for at least 90% of their retirement income. When these workers retire, they will be retiring into poverty, where they will have to choose between basic needs like paying for their prescription drugs or keeping the lights on.

Unlike the president’s myRA program, the Secure Choice Savings Program provides universal coverage and extremely simple enrollment procedures. It requires all employers who do not offer a retirement savings tools to automatically enroll their employees in the program. Studies show that automatic enrollment goes a long way toward closing the retirement security gap; employees also overwhelmingly endorse automatic enrollment procedures, particularly because they are so easy and make a daunting financial task extremely simple. With automatic enrollment, participation in 401(k)s increased from 75% to 90 or 95% of newly eligible employees. That change was highest among lower income and minority workers.

Under the Secure Choice Savings Program, employees can choose to opt-out of the program at any time, as well as choose a contribution level (default is 3%) and up to four investment options. By pooling all assets into a single fund, managed by the Illinois Treasurer and a qualified board, participants will benefit from low fees and competitive investment performance. The program allows workers to save competitively for retirement without having to make complex and time-consuming investment decisions. Learn more about the details of the Secure Choice Savings Program here. The text of SB 2758 can be found here.

As the President has said, without a universal solution to our looming retirement crisis, Illinoisans face a great and increasing risk of retiring into poverty. The Secure Choice Savings Program is the secure choice to ensure Illinoisans’ secure futures.

Help the Shriver Center and the Illinois Asset Building Group (IABG) along with the Woodstock Institute, Heartland Alliance, AARP, SEIU and many other organizations build the movement by supporting efforts to get the Secure Choice Savings Program passed! Take Action Now: Add your organization, financial institution or business to our list of supporters.


Federal Financial Security Credit Act

This blog post was written by Karen K. Harris, who was formerly Director of Asset Opportunity at the Shriver Center and is now a guest contributor to The Shriver Brief.

When the federal government shut down recently, the 16-day period showcased more than just congressional dysfunction—it also exposed the serious saving problems many Americans are facing. During the shutdown, over 8,200 furloughed federal workers were forced to make hardship withdrawals from their retirement accounts. They are not alone—increasingly, families that have exhausted all other options are now dipping into their retirement savings in order to make ends meet. What used to be a last resort has now become a common way to survive. Unfortunately, millions of low-income Americans will find themselves in this situation, where they will not be able to live off of savings during retirement, because they are spending those savings now.

Although the federal government spends $158 billion annually on tax expenditures to encourage retirement savings, only about $1 billion rewards savings by low-income families through the Saver’s Credit. Since the credit is not refundable, meaning that you cannot claim it if you don’t owe taxes, millions of low-income Americans do not benefit from it. Moreover, putting away savings in retirement accounts that have penalties for early withdrawal is problematic for low-income families. 

The Financial Security Credit Act of 2013 would offer a way for low-income families to save for a variety of needs and still receive advantageous tax benefits. Specifically, the bill provides for a 50-percent match on up to $1,000 of savings for single people who earn less than $41,625 and couples who earn less than $55,500. These savings could be held in the form of a retirement account, an education savings account, U.S. savings bonds, CDs, or even some savings accounts. To keep the match of up to $500, families would need to hold onto the savings for at least eight months.

Given that nearly half (43.9%) of households are liquid asset poor, meaning that they lack the savings to cover basic expenses for three months if unemployment, a medical emergency, or other crisis leads to a loss of stable income (approximately $5,763 for a family of four in 2012), the proposed bill would provide a mechanism for increasing many households’ financial stability. Assets such as cash, bank and other interest-earning accounts and assets, and equity in stocks, mutual funds and retirement accounts (IRAs, 401(k)s and KEOGH accounts) will enable families to weather an economic setback, as well as become economically mobile.

Increasing personal savings must be a policy priority if we want a strong economy and country.  The government shutdown is a prime example of how vulnerable many Americans are without robust personal savings. Families should be encouraged to build up savings that can be tapped strategically, in order to maximize economic opportunity, security, and resiliency. By supporting H.R. 2917, we can ensure that the tax code helps us achieve this important public policy objective and reversing the current skewed federal spending on savings support for the wealthy. 

 

Consumer Financial Protection Bureau Promoting Financial Literacy

Arguably the most important way to promote asset building is through education: specifically financial literacy education. In an age when creating a financially stable life requires actively engaging in a range of complex financial activities, it seems obvious that financial education should come standard with public education. Topics such as banking, credit, loans, taxes, insurance, retirement savings, and investing are difficult to understand. Yet, financial education is not generally taught in schools, and a majority of Americans need to increase their level of financial literacy

For example, according to a 2012 National Financial Capability Study, only 39% of respondents scored better than 80% on a financial literacy quiz. With such an obvious need for financial education, where do we currently stand? A new report describes the Consumer Financial Protection Bureau’s (CFPB) efforts in promoting financial literacy.

Since its inception in 2010, CFPB has developed and implemented multiple programs to promote financial literacy. 

CFPB’s primary strategy is to provide financial information during moments when consumers make big life decisions, such as going to college, retiring, and buying a home. For example, CFPB has developed “Ask CFPB,” an incredibly useful tool, which has nearly 1,000 questions and answers on a wide range of financial topics from mortgages to student loans to credit. Another tool CFPB has developed is “Paying for College,” a suite of online tools for students and families evaluating their higher education financing options when comparing college costs, shopping for financial aid and assessing repayment options. CFPB is also in the process of developing a toolkit for social service organizations to help them incorporate money management and financial literacy information and tools into their work with clients, a workplace financial education program to be shared with other government agencies and states and private sector employers, and a financial education program for new recruits.

Similarly, CFPB is working with other agencies to disseminate financial education materials such as handouts to Volunteer Income Tax Assistance sites and a module for the Federal Deposit Insurance Corporation money smart curriculum focused on older Americans

Another strategy that CFPB is experimenting with is promoting financial literacy through social media. This year CFPB hosted a Twitter chat in order to encourage parents to talk to their children about finances. CFPB believes that K-12 students should be taught financial education and issued an in-depth whitepaper this past April with their recommendations.

The range of financial literacy efforts that CFPB has pulled together in such a short period of time shows its effectiveness and efficiency.  As the agency becomes more firmly established within our government, hopefully it will enhance the overall level of financial literacy in America. 

Veterans and Servicemembers Need More Consumer Protections

Veteran saverIn 2006, a Department of Defense report examined how payday and other predatory lenders target servicemembers. The report revealed massive growth in the number of payday loan stores in zip codes adjacent to military bases (from 8,000 stores in 1999 to 23,000 in 2005). The report also found that 17% of servicemembers took out at least one payday loan, a much higher rate of payday loan use compared to the general population. To protect servicemembers from such abusive lending practices, in 2007 Congress passed the Military Lending Act (MLA), which capped annual interest rates on payday and auto-title loans to servicemembers at 36%. While the law has benefited numerous servicemembers, given the new types of predatory products and practices that have developed since its inception, new protections are needed.

The MLA narrowly defines the term “consumer credit,” which has allowed lenders to legally skirt the 36% interest rate cap it imposes. Loan products not covered by the law include payday loans with terms longer than 91 days; auto-title loans with terms longer than 181 days; payday, auto-title, or tax refund loans that are open-ended; and payday loans larger than $2,000. A recent report by the Consumer Federation of America found that over half of all servicemembers are currently stationed in states where high-cost lending is widely available and are not subject to the 36% interest rate cap.

In an effort to close these loopholes, Congress amended the MLA in 2012 as part of the National Defense Authorization Act. The amendment empowered the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) to enforce the 36% rate cap and required the Department of Defense (DoD) to conduct a study of abusive credit products frequently used by servicemembers. As a result of its study, the  DoD recently issued an advanced notice of proposed rulemaking requesting comments for the “enhancement of the protections that apply to consumer credit extended to members of the armed forces and their dependents.”  

Increased protections for military members are clearly needed. Since 2011 the CFPB has been collecting consumer complaints from military members. Between July 2011 and July 2013, CFPB has received 4,516 complaints from veterans and their family members; 49% relate to mortgages, 18% relate to credit cards and 13% relate to bank accounts. Since 2011, the CFPB has helped veterans obtain hundreds of thousands of dollars in monetary relief

Yet, rather than obtain relief after the fact, we need to ensure that military members are not taken advantage of in the first place. The compensation that servicemembers and veterans receive from the government is well deserved. After all, their duty required them to risk their lives. Stricter regulations to ensure that companies cannot step in and take the money meant for veterans, servicemembers, and their families are the first step in enabling such servicemembers to become financially secure.

 

New Statistics on the American Retirement Savings Crisis

Couple planning financesAre you confident about your retirement? According to the latest retirement confidence survey, 28% of Americans are not at all confident, and 21% are not too confident that they will have enough money saved for a comfortable retirement. These views are essentially unchanged from the record low levels of retirement confidence seen in the 2011 survey. The sad part is that, for most Americans, these retirement fears are well-grounded.

Nearly half (48%) of all elderly Americans are “economically vulnerable,” meaning that they have income that is less than two times the supplemental poverty threshold. People who are aged 80 and older are particularly prone to economic vulnerability (58.1% are economically vulnerable versus 44.4% for people aged 65 to 79), as are women (52.6% versus 41.9%) and minorities (63.5% African Americans and 70.1% Hispanics versus 43.8% whites).

These figures, which are derived from a new report by the Economic Policy Institute (EPI), use the Supplemental Poverty Measure (SPM) to measure the financial security or insecurity of elderly Americans.      

The SPM, which was released in 2011, is an attempt to update the current federal poverty measure that, it is generally agreed, is outdated and therefore underestimates the level of poverty in the U.S. The SPM takes into account household expenses such as taxes, housing, utilities, health care costs, child support payments, and work-related expenses (i.e., travel and child care). This is offset by including the value of government income supplements, such as subsidized school lunch programs, energy assistance programs, housing subsidies, and the Supplemental Nutrition Assistance Program (previously food stamps), which are not accounted for in the official poverty measure. The resulting new calculation more accurately reflects how low-income Americans are actually getting by. Thus, when examining poverty using the official measure, non-elderly people (ages 19-64) have a higher rate of poverty compared to seniors (13.4% vs. 8.9%), however, when using the supplemental poverty measure, seniors have a higher rate of poverty than non-elderly adults (15.5% vs. 15.1%).

These data on the financial vulnerability of elderly Americans were released at the same time that the National Institute on Retirement Security released a new report on the current state of retirement savings in America. The study confirms the need for greater retirement savings access, particularly, the need for an Automatic IRA program. According to the report, there is a widespread lack retirement savings in the U.S. Specifically, 38 million working-age households (45%) do not own any retirement account assets. While experts estimate that, in order to replace 85% of pre-retirement income, families must save 8 to 11 times their annual income, 80% of all working people ages 25-64 have less than 1 times their annual income in retirement savings. For all households, those who do and do not have retirement accounts, the median retirement account balance is $3,000, and just $12,000 for those nearing retirement. Americans need to save an additional estimated $6.8 to $14 trillion in order to be financially secure in retirement.

One of the reasons for this dramatic shortfall is that many employees lack access to employer-based retirement savings accounts, which is the primary way that people begin saving for retirement.  In 2011, 52% of employees had access to employer-sponsored retirement savings, a 20% drop is just a decade.

Moreover, retirement accounts are concentrated among the wealthy. Eighty-nine percent of households in the top income quartile and 72% of households in the second highest income quartile have retirement accounts, while just 51.1% of households in the second lowest quartile and a mere 26% of households in the lowest income quartile have retirement savings accounts. The median income of families with retirement accounts is $76,238, whereas the median income for families without retirement accounts is $30,495.

These studies further demonstrate that there is a great need for broader access to retirement savings for workers. One policy proposal that is gaining traction is the Automatic IRA. In 2012, the California state legislature passed the California Choice Retirement Savings Trust Act, which lays the initial groundwork for creating a statewide retirement plan for private sector workers who do not have access to an employer-sponsored savings plan. In 2013, the Illinois Asset Building Group (IABG) is promoting S.B. 2400, which would create an automatic IRA program in Illinois

Under the bill all employers with more than 10 employees that have been in business at least two years and have not offered a qualifying retirement plan for the past two years would be required to automatically enroll their employees in an automatic payroll deduction. The employer would, on behalf of the employee, deposit this deduction into an Individual Retirement Account (IRA) that is held by the state. Employees would have the ability to select their contribution rates and investment option or opt-out of the deduction entirely. If an employee did not make any selection, then she or he would be automatically enrolled in a default target-date lifecycle investment option with a 3% income contribution rate.   

All investments would be overseen by the Automatic IRA Program Board established by the bill. This board would consist of seven members: The State Treasurer (serving as chair), the State Comptroller, and the Director of the Governor’s Office of Management and Budget, as well as two public representatives with retirement savings and or investment expertise, a representative of employers, and a representative of enrollees, each of whom would be appointed by the Governor. The board would contract with third-party investment firms to invest and administer the fund. All interest and income earned from the investment fund would remain in the fund. Administrative fees charged on the interest on the fund would pay for initial startup costs and ongoing administration. The program would add minimal cost to employers, and employees would have the option to opt-out. 

We are building a strong campaign to move the legislation forward next year. Join the campaign today, and help us build financially secure retirements for all workers in Illinois.

Overdraft Fees Power Bank Revenues

Recently, the Consumer Financial Protection Bureau (CFPB) released a report summarizing the findings from a 2012 inquiry into financial institutions’ overdraft practices and their effects on consumers. The report shows that overdraft practices are extremely costly to consumers.

Historically, banks denied transactions when a consumer’s account contained insufficient funds and only permitted overdrafts for their best customers as an occasional courtesy. Over the last ten to fifteen years, however, there has been a rise in automated overdraft programs. Now, when a consumer has insufficient funds to pay a check, electronic Automated Clearing House (ACH), debit card, ATM, or other account transaction, the bank can either deny payment or cover the amount. In both of these situations, the bank generally assesses a fee. When the bank pays the transaction, it is called an overdraft, and the fee is an overdraft fee. When the bank denies payment on the transaction, except for debit card and ATM transactions, it will impose a “not sufficient funds” or NSF fee. 

Overdraft programs generate large profits for banks while imposing enormous costs on consumers. Consumers paid an estimated $32 billion in overdraft fees in 2012.  In 2012 the median overdraft fee was $34 at the 33 largest financial institutions, and $30 at 800 smaller banks and credit unions. While overdrafts only cost banks roughly 14.4% in revenue, overdraft fees are generating 61% of banks’ profits.

This raises the question: what exactly is the purpose of overdraft fees? Is an overdraft fee a penalty for irresponsible behavior? Or is an overdraft fee a credit product?

If overdraft fees are penalties, then according to the National Consumer Law Center they should be governed by the anti-penalty doctrine and should not result in a penalty above a reasonable estimate of the damages. While there are no publicly available data about the cost to a typical U.S. bank for an overdrawn transaction, based on the 1985 case of Perdue v. Crocker National Bank, the cost of a nonsufficient fund transaction was 30 cents (64 cents adjusted for inflation in 2013). Similarly, a 1974 law review article cites the cost of a nonsufficient fund transaction as $3.50 adjusted for 2013 dollars. Nevertheless, according to a 2008 Federal Deposit Insurance Corporation study of bank overdraft fees, the average debit card transaction, or potential loss or damage to the bank, triggering an overdraft was $20, but the average overdraft fee, or penalty, was $35. Based, then, on the actual cost to a bank when a consumer overdrafts, the penalty charged is disproportionate to the damage caused. If, however, the anti-penalty doctrine were applied, banks would be required to charge somewhere between $0.64 to $3.50 per overdraft rather than the $35 fee they currently charge.  

If, on the other hand, overdraft fees are credit products, a $35 charge for a $20 overdraft would amount to an interest rate of over 100%. Stated in terms of an Annual Percentage Rate (APR), some banks’ overdraft programs would have the equivalent of a 2,000% APR. We criticize payday loans as predatory due, in part, to their 400% APRs; overdraft programs would also appear to be predatory lending products that are just as harmful as payday loans.  

If overdraft programs are supposed to be a form of customer service, then banks are actually doing their customers a disservice and a costly one at that. According to the CFPB report, 27% of accounts opened during 2011 experienced at least one overdraft fee, and the total fees paid by the average bank accountholder that had at least one overdraft fee during 2011 was $225.   

Overdraft programs in their current form cost billions of dollars a year, yet it is unclear what their purpose really is. Whether overdraft fees constitute a penalty to discourage bad financial behavior, a high-cost credit product similar to payday loans, or a so-called costly customer service, these fees drain millions of dollars from working class families’ bank accounts. As such, regulators need to consider their continued appropriateness.

Tax Expenditures: Welfare for the Rich

A new Congressional Budget Office (CBO) examines the current tax code and its convoluted system that favors the rich while forgoing trillions of dollars in tax revenues through exclusions, deductions, preferential tax rates and tax credits. Specifically, the report looks at the 10 largest tax expenditures within the U.S. income tax system and who benefits from each of them the most. 

Tax expenditures are revenue losses attributable to tax provisions that often result from the use of the tax system to promote social goals without incurring direct expenditures. How tax expenditures are structured affects both who will benefit from them and how much they will reduce federal revenues. For example, while technically the income tax rate for the highest income earners is 39.6%, tax expenditures such as the pension and capital gains exclusions, mortgage interest payment and charitable deductions, and preferential tax rates for capital gains and investments can effectively lower this rate. As a result, as Warren Buffet famously disclosed, a millionaire’s tax rate can be lower than his or her secretary’s

The CBO report shows that the wealthiest Americans pay much lower tax rates than the supposed marginal rate of 39.6%. Over 50% of all tax expenditures go to households with incomes in the top quintile. Additionally, the top 1% of households receives 17% of all tax expenditures, while only 8% of tax expenditures go towards families in the lowest income quintile

According to the report, over the next 10 years, these combined top 10 tax expenditures will total $12 trillion. During 2013 alone, such expenditures will equal 1/3 of total federal revenue and exceed spending on Social Security, Medicare or defense. In other words, the largest welfare program in the U.S. is a program that helps the rich significantly more than the poor. 

The CBO report confirms previous studies. A report from the Corporation for Economic Development (CFED) shows that asset building policy in the U.S. disproportionately benefits highest earners. In 2010, the U.S. government spent $400 billion on asset building policies that help families buy homes, start businesses, and pay for post-secondary education. Unfortunately the CFED report found that 53% of all subsidies went to the top 5 percent of taxpayers—those with incomes higher than $160,000. The top fifth of taxpayers—those with incomes greater than $80,000—received 84% of the benefits, with an average subsidy of $5,109 per taxpayer. The average asset subsidy awarded to households making more than $1 million was nearly $96,000. In contrast, the bottom 60% of taxpayers (those making $50,000 or less) received only 4% of the benefits, and the bottom fifth of taxpayers (incomes of $19,000 or less) received 0.04% of benefits, amounting to $5 on average for each taxpayer.

All of this data point to the conclusion that our government does not necessarily spend too much on the poor: it spends too much on the rich. It forgoes trillions of dollars in revenue so that the rich can continue accumulating wealth and widening the wealth gap. To actually fight poverty, we must redirect our country’s income tax exclusions, deductions, preferential tax rates and tax credits away from the wealthy and towards those who actually need it.   

Rising Tuition and Student Debt Make Children's Savings Accounts More Appealing

Piggy bankThe cost of college tuition continues to outpace inflation, and youth across the country seeking higher education are forced to take out massive loans in order to keep up with the soaring costs. According to a 2012 report by the Consumer Financial Protection Bureau (CFPB), there are more than 38 million student borrowers with over $1.1 trillion in outstanding debt. As a recent Wall Street Journal Op-Ed noted, like the housing crisis before it, the looming student debt crisis and how we finance higher education is intimately connected to America’s growing wealth inequality and the asset building opportunities, or lack thereof, for lower income Americans.

Early signs of widespread student loan default are already here: the job market is weak, wealth inequality is soaring, congressional inaction has resulted in a doubling of the interest rate on federal student loans (from 3.4% to 6.8%), the rate of student loan default is on the rise, and private student lending companies continue to prey on underserved populations. It seems like it’s only a matter of time before disaster strikes. 

Yet attaining higher education is still a necessary component for being able to build assets and move up the economic ladder. The question is, how can low-income, underserved, asset-poor communities afford higher education without falling into debt traps?

One answer is Children’s Savings Accounts (CSAs). CSAs are long-term asset building accounts established for children as early as birth and allowed to grow over a lifetime. Under most CSA proposals, the accounts would be seeded with an initial deposit from the government, often with supplemental amounts for low-income families, and then states would offer matching funds. Four states have convened CSA task forces, and numerous pilot programs have demonstrated the effectiveness of CSA programs, including the ten-year Saving for Education, Entrepreneurship, and Downpayment Initiative (SEED) program and more recently the San Francisco Kindergarten to College program wherein every kindergartener in San Francisco is receiving a CSA account. 

On the federal level, Senator Coons (D-DE) recently proposed the American Dream Accounts Act, which would provide grants through the Department of Education (DOE) to create a Facebook-like social networking/information sharing website where students could create American Dream Accounts. These accounts would allow students to maintain college savings, as well as monitor college readiness and interact with stakeholders such as teachers and counselors.

Under the Obama Administration, the DOE has already allocated $8.7 million in funding to explore CSAs. In 2012 DOE announced that it would work to help low-income, underserved youth access higher education through investing in College Savings Accounts. The new College Savings Account Research Demonstration Project will support college savings accounts for students participating in the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP), which is designed to increase the college readiness of low-income middle school and high school students.

The Asset and Education Initiative (AEDI) at the University of Kansas recently published an study of GEAR UP grantees’ efforts to establish CSAs. Five GEAR UP programs were selected for in-depth surveys, interviews, and focus groups designed to learn more about their views on CSAs. The study showed that, while the GEAR UP grantees believe that CSAs improve students’ access to college, they do not seem to make the connection that students’ involvement in a CSA program would boost their academic achievement, despite the fact that evidence suggests that it does. Similarly, many GEAR UP personnel expressed doubts about the ability of low-income families to save money. Again, this is despite research showing that the poor can save, particularly when given the correct institutional supports. The study also found that GEAR UP programs are well aware of the dangers of accumulating too much student debt and try to steer kids away from high loans.

To assist GEAR UP programs in developing their CSAs, AEDI recommended that the DOE provide additional funding for CSA administration, matching, and other savings incentives; expand access to CSAs to students prior to high school so that the accounts have sufficient time to grow; allow students to access CSA funds early if needed to address short-term human capital needs (e.g., purchasing computers); and relax restrictions against federal-to-federal matching funds so that GEAR UP programs have more flexibility in finding the funding for the matching amounts. 

The concept of CSAs seems to be gaining more and more support, especially considering the ticking student debt time bomb. Previous pilot programs, state task forces and research studies have paved the way for large-scale CSA endeavors. Hopefully, such endeavors will develop before the bomb goes off.   

Deposit Advance Loans--Another Name for Payday Loans

We often hear stories of people taking out payday loans to pay off previous payday loans thus becoming trapped under a pile of debt. A recent study released by the Consumer Financial Protection Bureau (CFPB) shows that these stories are not just rare anecdotes: payday loans truly do trap people in a cycle of debt. Moreover, the study also found that mainstream banking loans known as “deposit advance loans” are basically payday loans with a different name. 

Payday Loan Findings
The median income of a payday loan borrower is $22,476, and the
average loan amount is $350 with a 14-day term and an Annual Percentage Rate (APR) of 322%. The median borrower in the study took out 10 loans per year paying $458 in fees on top of the principal amount of the loan. In fact, two out of three payday loan borrowers took out over 7 loans per year, and 48% of borrowers took out more than 10 payday loans. Among those who took out 10 or more loans in a year, most loans were taken out the same day a previous loan was closed. Extrapolating from this, it seems clear that most people are taking out payday loans to pay for other payday loans. 

The CFPB report’s data is consistent with other research. The Pew Charitable Trust’s series of reports on payday lending in America reveals that the average borrower takes out 8 loans of $375 per year and spends $520 on interest. Additionally, the Center for Responsible Lending’s 2009 report on payday lending reveals that 75% of the payday loans are generated by borrowers who, after meeting the due date of the initial loan, must re-borrow before their next pay period.

Deposit Advance Loan Findings
In addition to examining payday loans, the CFPB study also looked at deposit advance loans. Deposit advance loans are offered by mainstream financial institutions and function similarly to payday loans. Consumers who need a quick infusion of cash can request a deposit advance from their bank; once the request is approved, the bank will deposit the money into the consumer’s account immediately. Typically, there is no fixed repayment date when the advance is taken, but if the advance is not repaid by the consumer’s incoming direct deposits within 35 days, the consumer’s account will be debited for the amount due even if it results in an overdraft. For an example of a
deposit advance product, see the one offered by Wells Fargo.

According to the CFPB study, the median deposit advance loan was $180 with an APR of 304%. However, because most deposit advance borrowers take out multiple loans, they tend to have outstanding balances from previous loans at the same time that a new deposit advance loan is taken out. Thus the CFPB study determined that, during an advance balance episode the average consumer had an outstanding account balance of $343. The average user of deposit advance products took out 8 deposit advance loans per year totaling $3,000 in loans per year.

The CFPB study also compared users of deposit advances to consumers who are eligible for deposit advance but do not use the product. Nearly two-thirds (64.6%) of deposit advance users incurred overdraft fees compared to just 14.4% of nonusers. While the average person from each group had almost the same income (about $3,000 per month), nonusers had a significantly higher daily bank account balance compared to deposit advance users ($1,702 compared to $396). 

Deposit Advance Loan Guidance
In April 2013, federal banking regulatory agencies,
the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of Currency (OCC), issued guidance for banks in offering deposit advance loans. This guidance discusses the results of the CFPB study and acknowledges that deposit advance products “share a number of characteristics seen in traditional payday loans, including high fees; very short, lump-sum repayment terms; inadequate attention to the consumer’s ability to repay.”  While the FDIC and OCC “encourage banks to respond to customers’ small dollar credit needs,” the guidance states that banks must engage in appropriate underwriting when issuing deposit advance loans so as not to jeopardize the safety and soundness of the institutions. In addition the guidance states that the OCC and FDIC will conduct examinations in order to ensure that banks offering deposit advance loans are complying with the Federal Trade Commission Act, Truth in Lending Act, Electronic Fund Transfer Act, Truth in Savings Act, and the Equal Credit Opportunity Act.

While the OCC and FDIC guidance is a step in the right direction, it does not go far enough. Now that the CFPB has provided objective data that deposit advance products are no better than payday loans, these agencies should jointly issue regulations limiting these types of loans.  

You Can't Seriously Be Saying Consumer Advocates Should Let the Unbanked Pay Prepaid Fees?

Credit cardsA recent blog post, entitled “The Top 4 Reasons the Unbanked Pay Prepaid Fees & Why Consumer Groups Should Let Them,” advocates prepaid cards as a good alternative to bank accounts for people who are unbanked and perpetuates three common myths about banks, the unbanked, and prepaid cards. Let's clear up these widespread misconceptions once and for all.

Myth #1: Since banks and credit unions don’t open branches in high-crime areas, prepaid cards finally provide the unbanked population with access to financial services in their communities, but of course there is a cost for such services.

Fact: First, the assumption that all unbanked people live in high-crime neighborhoods is patently false. Being unbanked is a widespread phenomenon. In fact, according to the Federal Deposit Insurance Corporation (FDIC), 8.2%, or 17 million adults, are unbanked. People are unbanked for many reasons, including lack of access to financial institutions in their neighborhoods. A recent analysis by Bloomberg shows that 90% of the 1,826 bank branch closings in recent years have been in zip codes where the income is below the national median. Additionally, while the FDIC Model Safe Accounts Pilot shows that banks could profit from banking the unbanked, most banks continue to ignore this population. At the same time, this past year banks posted their second most profitable year on record.  

But lack of access isn’t the primary reason many people are unbanked. Instead, more than half of all unbanked households do not have an account because they do not believe they have enough money (32.7 percent) or they do not need or want an account (21.0 percent), not because they live in high-crime area and therefore don’t have physical access to an account in their community.

Second, the fact that banks and credit unions are not fulfilling their responsibilities to low-income and minority communities by opening branches in these neighborhoods doesn’t give prepaid card issuers the right to enter these markets and charge whatever fees they want.    

Not only should banks be required to provide financial services in these areas, but prepaid card fees should be capped as well. Prepaid card issuers act as though they are actually the good guys because they service this market. But greed, not kindness, is the reason they are picking up where banks have fallen down. We shouldn’t allow them to make a bad situation (i.e., lack of equal financial access) worse by giving them carte blanche to charge whatever fees they want. 

Myth #2: Transaction fees make the prepaid card value proposition clear because fees are only charged for the services the cardholders use and there are no surprise costs associated with negative balances. 

Fact: To imply that prepaid card fee structures are in any manner clear and understandable is ludicrous. And expecting underserved people to find the hidden fees, let alone interpret such complex unregulated fee structures is ridiculous.  

First of all, the fees are unregulated and therefore lack the kind of transparency and clear disclosure that consumer protection laws typically require. Second, fee structures vary across cards, so keeping track of them is nearly impossible, and prepaid card issuers create new types of fees all the time. Common fees found on prepaid card plans include ATM fees, inactivity fees, customer service fees, money transferring fees, acquisition fees, point-of-sale-fees, and monthly fees, to name just a few. According to a NerdWallet study, prepaid card users end up spending on average $300 per year in fees. 

As the Consumer Financial Protection Bureau (CFPB) has noted, the lack of an industry-wide standard on prepaid card fee disclosure may make it difficult for consumers to understand the cost of the product or to compare fees. As a result, consumers do not know what protections or fees come along with their prepaid cards prior to purchase because such disclosures are contained inside the packaging, thereby preventing consumers from being able to comparison shop in order to make a well-informed decision. This is one of the reasons that the CFPB issued a notice of proposed rulemaking seeking to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent. As CFPB Director Richard Cordray noted:

The people who use prepaid cards are, in many instances, the most vulnerable among us. All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront. Yet right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards. That’s why the [CFPB is] launching a rulemaking to promote safety and transparency in this emerging market.

Claims that paying $300 in annual prepaid card fees is a good alternative to having a mainstream bank account are especially outrageous when many individuals could open mainstream banking accounts through Bank On programs virtually free. Nearly 70 cities/states/municipalities offer Bank-On programs, which are partnerships between municipal leaders, community organizations, financial institutions, and other community stakeholders, that market low-cost checking and savings products to the un/underbanked. So, avoiding these fees is not only doable, but preferable.

Myth #3: If fees are capped, then prepaid card issuers will either have to find ways to reduce costs or increase revenues from cardholders, perhaps by abandoning low-income cardholders, or adding new services for a fee, or a bit of both.

Fact: The argument that restrictions on fees will eliminate prepaid products from low- and moderate-income neighborhoods and reduce consumer choice is unfounded.

In the past five years, the prepaid card industry has quadrupled—consumers loaded an estimated $19.5 billion onto prepaid cards in 2008, and this rose to nearly $77 billion in 2012. This amount is expected to increase to $168 billion by 2015. Even if fees were capped, prepaid card issuers can still earn millions from these cards. If such issuers choose to abandon the market simply because they aren’t making enough, then they are no better than the banks and credit unions who have neglected this market in the first place.  

The unbanked and underserved do need financial services that are available beyond the traditional 9:00 a.m. and 5:00 p.m. banking hours. These consumers value the convenience of non-traditional financial providers that have longer hours. Merchants that sell prepaid services are commonly open until midnight; many are open around the clock. Consumers may find it easier to buy prepaid products than to use traditional banking services.  

But arguing that fee caps will eliminate prepaid cards from merchants’ locations in moderate-income neighborhoods, thereby forcing the unbanked and underserved to walk farther and stay up later than they already do, doesn’t follow logic. Instead it’s just a thinly veiled threat that if prepaid card issuers aren’t allowed to gouge consumers they will make them suffer instead. With the ability to still make millions, even if subject to fee caps, it wouldn’t be a financial necessity, but rather a financial decision, and a poor one at that, to withdraw from the market.  

As prepaid cards continue their rapid growth, we need to make sure that consumers understand the truth about them, their costs, and low-cost alternatives. Perpetuating myths about prepaid cards will not provide low- and middle-income families with the opportunities they need to build assets and move up the economic ladder. Implying that prepaid card companies are doing poor people a favor is an oversimplified view of the financial oppression faced by low-income and minorities in the U.S. Instead, we need to continue to provide accurate information about the true nature of prepaid products and not what the prepaid card industry wants everyone to believe.


    

Unbanked and Uninsured: Implications for ACA Enrollment

Description: https://mail.google.com/mail/u/0/images/cleardot.gifStethoscopeAs the countdown to full Affordable Care Act insurance coverage on January 1, 2014, proceeds and details get filled in, smart folks in government and the private sector are analyzing those details and catching potential problems. Case in point--a recent report by Jackson Hewitt raised concerns that nearly 8 million of those uninsured Americans eligible for premium assistance to help them purchase insurance and meet the mandate under the Affordable Care Act (ACA) will not be able to buy insurance and utilize such assistance. According to the report, more than 25% of Americans who are eligible for tax credits to help them purchase health care insurance are unbanked. Among African Americans and Hispanics the prospects are even worse, as they are 40% more likely than whites to be unbanked. The concern was that for these uninsured Americans health care coverage would remain unattainable because insurance companies might not allow consumers to pay premiums through methods other than through a checking account, whether by check or electronically. Turns out the Centers for Medicare and Medicaid (CMS) and the Department of Health and Human Services (HHS) had this potential problem on their radar screen, too. They included provisions requiring insurance companies to accept premium payments in many forms in proposed rules released on June 14 and published in the Federal Register on June 19.  

The Jackson Hewitt report, which was released last month, raised significant concerns that the very people who most need the assistance in purchasing health insurance provided by the ACA would not benefit from it. As the report noted, more than 1 in 4 uninsured Americans eligible for the new premium assistance tax credits under the ACA do not have a checking account. Thus, limiting premium payments to only checks or electronic transfers from checking accounts would have prevented these individuals, who are also heavily African American and Hispanic American, from accessing health insurance. 

While the report noted that HHS issued guidance in April to issuers on federally-facilitated and state partnership exchanges that included a statement that “issuers must be able to accept payment in ways that are non discriminatory,” it did not specifically state what alternative methods of payment should be accepted. The proposed rules spell out those methods.

Although the Jackson Hewitt report suggested that allowing unbanked Americans to make their health insurance premium payments using prepaid cards would be the best option, this suggestion also raised some concerns. Consumer advocates have warned that prepaid cards are risky and have high fees, and they are likely to weigh in with their concerns in commenting on CMS’s proposed rules.

Clearly in order to ensure that the benefits the ACA was meant to confer were in fact conferred, further guidance was needed, and CMS and HHS have provided just this. Under the proposed rules, qualified health plan issuers must, at a minimum, accept a variety of payment formats, including, but not limited to, paper checks, cashier’s checks, money orders, and replenishable prepaid debit cards, so that individuals without a bank account will have readily available options for making monthly premium payments. As HHS noted, this will allow unbanked individuals to be able to access coverage through an exchange on the same basis as those with a bank account or credit card and ensure that they are not unable to access coverage merely due to the inability to pay their share of the premium by means of a check. The proposed rule also permits issuers to offer electronic funds transfer from a bank account and automatic deduction from a credit or debit card as payment options. HHS also specifically asked for the public to submit comments on this proposal and whether other payment methods should be included during the 30-day comment period.

While we are pleased with the CMS/HHS proposed rules, the issue that millions of Americans are unbanked remains. According to the FDIC, 10 million American households are unbanked, and another 24 million households are underbanked. Thus, the long-term solution to this issue must be to continue to offer banking opportunities to the unbanked and provide greater access to mainstream financial services. As detailed in our recent Clearinghouse Review article, The Affordable Care Act: An Effective Asset-Building Policy” and related webinar, being uninsured hinders a person’s ability to build assets. Extensive research shows that poverty and poor health outcomes go hand in hand. Sometimes poverty leads to negative health outcomes, and sometimes negative health outcomes lead to poverty. While the directionality of this relationship is not consistent, poor health is known to place additional burdens on low-income people and acts as a barrier against moving out of poverty. Improving health outcomes is, therefore, not only an important asset-building tool, but another reason why banking the unbanked is paramount. 

Clinton Global Initiative Announces Woodstock Institute CGI Commitment to Action

Today at its annual Clinton Global Initiative America (CGI America) meeting, Woodstock Institute announced its “Commitment to Action,” which will further its work to strengthen retirement security.

CGI is an initiative of the Clinton Foundation founded by former President Bill Clinton to “turn ideas into action.” The Commitment to Action represents the key feature of the Initiative, lending the Foundation’s name to build awareness, identify partners, and share results for ideas that address some of the world’s biggest problems in a new way. Through Commitments to Action, the initiative has impacted more than 400 million individuals worldwide since 2005.

Woodstock’s Commitment to Action is supported as part of CGI’s financial inclusion Working Group and centers on retirement security. Woodstock's 2012 report, Coming Up Short: The Scope of Retirement Insecurity Among Illinois Workers, found that over half of private sector workers in Illinois lack an employment-based retirement savings option. With most of these workers possessing limited or no assets, they face the real possibility of retiring into a declining quality of life, or even poverty. 

Woodstock's commitment, in conjunction with partners such as Heartland Alliance for Human Needs & Human Rights and the Sargent Shriver National Center on Poverty Law, is to build broad-based support for the solution we recommended in Coming Up Short: establishing a statewide Auto Individual Retirement Account (IRA) program.

The proposed Illinois Auto IRA program would establish a retirement savings account program and automatically enroll workers who do not have access to an employer-based retirement savings option. Workers would be able to opt out of the plan. Participants could take their retirement savings from job to job without penalty. Savings in the plan would receive the favorable tax treatment accorded current IRAs and Roth IRAs. 

Woodstock and its partners will be trying new approaches to build support, including outreach to new legislative partners, media, businesses, trade groups, and women’s groups.

With millions of Americans are approaching retirement without adequate savings, now is the time to act. An Auto IRA program can help Illinois support its workers and economy while preventing a full-on retirement insecurity crisis in the future.

Read the full Commitment to Action.

About CGI America
The Clinton Global Initiative (CGI), an initiative of the Clinton Foundation, convenes global leaders to create and implement innovative solutions to the world’s most pressing challenges. Established in June 2011 by President Bill Clinton, the Clinton Global Initiative America (CGI America) addresses economic recovery in the United States. CGI America brings together leaders in business, government, and civil society to generate and implement commitments to create jobs, stimulate economic growth, foster innovation, and support workforce development in the United States. Since its first meeting, CGI America participants have made more than 200 commitments valued at $13.4 billion when fully funded and implemented. To learn more, visit 
cgiamerica.org.

[Note: This blog is reposted from the Woodstock Institute.] 

Don't Let it Get Worse: Wealth Inequality

A new report by the Pew Research Center illustrates the worsening wealth inequality in the U.S. According to the report, during the first two years of the nation’s recovery (2009-2011) the net worth of the top 7% of households rose 28%, while the net worth of the bottom 93% dropped 4%. In other words, during the recovery the total wealth of the top 8 million households rose $5.6 trillion, while the total wealth of the bottom 111 million households dropped $600 billion. That’s an average gain of $697,651 for the top 8 million households, versus a $6,079 average drop for the 111 million households in the bottom rung of the economic ladder!   

U.S. wealth inequality was already staggering before the recovery began in 2009. At that time, the average household in the top 7% had 18 times more wealth than the average family in the bottom 93%. But since 2009, the top 7% have increased the gap, increasing their total wealth to 63% of total U.S. wealth and 24 times the wealth of the bottom 93%.

The major contributor to the dramatic increase in the wealth gap, according to the Pew Report, was the rise of the stock market and the fall of the real estate market. Because 87% of stock market shareholders are members of the top 7%, the nation’s wealthiest households benefited greatly as the S&P 500 rose by 34% during the recovery. And the top 7% continue to rake in investment gains as the Dow Jones industrial average hit a record 15,000 on May 4, 2013. At the same time, the bottom 93% of families, who rely on the real estate as their main asset, saw the housing market fall 5% from 2009-2011. The bottom 93% also lost out on the fruits of the stock market gains since their share of stock ownership declined during this period (from 16% in 2009 to 13% in 2011). 

Overall, during the economic recovery (2009-2011) only households with greater than $500,000 in wealth, or 13% of Americans, saw a growth in wealth (21% growth). The average household earning less than $500,000 lost wealth from during the recovery. The data are consistent with other research showing a consistent growth in wealth inequality in the U.S. over the last 50 years.

While reading these statistics is hard enough, seeing them illustrated graphically drives the point home. A short video about the overall U.S. wealth inequality that was recently posted by “Politizane” uses data from Dan Ariely and Michael Norton’s 2011 study on perceptions of wealth inequality compared to actually wealth inequality in order to drive home the depressing reality of the current wealth inequality in the U.S.

While overall wealth inequality in the U.S. is problematic, when focusing in on race, inequality looks even worse. A new report by the Urban Institute shows that a dollar in a white person’s hand grows significantly faster than a dollar in a black or Hispanic person’s hand. In 1983, whites age 30 had on average 3 times more wealth than blacks age 30By 2010 the same group of whites had 7 times more wealth compared to the same group of blacks. Unfortunately, just as the recession increased the overall wealth gap in America, it also increased the racial wealth gap. Between 2007 and 2010 Hispanic families lost 40% of their wealth on average, and blacks lost an average of 31%. Meanwhile, white families lost only an average of 11% of their wealth. Overall, on average whites had 6 times more wealth than blacks and Hispanics, according to Urban Institute’s report. These findings are inconsistent with a 2011 Pew Research Center report that found that white households had 20 times the wealth of black households and 18 times that of Hispanic households

To further demonstrate these staggering figures, the Urban Institute also released a video illustrating the racial wealth gap, based on the findings of their recent report.

But this is just the tip of the iceberg. According to The Rules’ new short video based on United Nations Data, globally, the richest 300 people have more wealth than the poorest 3 billion people. To put that in perspective, the number of people it takes to fill a midsize aircraft have more wealth than the populations of India, China, the U.S., and Brazil combined. The richest 1% of people have 43% of the world’s wealth, while the bottom 80% of people have just 6% of the wealth. Two hundred years ago the richest countries were 3 times richer than the poorest countries; by the 1960s they were 35 times richer, and today they are about 80 times richer.

Clearly, something needs to be done in order to close these wealth divides. All people, whatever nationality or race, must have an equal opportunity to build wealth. This is why the Shriver Center’s Asset Opportunity Unit focuses on asset building policy and initiatives. To learn more about the Shriver Center’s work visit our website and see how you can get involved.

 

An Asset Building Agenda for the States

How are states working to promote asset building among their residents? A recent paper I wrote for The New America Foundation, An Assets Agenda for the States,” highlights state asset building trends during 2012 in four policy areas: (1) promoting savings; (2) increasing access to the mainstream financial system; (3) consumer protection; and (4) financial education.

Promoting Savings. States are promoting savings in several ways. First and foremost is through the elimination of asset limits in public benefit programs. Currently, six states have removed asset limits in their state’s Temporary Assistance for Needy Families (TANF) programs, 25 states have removed them from their Medicaid programs, and over 40 states have removed them from their Supplemental Nutrition Assistance Programs (SNAP). The Illinois General Assembly, for example, recently passed a bill that will eliminate asset limits in Illinois’s TANF program.

A second way states are promoting savings is by providing families with mechanisms to effectively build college savings accounts. All 50 states have some type of 529 college savings plan; however, since only 9% of existing 529 account holders earn less than $50,000 per year, it is clear that such plans are not being used by low-income people. Some states have begun collecting data on 529 plan participants in an effort to demonstrate the necessity for program changes. For instance, after Texas began gathering 529 college participation data, it found that only 17% of participants in its 529 prepaid tuition plan during 2008-09 were African-American or Hispanic, even though together these populations represent a majority of Texans under age 18. Moreover, only 5.4% of such accountholders had incomes below $50,000, even though 41.4 percent of Texas families earn less than $50,000 per year. RAISE Texas, a prominent Texas asset building coalition, used this information to develop suggestions for making the state’s 529 program more accessible to these populations, which lead to the recent launch of the Texas Match the Promise Foundation, which will supply matching scholarships to participants in the state’s prepaid tuition fund. 

Similar to 529 programs, states are also considering policy proposals such as children’s savings accounts (CSAs). Under most CSA proposals, children would be given savings accounts that would be seeded with an initial deposit from the government, often with supplemental amounts available for low-income families, and states would also offer matching funds, up to a cap, for contributions made by family, friends and children themselves. Numerous pilot studies of CSA plans over the last decade have demonstrated such accounts’ usefulness and in 2012 San Francisco expanded its Kindergarten to College pilot program to all San Francisco elementary schools. Under the program children are provided with an initial deposit of $50, matching funds of up to $100 for the first year, and children receiving free or reduced lunch receive an extra $50.   Additional incentives include a $100 bonus when families sign up for auto-deposit of a minimum of $10 every month for six months. 

Another way states are promoting savings is by expanding access to retirement savings opportunities. Currently only about 50% of all workers have access to employer-sponsored retirement savings accounts. In 2012, California passed the first comprehensive state bill to address this issue. The bill lays the groundwork for establishing an automatic enrollment IRA program for employees in California. Illinois has also introduced legislation to create an Illinois automatic IRA program, though the bill has to yet to make it out of committee.

Finally, incentivizing savings accounts through programs like D2D’s prized-link savings have also started to gain traction in states. In prize-linked savings programs, consumers are given lottery ticket equivalents for each deposit they make. The opportunity to win prizes encourages them to continue to save money. Results from initial pilot studies in Michigan have been very promising.

Increasing Access to Mainstream Financial Services. Asset building advocates’ efforts to increase access to mainstream financial services continue to focus on programs that help bank the unbanked. According to the Federal Deposit Insurance Corporation (FDIC), approximately 8.2% of U.S. households are unbanked. This represents 1 in 12 households in the nation, or nearly 17 million adults. Low-income households, with incomes of $30,000 or less, constitute nearly 82% of unbanked and nearly 41% of underbanked households, and minorities are more likely to be un/underbanked—nearly 63% of unbanked and 40% of underbanked households are African American or Hispanic. Bank On programs, which began in San Francisco in 2006, are collaborations between governmental agencies (e.g., cities or states), financial institutions, and community groups, wherein the financial institutions offer low-cost basic transaction accounts to unbanked individuals. Since Bank On programs are low-cost initiatives, states can still implement such programs despite existing budget crisis. The Bank On model has been replicated in more than 30 cities, 4 states, and two regions, with dozens more programs in development

Another way to provide access to mainstream financial services that states are exploring is alternative data reporting. An estimated 50 to 70 million Americans do not have a credit score. They are considered “thin 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. 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, rental housing, and real property insurance decisions hinge on credit information. Whether the inclusion of such nontraditional credit information will be helpful or harmful to those with thin files or no score at all is controversial. Although research has shown that using alternative credit data reporting increases the number of people able to be scored, it is not clear what such scores will be. Thus, more research is needed to determine the effect of alternative credit reporting. In the meantime, states seem to be focusing on other problems within the credit reporting system.  As of December 2011, legislation had been introduced in 26 states, up from 16 states in 2009, regarding insurance scoring and other aspects of the credit industry, such as preventing the use of credit scores in employment decisions.  Given that credit, for good or ill, is a fundamental part of our country’s economic DNA and an essential part of asset building, such efforts should be encouraged.

Protecting Consumers Against Predatory Financial Products. Usurious payday and auto-title loans perpetuate a cycle of debt for low-income Americans. With interest rates as high as 400%, 12 million Americans are caught in a long-term debt cycle created by payday loans each year. Additionally, banks have entered the short-term, high-cost loan market by offering so called “deposit advance loan products,” which are basically payday loans with another name. Yet, currently only 19 states ban payday loans or cap interest rates. On the federal level, it appears that we may be closer than ever in obtaining more comprehensive federal payday and auto-title regulation as the Consumer Financial Protection Bureau (CFPB) continues to study the issue and publish guidance, such as its Short-Term, Small Dollar Lending Procedures guide, a field guide that CFPB examiners will use to ensure that payday lenders are compliant with federal consumer protection laws. In the meantime, states continue to introduce legislation to cap payday and auto-title loan interest rates, particularly at the municipal level, as well as encourage mainstream financial institutions to provide affordable and safe small dollar loans as alternatives to payday and other predatory loans.  

State asset building advocates are also looking to increase consumer protections on prepaid cards and other payment products used by the low-income and asset poor populations. A growing number of unbanked Americans, instead of using checking account debit cards or credit cards, which have consumer protections provided under the Electronic Fund Transfer Act and Regulation E, are using prepaid cards instead. Prepaid cards are fraught with higher and less transparent fees than traditional credit and debit cards, frequently resulting in consumers spending more for such products than they should or can afford to. As a result, state asset building groups are paying close attention to the marketing of these products and looking for ways to ensure that consumers do not wind up in a cycle of debt.

Improving and Increasing Financial Education. Arguably nothing is more important than improving financial education. Currently, 44 states include personal finance in their education standards, up from 40 states in 2007 and 21 states in 1998. While, 13 states require high schoolers to take a personal finance course in order to graduate, the majority of states do not have such a requirement. Thus, state asset building advocates continue to encourage more states and school boards to adopt curricula that include comprehensive financial education.

To learn the current status of all of these and other asset building policies in each states read my report, An Asset Agenda for the States,” recently published by New America. The paper, which includes a comprehensive appendix that provides charts which outlay the status of each asset building policy by state, is a very useful tool for organizations trying to get a sense of what is happening around the country when it comes to asset building.

Payday Loans Harm the Economy, Not Just People

Payday lenderA large body of research shows that payday loans place households at financial risk. For instance, two recent Pew Charitable Trust reports on payday lending (2012 and 2013) show that 12 million Americans use payday loans annually, spending a total of $7.4 billion. Moreover, these reports show that 86% of borrowers cannot afford to repay the average payday loan on time, which leads the average borrower to take out eight loans of $375 each per year and to spend $520 on interest. The five groups of people most likely to use payday loans, and therefore most likely to be harmed, are people without a four-year college degree, home renters, African Americans, people earning below $40,000 per year, and people who are separated or divorced.

Yet, until recently the harmful effects of the payday lending industry on the national economy were not known. A recent report by the Insight Center for Community Economic Development (Insight Center) now reveals new statistics on the negative impact of payday loans on the national economy as a whole. According to the report, in 2011 households paid a total of $3,309,926,773 in interest on payday loans. While this approximate $3.3 billion in interest payments to payday lenders added a total of $5.5 billion and 65,122 jobs to the overall U.S. economy, the report found that payday loans actually caused a net loss of $773 million and 14,094 jobs. According to the report, if private households had held on to the $3.3 billion that they paid to payday lenders, they would have generated $6.3 billion and 79,216 jobs for the overall U.S. economy. Additionally, the report found that, because payday loan borrowers are five times more likely to file for bankruptcy compared to the average American, payday lending leads to an increase in bankruptcies. Since the average bankruptcy costs $3,000. and there were a total of 56,250 bankruptcies due to payday lending, the report estimates that the total cost of bankruptcies due to payday lending in 2011 was $169 million

On a state-by-state basis, the report reveals that every state’s economy suffered due to the payday lending industry—from a low of $330,000 lost in Hawaii to a high of $135 billion lost in California. Every state also lost jobs as a result of the amounts households paid to payday lenders—from a low of 5 jobs lost in Hawaii to a high of nearly 2,000 jobs lost in California. For instance, according to the study, Illinois was the fifth worst state for payday lending with a total interest in 2011 of $237 million and a loss to the economy of $55 million and 810 jobs

When all losses are calculated, payday lending costs our overall economy about $1 billion per year. Now that the evidence is so clear regarding the economic damage that payday loans have on individuals and on society at large, it is time to legislate a ban on payday loans. A new report by published by the Woodstock Institute highlights the need for strong action by federal and state regulators and lawmakers. The report shows the historical strength and success of the payday lending lobby, but reminds us that consumer protections against payday lending have gained traction in several state legislatures in recent years. The Stopping Abuse and Fraud in Electronic (SAFE) Lending Act is the latest federal level bill to stop payday lending. Although many states have already successfully implemented state level bans and others have proposals on the table, a national ban is needed to ensure that all Americans, as well as the national economy are protected. 

CFPB Consumer Complaint System Shows Early Success

For an agency that has existed for just under three years, the Consumer Financial Protection Bureau (CFPB) has accomplished quite a lot for consumers, breaking down the stereotype that all government agencies are slow, inefficient bureaucracies. In its short existence, the CFPB has already developed and implemented an efficient, user-friendly consumer complaint system that has allowed 131,300 consumers to file complaints regarding a range of financial products and issues. The Consumer Complaint System, developed in July 2011 to handle credit card complaints, has been gradually expanded to cover mortgages in December 2011, bank accounts and loans in March 2012, and most recently credit reporting in October 2012. In addition to handling civilian complaints, the CFPB’s Office of Consumer Response coordinates with its Office of Servicemember Affairs to track complaints from military servicemembers, veterans, and military family. The CFPB recently released two reports that provide an overview of the complaints filed to date: one report analyzes complaints by the general population and one analyzes complaints by servicemembers.

Both reports suggest that it is likely more effective for consumers to file complaints to companies through the CFPB complaint system than independently. Since its inception, the consumer complaint system has allowed the CFPB to recover an average of $145 for 9,300 civilian consumers as well as an average of $170 for 345 servicemembers. Companies are extremely responsive to complaints filed through this system, responding to 95% of the complaints they received from the general public and 98% of complaints they received from servicemembers.

Mortgage complaints are currently the most popular type of complaint filed by both servicemembers and the general public. Nearly 50% of all consumer complaints (63,700) related to mortgages. For the most part, consumers who filed mortgage complaints through CFPB were “driven by a desire to seek agreement with companies on foreclosure alternatives.” Sixty-one percent of all complaints regarded problems in which consumers were unable to pay their mortgages. Out of the complaints received, 1,800 consumers received an average of $425 of relief from mortgage companies. Unfortunately the report does not include data on how many people were able to prevent or delay foreclosures or renegotiate mortgages. The growing body of evidence showing the structural racism embedded in the subprime mortgage crisis makes it clear that the CFPB’s role as an advocate on behalf of consumers in mortgage complaints is important.

In addition to advocating for consumers facing mortgage difficulties, there is a clear, demonstrable need for the CFPB to advocate for people facing credit score problems. In 2012 a CFPB report that examined the credit rating system’s infrastructure found that it is hard for consumers to resolve complaints because of the maze of contracted “data furnishing” companies. Earlier this year the Federal Trade Commission (FTC) released a long-awaited study on credit reporting accuracy that found that credit reporting agencies make errors on a massive scale leading to decreased credit scores for 26% of consumers for no fault of their own. With the data so clear, it seems obvious that consumers facing credit score problems need an advocate. Since the CFPB opened its credit reporting complaint system in October 2012, 6,700 consumers have filed complaints, 73% of which related to incorrect information in their credit reports. Credit reporting companies responded to 90% of the complaints they received, and out of the 3,900 company responses there have been just 600 situations (15%) in which the consumer was still not satisfied with the resolution. In the FTC study, on the other hand, 95% of consumers who found errors in their credit reports were dissatisfied with the credit reporting agency’s response. Thus, it appears that using the leverage of CFPB has led to substantially better outcomes for consumers compared to filing complaints individually.

Overall, for all types of complaints, after receiving a response from companies, most consumers using the CFPB complaint system did not dispute the response (73%). The majority of companies, however, did not respond with monetary relief.  While most consumers sought monetary relief only 15% received such relief. Instead, 65% of complaints ended with the company providing a written explanation. So while in certain instances the consumer complaint system seems to be effective in resolving issues, it does not necessarily lead to reimbursement or compensation.

As the CFPB continues to expand the consumer complaint reporting database to more types of complaints, it will be important for advocates to monitor the efficacy of the complaint system and ensure that the CFPB has the capacity to pursue such complaints. 

Illinois General Assembly Votes to Eliminate TANF Asset Limits

Piggy bankHB 2262, has passed the Illinois House and Senate and will be signed into law later this summer by Governor Quinn, who supported the legislation. HB 2262 is landmark legislation that eliminates the asset limit in Illinois's Temporary Assistance for Needy Families (TANF) program, the cash assistance program for needy children and their families. Rep. Robyn Gabel and Sen. Mattie Hunter were the bill's chief sponsors and are to be commended for their hard work in getting this difficult piece of legislation passed by a margin of two votes in each house. 

Under current law, families with more than $3,000 in assets are not eligible for TANF. This has disqualified families in need with modest savings or a second care needed to get to work. It has also sent the message to low-income people that they should spend and not save. Passage of HB 2262 signals a new day where low-income families will be allowed and encouraged to take responsibility for their own financial futures and to build savings that will enable them to weather future adversity. 

Asset limits were originally put in place to ensure that only the truly needy would qualify for cash assistance. However, as a result of the stringent work requirements imposed by the 1996 federal welfare reforms, asset limits are no longer necessary. TANF recipients are now required to engage in work-related activities for 30 hours per week to "earn" $432, a monthly grant for a family of three. This works out to $3.32 per hour. No person with alternative means would choose to receive TANF under these conditions. 

In addition, the Illinois Department of Human Services (IDHS) has estimated that eliminating asset limits in the TANF program will save the state nearly $1 million in administrative costs annually. Last year, IDHS conducted 192,000 individual TANF asset reviews at a cost of $960,000.  

Advocates have sought to eliminate asset limits in the TANF program for many years. Kudos to the Illinois Asset Building Group, a program of Heartland Alliance for Human Needs and Human Rights, the Woodstock Institute, and the Shriver Center for achieving this legislative success. 

Auto-Title Loans: Driving Dangerously

Repossessed autosAuto-title loans are very common non-bank loans in which borrowers use their cars as collateral for the loan. A new report, Driven to Disaster: Car-Title Lending and Its Impact on Consumers, by the Center for Responsible Lending (CRL) and the Consumer Federation of America (CFA), reveals the predatory nature of auto-title lending, and just how damaging such loans can be for consumers. According to the report, borrowers pay $3.6 billion each year in interest on $1.6 billion in loans, renewing such loans an average of 8 times and paying $2,142 in interest on a $952 loan.

Auto-title loans are asset-based loans, meaning that lenders make the loan based on the value of the collateral rather than the ability of the borrower to repay the loan. According to the report, there are 7,730 car-title lenders across the county. Like all alternative financial services (AFS), auto-title loans are mainly used by people outside of the financial mainstream—the un- and underbanked.  About half of car-title borrowers are unbanked, and the average borrower is more likely than the average U.S. resident to earn less than $30,000, be unmarried, have less than a high school degree, rent a home, and be a foreign-born Spanish speaker.    

Compared to payday loans, it appears that car-title loans may be even more damaging to consumers.  According to research form the Pew Charitable Trust, the average payday loan borrower takes out 8 loans of $375 each per year and spends $520 on interest. Twelve million Americans use payday loans annually, spending a total of $7.4 billion. Yet while the payday lending market is much larger than the car-title loan market (12 million payday loan borrowers compared to 1.7 million car-title loan borrowers), the car-title loan market earns more money in annual interest than the payday loan market ($3.6 billion auto-title loan interest compared to $3.3 billion payday loan interest) since car-title loans are typically much larger than payday loans. In addition, whereas payday loans damage borrowers’ credit and could cause additional indebtedness through bank overdraft fees, car-title loans often result in borrowers’ cars being repossessed. According to the report, 1 in 6 borrowers had their cars repossessed. Not only does repossession impact many borrowers’ ability to work, since their transportation is gone, but the value of the car that is repossessed is significantly higher than the value of the original loan (on average loans were 26% of the value of the car). To add insult to injury borrowers are then hit with $350 to $400 repossession fees, which put them in even more debt.

Just as with payday lending, the legislative landscape for auto-title lending varies across states. While 38 states have specific statutes that allow for payday lending, only 21 states explicitly authorize car-title loans, 17 of which allow for triple-digit annual percentage rates (APRs). Even in certain states that have laws against usurious car-title loans such as Kansas, South Carolina, and Louisiana, the report points out how easy it is to get around these laws. 

On the federal level, in March of last year the Consumer Financial Protection Bureau (CFPB) launched its complaint database for auto loans with large banks; however, complaints involving small banks or nonbanks are still referred to other federal agencies with the authority to handle such complaints. More recently, in March the CFPB released a bulletin explaining that certain lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. The bulletin provides guidance to indirect auto lenders within the CFPB’s jurisdiction on how to address fair lending risks. According to the CFPB, it will closely review the operations of both depository and nondepository indirect auto lenders, utilizing all appropriate regulatory tools to assess whether supervisory, enforcement, or other actions may be necessary to ensure that the market for auto lending provides fair, equitable, and nondiscriminatory access to credit for consumers. While neither of these actions addresses car title lending directly, the CFPB has previously indicated that auto-title lending is among its priorities.

In order to end predatory lending that preys on the underserved, we need a two-pronged approach consisting of laws that restrict predatory lending on both the state and federal level and continued efforts by both the CFPB and states ensure consumers are not driving down dangerous roads by using auto-title loans.

                     

 

Frontline Report Uncovers the Hidden Costs of Retirement Plans

Piggy bankThe financial industry has continued to grow over the past 30 years, even throughout the Great Recession. In 2010 money flowing to financial services comprised an all-time high 9% of the Gross Domestic Product (GDP). Expansion of employer-sponsored retirement savings accounts managed by banks and financial services companies has fueled this growth. According to the Urban Institute, total financial assets invested in retirement accounts is now $10 trillion. This year, Wall Street has seen unprecedented growth, and the stock market has reached an all time high, despite the fact that the average American family continues to face financial challenges.

A recent PBS Frontline documentary uncovered how average consumers with actively managed employer-sponsored retirement plans are paying huge chunks of their retirement savings in fees to investment managers and financial advisors. The report, which focuses on data from a study by Demos, found that a median-income family pays $150,000 in fees over the lifetime of an average retirement plan. In fact, after adjusting for inflation, the average mutual fund management company collects approximately 50% of the total growth of the fund over the course of an account’s life.

Although actively managed mutual funds claim to collect, on average, approximately 1% in fees annually, that number is based on the total value of the fund, not on the value of the fund’s earnings. When mutual funds’ ratio of earnings are examined over a 40-year period, including hidden and compounded fees, and those earnings are adjusted for inflation, the average retirement savings fund plan is actually collecting about 50% of its earnings in fees. This includes 401(k)s, 403(b)s, 457s, IRAs, Koeghs, and SEPs.   

According to the Frontline report, the fundamental problem with retirement savings accounts is that, more often than not, mutual fund managers and financial advisors work together to invest in such a way as to maximize profit for themselves and not their clients, the workers saving for retirement. The most common retirement account investment is called an “actively managed fund” in which an investment firm carefully selects a range of stocks and bonds and then actively trades these stocks and bonds on behalf of clients in an attempt to create an average return of approximately 7%. Since the firm is paid a fee for each trade, active trading generates more work and more fees that clients must pay. Because financial advisors and mutual fund companies earn more money through actively managed portfolios, they tend to market these more heavily than index funds. An index fund is a type of mutual fund that attempts to match the returns of a market index such as the Standard and Poor’s 500 or the Dow Jones Industrial. Ample evidence shows that index fund investments out-earn actively managed funds, require much less labor to manage, and are much more transparent for the consumer.

Despite the fact that an estimated 85% of financial advisors do not owe any fiduciary duties to their clients, many workers believe that their financial advisors have their best interests at heart. Instead, advisors who have no fiduciary obligations can, and do, use retirement savings accounts to maximize their fees. While attempts to require all retirement account managers to be fiduciaries have failed due to strong financial industry opposition, other efforts to make the fees consumers pay investment firms for managing their retirement funds more transparent have been successful.

On October 20, 2010, the U.S. Department of Labor's Employee Benefits Security Administration issued a final rule to help America's workers manage the money they have contributed to their 401(k) accounts, or similar retirement plan accounts, by requiring the disclosure of information regarding the fees and expenses associated with their plans. This participant-level disclosure rule requires plans to provide investment information in a format that enables consumers to meaningfully compare their plan's investment options—similar to the way that interest rates are disclosed by credit card issuers under the Credit Card Responsibility and Accountability Disclosure Act (CARD). A second and related fee transparency rule requires, in part, that certain covered service providers furnish specified information to plan administrators so that they in turn can comply with their disclosure obligations to participants. This second rule, published by the Department on February 3, 2012, requires disclosures to employers sponsoring pension and 401(k) plans about the administrative and investment costs associated with providing such plans to their workers

As a result of these rules, plan administrators must provide plan participants with certain plan-related information and certain investment-related information, including an explanation of (1) administrative expenses, such as any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts (i.e., fees and expenses for legal, accounting, and recordkeeping services), and (2) individual expenses, such as any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person (i.e., fees and expenses for plan loans and for processing qualified domestic relations orders). Additionally, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether "administrative" or "individual") actually charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. While these rules are a step in the right direction, 401(k) plans remain inherently unsuitable as the primary income supplement to Social Security for retirement since, in addition to high fees, they also pose a multitude of risks—such as losing one’s savings to a market downturn and outliving one’s savings—to workers’ retirement security.

The Shriver Brief has repeatedly highlighted the many ways that both the mainstream financial industry and the fringe financial market have found to get working middle- and lower-income Americans to hand over large portions of their paychecks. These include prepaid cards, payday loans, tax refund anticipation checks, overdraft fees, fees for checking and savings accounts, distribution of public benefits through electronic benefit transfer cards, and now, retirement savings accounts. Yet, most consumers are not aware of how their retirement funds can be drained. According to a recent study by NerdWallet, 9 in 10 Americans dramatically underestimated the amount of fees they incur through their retirement savings accounts. Most people thought the average lifetime fees were under $50,000, whereas in reality it is approximately $150,000 per household. Similarly, a 2007 AARP study on lay-person investment knowledge found that 65% of 401(k) account holders didn’t know they were paying any fees for their 401(k) accounts, and 83% lacked basic knowledge about what the fees were. 

As wealth inequality continues to grow, it’s time to ensure that all financial managers and advisors are looking out for their clients and not their own wallets. 

                                                                                                                                                                            

Employer Credit Checks: A Discriminatory Practice

Credit ScoreLenders use credit reporting information to determine a borrower’s creditworthiness and to make lending decisions. However, a new report by Demos reveals that a growing number of companies are checking credit reports as part of the hiring process.     

According to Demos, 1 in 4 unemployed people reported that a potential employer requested to check their credit report as part of the job application. Employers’ rationale for this practice is that people with bad credit scores will be less reliable or won’t be hard-working or high-quality employees. Yet the report clearly shows that negative beliefs about people with poor scores are nothing more than false stereotypes. According to Demos, financial misfortune is the major driving force behind peoples’ low credit scores, not irresponsibility or poor work ethic. Job loss, loss of health coverage, and medical debt are the leading reasons for poor credit scores—not laziness or irresponsibility. While these factors might hinder a person’s creditworthiness, there is no evidence to suggest that they hinder a person’s job performance. Additionally, African Americans and other minorities are more likely to have poor credit scores, partially due to the proliferation of predatory lending schemes that target minority neighborhoods. Often, these predatory financial products leave people with no option but to default on their loans. The practice of using credit checks in the hiring process is a clear example of structural racism and could be a driver of the ever-growing racial wealth gap.  

Moreover, credit scores are prone to error, and therefore cannot be relied upon as an accurate predictor of a person’s reliability as an employee. According to a recent Federal Trade Commission (FTC) study, 1 in 4 consumers identified at least one potentially material error among their three credit reports that could negatively affect their credit scores. Out of the people who found errors in their reports, just 5.2% were able to have their credit scores adjusted enough to move to a lower credit risk score. This study revealed that the Fair Credit Reporting Act (FCRA) is inadequate in allowing consumers to control their own credit scores. The Consumer Financial Protection Bureau (CFPB)’s recent comprehensive study of credit reporting found that ongoing efforts to measure credit report accuracy will likely continue to rely on consumers to identify potential inaccuracies in their credit reports and to rely on the dispute resolution system to validate that inaccuracies have occurred. However, the FCRA’s existing consumer dispute process will not identify or ameliorate certain types of errors that may be associated with the credit reporting agencies’ data processes.

As part of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, the CFPB was given authority to supervise both consumer reporting companies and those that provide consumer reporting companies with consumers’ credit information, such as large banks and many types of nonbanks. In July 2012, the CFPB adopted a rule to extend its supervision authority to cover larger consumer reporting agencies, and in September it released the examination procedures it will use to examine these companies. Previously, these companies were not supervised at the federal level. In October 2012, the CFPB began accepting consumer complaints about credit reporting; for the first time, this gave consumers individual-level complaint assistance with consumer reporting agencies at the federal level. The CFPB has indicated that it may also consider the development and implementation of data quality and accuracy metrics to reduce risk to consumers and assure compliance with FCRA obligations.

As of February 2013, eight states (California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont and Washington) have passed laws prohibiting the use credit checks as part of the hiring process. During 2012, 35 bills in 17 states and the District of Columbia were pending related to restrictions on the use of credit information in employment decisions. Given credit checks’ low probability of providing reliable proof of a worker’s abilities and its disparate impact on minorities, this practice should be banned nationally. Moreover, when credit rating agencies make errors on reports, the person with the damaged score should not be punished. Requiring people who have suffered financial misfortune to face greater barriers to employment embodies everything America is not about. 

Federal Amazon Law Vote Today

Cash registerThe Senate could vote this week on legislation that would close the “Amazon Loophole,” a tax loophole that allows online retailers like Amazon and eBay to avoid collecting sales taxes on most purchases made through their sites. The loophole gives online retailers a major advantage over their offline competitors, since they only have to collect sales taxes in states where they have a physical presence.

This vote is particularly important for state governments whose budgets continue to come up short and could therefore use the huge sums that the failure to tax Internet sales has denied them. In 2012, Internet retailers earned $225.5 billion costing states millions of dollars—California (over $4 billion), Texas ($1.7 billion), Florida ($1.4 billion), Illinois ($1 billion), and New York ($1.7 billion). Cities, whose budgets are also in dire straits, are also taking a hit. Take for instance, Los Angeles, where the projected e-commerce tax revenue loss for 2013 is over $95 million. In Chicago, it tops out at more than $55 million.

Technically, online retailers should be collecting taxes, however, due a complicated history of Supreme Court cases, Internet-based retail stores have not had to comply with the same sales tax rules that brick-and-mortar stores had to comply with. Regardless of whether or not retailers collect the taxes, buyers are technically still required to pay such taxes—although few actually do. In recent years, a few states have begun enacting laws to require Internet companies to collect sales taxes. New York was the first state to enact a law defining “nexus” or presence more broadly in order to be able to require Internet sellers to collect sales taxes. Since then, six other states (Rhode Island, North Carolina, Illinois, Arkansas, Connecticut, and California) have adopted similar laws that require online retailers with sales affiliates based within their borders to collect sales tax, while other states (South Dakota and Colorado) have enacted laws that require online companies to at least notify customers that they owe the tax. California's law also extends the obligation to collect sales taxes to online retailers that have subsidiaries or affiliated companies in the state. While some of these laws have been upheld, others—such as Illinois’s—have been declared unconstitutional based on the previous Supreme Court cases.

States have also tried to collect the tax directly from consumers through amnesty programs. Illinois, for example, implemented an amnesty program to allow customers to pay sales and use taxes on past online purchases, made between June 30, 2004, and December 31, 2010, without penalty. North Carolina’s program, on the other hand, specified that if Internet retailers commenced collecting sales tax on products sold to North Carolina state residents, the state would, in turn, forgive taxes, penalties, and interest for certain periods, and it would not seek information about customers who bought from them. Such approaches have not been too successful. Illinois, for instance, collected only about $10 billion of the estimated $150 billion that should have been paid

As a result of state amnesty programs not working and laws being overturned, the pressure on Congress to pass federal legislation has been intense. The Marketplace Fairness Act of 2013 would give states the authority to levy sales taxes on online purchases even when the retailer isn’t based within a state’s borders. Passing the legislation would both remove an unfair advantage for online retailers and give cash-strapped states more authority to collect sales taxes. The bill states that the tax is only required for companies earning more than $1 million per year in sales, and states that do not currently have a sales tax would not be required to participate.   

The bill has caused a wide divide between supporters and opponents. Online companies like Amazon and brick-and-mortar giants like Wal-Mart and Target support the bill, while other online giants like eBay oppose it. It has also created a divide within the Republican party; many conservative Republican lawmakers who are anti-tax and pro-business are against the bill, while others are acknowledging their small business constituents’ desires and supporting it.

More important that the benefits to states are the effects such a law would have on low-income families. In general, poorer families pay a larger share of their income in sales taxes than better-off families do because they have to spend almost everything they earn. The Internet sales tax, though still regressive, might have less of an effect on low-income consumers since they are not heavy users of online shopping. Low-income families’ lack of home computers, high-speed Internet, and lack of credit cards relative to higher income families means that they are already paying state sales taxes when they shop in traditional stores. The bill, if passed, merely levels the playing field by ensuring that everyone else pays the tax too. Moreover, the increased revenues from sales taxes could help states fund the types of public programs that benefit these communities—job training, education, public health—which have been cut due to state budgets. 

Thus, the vote, which is scheduled for May 6th , is an important one for states and low-income communities they are trying to serve.

To see an interactive chart showing how much each state is estimated to loss in Internet sales taxes, click here.  

Prepaid Cardholders Need More Protections

One of the largest concerns involving the rapidly growing prepaid card market is that money deposited onto prepaid cards does not have the same protections as money held in mainstream bank checking accounts. Specifically, prepaid cardholders are not covered under Regulation E of the Electronic Transfer Fund and therefore do not have protections against lost or stolen cards like those afforded to checking account debit cards. Nor are prepaid card companies required to provide consumers with important information such as statements, receipts, and notifications. Additionally, prepaid cardholders lack the benefit of having Federal Deposit Insurance Corporation (FDIC) insurance of up to $250,000 on their accounts.

According to the Consumer Financial Protection Bureau (CFPB), from 2007 to 2011 the dollar amount loaded onto prepaid cards grew 477% ($12 billion in 2007 compared to $57.2 billion in 2011), and this year Americans are expected to load over $200 billion onto these cards. Prepaid cards essentially function that same as debit cards, but without the underlying banking account, and are frequently touted as the same thing as a checking account despite the fact that important consumer protections may be missing from these products. These cards are typically marketed to the 34 million Americans who lack access to mainstream banking services: the so-called unbanked and underbanked.

While some prepaid card providers are able to offer their customers FDIC insurance by complying with the FDIC’s requirements for “pass-through insurance,” many prepaid cards do not. Moreover, it is often impossible for a consumer to know whether or not a prepaid card has such insurance because issuers do not have disclosure requirements. In addition, most consumers probably do not even understand the ramification of not being FDIC-insured. Yet, since the establishment of the FDIC in 1933, no depositor has ever lost money from FDIC-insured funds.

Money Transmitter Laws regulate any entity that acts as an intermediary of a transfer of money between two parties. PayPal, for example is considered a money transmitter because it serves as an intermediary for a large portion of online purchases. Thus PayPal must comply with all 50 state money transmitter laws. In addition, PayPal has pass-through insurance, meaning funds held by PayPal are insured by the FDIC up to $250,000. PayPal is not legally required to purchase pass-through insurance in order to protect consumer funds, however it is required to comply with state money transmitter laws. A recent report by the Pew Charitable Trust details the state-by-state requirements for complying with money transmitter laws in terms of insuring consumer funds. According to the report, requirements for insuring consumer funds vary across all 50 states, and in general, consumer protections required by money transmitter laws are much worse than the protections offered by FDIC insurance. For example Montana, South Carolina, and New Mexico money transmitter laws do not require transmitters to insure consumer funds at all, whereas New York transmitter laws require the transmitter to purchase a $500,000 surety bond. If companies were to comply with the floor state money transmitter requirements across all 50 states they would be required to purchase on average a $75,000 surety bond in each state. Thus, if the money transmitter went under, there would be insurance to cover an average of only $75,000 losses per state, not to mention the fact that three states do not even require the transmitter to purchases insurance.

The Pew report also points out that prepaid cardholders without FDIC-insured funds would likely be required to navigate burdensome legal processes in order to obtain their funds in the event of a money transmitter default.  However, it is unclear what this legal process would like; it is implied that most prepaid cardholders would lose their money in the event that the uninsured company became insolvent.

Even when prepaid card companies have FDIC pass-through insurance, the protections for consumers are thin at best. One of the largest prepaid cards on the market today is the Bluebird card issued by American Express and Walmart. When Bluebird was first launched, it did not have FDIC pass-through insurance. Only recently, after criticism, did they decide to provide this feature. The FDIC insurance only covers the funds in the event that the bank in control of the custodial accounts (Wells Fargo or American Express Centurion Bank) becomes insolvent. If American Express becomes insolvent, consumer funds are not protected. 

In addition, the Bluebird card has limited coverage for cardholders who lose their cards. While Regulation E protects mainstream credit and debit cardholders against lost or stolen cards, prepaid cardholders are afforded no such protections, and most companies do not voluntarily offer such protection. According to Bluebird’s cardmember agreement, lost or stolen cards are replaced with a value equal to the available funds on your card at the time you notify Bluebird of the loss or theft. By that time a cardholder’s funds have likely been taken. Also, the cardmember agreement details a laundry list of exclusions comprising almost any imaginable situation in which a card would be lost, stolen, or damaged. So in reality, if you lose your Bluebird card, you lose the money on the card.  

To ensure that the growing number of prepaid card users are protected, the federal government should require that all prepaid card issuers offer FDIC insurance and comply with Regulation E. While the prepaid market may be new, there is no reason that the same, tried-and-true protection given to debit cardholders can’t also be required for prepaid cardholders. 

[Editor's Note: The Illinois Asset Building Group will sponsor a free webinar on prepaid cards on May 21, 2013. Learn more.]

Mobile Banking on the Rise in 2013

Mobile bankingIn March, the Federal Reserve released a report examining the use of mobile banking in the U.S. The report, which defines mobile banking as “using a mobile phone to access your bank account, credit card account, or other financial account,” revealed mobile banking is on the rise, up 33% since December 2011. 

According to the report, the most common use of mobile banking is to check account balances or recent transactions (87% of mobile bank users). The second and third most common uses of mobile banking is to transfer money between accounts (53%) and to receive text message alerts (29%).

The report also discusses the use mobile banking by the un- and underbanked. According to the most recent Federal Deposit Insurance Corporation (FDIC) study of the un/underbanked, more than 1 in 4 households are un- or underbanked (28.3% or 68 million people). According to the Federal Reserve mobile banking report, the un/underbanked make significant use of mobile phones and smartphones. Among the unbanked, 59% have access to mobile phones, and 50% of these are smartphones. Among the underbanked, 90% have mobile phones, 56% of which are smartphones. In general, the low-income population has a high rate of access to mobile phones. Seventy-six percent of adults earning less than $25,000 per year have a mobile phone, and 40% have smartphones. Yet, despite their high rates of mobile phone access, people earning less than $25,000 are far less likely to use mobile banking compared to people making over $100,000 (16.7% compared to 28.4%). In addition, people who lack a high school degree are far less likely to use mobile banking than those with a bachelor’s degree or higher (5.6% compared to 37.1%). 

In the search for new, creative ways to expand access to banking among the un- and underbanked, the idea of mobile banking has generated momentum among asset building advocates. Specifically, it is hoped that digital access to mainstream banking might make it easier for people to avoid costly alternative financial services such as payday lenders, pawn shops, and check cashers. Unfortunately, since the most common uses of mobile banking are tied to an already existing account, these types of mobile banking do nothing to help bank the un- and underbanked.

One mobile banking use that has seen the greatest increase is depositing a check by phone. This feature, known as “remote deposit capture,” nearly doubled in usage from 11% in 2011 to 21% in 2012. This feature, particularly if combined with Bank-On programs that offer low or no-cost bank accounts to the unbanked, could harness mobile technology in a way more likely to benefit low-income people. 

According to the FDIC’s report on the un- and underbanked, the most commonly cited reason for using non-banks instead of banks was convenience; this was cited by 45.2% of all households that used non-bank check cashing and 56% of all households that used non-bank money orders. These results are similar to those reported in 2009. Convenience was the most common reason given by both underbanked and fully banked households. Among under­banked households, the second most common reason for using non-bank check cashing was “to get money faster” (18.4%), while the second most common reason for using non-bank money orders was that “a bank charges more” (28%). Among unbanked households, the most commonly cited reason for using non-bank check cashing was the fact that the household did not have a bank account (38.9%); convenience was the next most common reason (28.7%). These were also the most common reasons for unbanked households’ use of non-bank money orders, although the order was reversed: the most common reason for using non-bank money orders was convenience (39.1%), and the second most common reason was that the household did not have a bank account (27.3%).

By linking the remote deposit capture mobile banking feature and Bank On programs, which provide low-cost accounts to consumers, mobile banking could become more frequently used among the un- and underbanked. The convenience of this feature and its low cost, combined with access to an account through the Bank On program, could encourage this population to become banked.

To learn more about mobile banking in the lives of low-income and un/underbanked people view our webinar and read our Clearinghouse Review article

Big Banks Engaging in Payday Lending

When people who lack access to mainstream financial services, primarily the unbanked or underbanked, need an infusion of cash, they often take out payday loans. Payday loans are typically marketed as two-week credit products for temporary needs, with annual interest rates set at around 400% and often more. Payday loans, which are advertised as quick way to obtain needed funds, appeal to disadvantaged members of society for many reasons. Payday loan stores are everywhere, with more locations than all of the McDonalds and Starbucks locations combined, and practically anyone can walk into a payday loan store broke and walk out with $300 cash in a matter of minutes. 

Although if paid back within a two-week period, borrowers can avoid the 400% interest, according to the latest Pew Charitable Trust report on payday lending, Payday Lending in America: How Borrowers Choose and Repay Payday Loans, the people who borrow payday loans are not prepared to pay them back in such a short period. 

According the report, 86% of borrowers cannot afford to repay the average payday loan on time. The first Pew Charitable Trust report on payday lending, Payday Lending in America: Who Borrows, Where They Borrow, and Why, found that 12 million Americans use payday loans annually, spending a total of $7.4 billion. According to that report, the average borrower takes out eight loans of $375 each per year and spends $520 on interest. The five groups of people most likely to use payday loans are people without a four-year college degree, home renters, African Americans, people earning below $40,000 per year, and people who are separated or divorced.  

The two Pew reports show the extent to which the payday loan industry attracts vulnerable customers: people who are financially desperate, people who are ill-equipped to understand the ramifications of payday loans, and people who are ill-equipped to repay payday loans in time. Payday loans are bad products, and they exist only because struggling people feel like they have nowhere else to turn. 

So who is at fault? Obviously the payday lenders themselves are engaging in morally reprehensible behavior, but the fact is that these lenders are enabled by mainstream banks.

Although the major banks are not literally distributing payday loans, they are an integral part of the payday lending market. Banks such as Wells Fargo, U.S. Bancorp, and JPMorgan Chase bankroll the payday lending industry providing more than $2.5 billion in credit to the payday lending industry. These banks earn approximately $70 million annually lending money to payday lenders.

In addition, banks profit directly from payday loan borrowers.  Many banks including JPMorgan Chase, Bank of America, and Wells Fargo authorize payday lenders to withdraw funds from borrowers’ bank accounts. Given what we know about the population that obtains payday loans, it is not surprising that when banks provide payday lenders access to borrowers’ bank accounts to repay the loans, there are usually insufficient funds available. As a result borrowers’ accounts are often overdrawn. In fact, according to the latest Pew report, 27% of payday loan borrowers overdrew their accounts. To add insult to injury, since paydayloans are rarely one-time purchases—the average borrower takes out eight per year—these fees help trap people in a cycle of debt. Even in states where payday loans are illegal, consumers that used online payday lenders are faced with overdraft fees from their banks due to online payday loans. In 2012 alone, banks earned $31.5 billion on overdraft fees, charging a median fee of $29 per overdraft

Thus banks are benefiting just as much as payday lenders.    

There is one piece of recent good news for consumer advocates. Two days after the publication of a front page New York Times article exposing these unfair overdraft practices, Jaime Dimon, the CEO of JPMorgan Chase, said that he would change how the bank deals with internet-based payday lenders that automatically withdraw payments from borrowers’ accounts. Additionally, as discussed in a previous blog, the Stopping Abuse and Fraud in Electronic (SAFE) Lending Act of 2013 (S. 172) was recently reintroduced. This bill attempts to address the issue of online lenders who have designed abusive products in order to evade state consumer protections.

To become part of the effort to stop predatory lending in Illinois, join the Illinois Asset Building Group.

Refund Anticipation Checks: The New Refund Anticipation Loan

The 2013 tax season is officially in full swing, and this year consumers no longer have to worry about refund anticipation loans (RALs).  RALs are short-term, high-interest, payday loan-style bank loans sold through tax-preparation sites. The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds; however, like payday loans, RALs have usurious interest rates and hidden fees. Fortunately, tax preparers will no longer be able to offer RALs this tax season.

In 2010, the Internal Revenue Service (IRS) stopped providing its “debt indicator” device to tax- preparers. As a result federal banking regulators such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued cease and desist orders to banks funding RALs. According to federal banking regulators, because the IRS debt indicator was no longer available, tax preparers’ ability to adequately underwrite RALs was undermined. Banks were, therefore, engaging in unsound lending practices when making loans to tax preparation companies to fund RALs. The effect of these cease and desist letters was to prohibit banks from lending to tax preparers, forcing them in turn to cease offering RALs as of the 2012 tax season. Thus, in 2011 only 750,000 RALs were issued.   

Unfortunately, since tax-preparers earned millions from RALs (a high of $1.24 billion at their height in 2004), and they are no longer allowed to offer them, they have switched to a similar product that hasn’t been subjected to the same scrutiny by federal regulators: Refund Anticipation Checks (RACs). RACs are temporary bank accounts set up by the tax-preparer on behalf of a taxpayer into which the IRS direct deposits a refund check. Consumers access the money through a check or prepaid card. Consumers typically pay about the $30 to set-up the one-time use account. 

A recent report by the National Consumer Law Center (NCLC) looks at RAC growth in recent years. In 2009 12.9 million taxpayers used RACs at a cost of $387 million. By 2011, the number of RAC consumers grew to 18.3 million taxpayers paying about $550 million. Given that RALs are no longer offered, the number of RACs issued is likely to grow in 2013.

According to the NCLC report, many tax-preparers engage in deceiving practices that allow them to squeeze as much money as they can from consumers. Tax-preparers often charge add-on fees such as document processing or e-filing fees. Thus, the report estimates that RAC consumers paid a total of $140 million in add on fees in 2011. The study also points out that many people use RACs to pay for the services of the tax-preparer, which ultimately serves as a loan with a usurious interest rate. For example, a person is, in essence, paying $30 to defer a $200 tax-preparer fee for three weeks when they use a RAC. The annual percentage rate (APR) equivalent here is 260%. In addition, by allowing taxpayers to deduct the cost of tax-preparation from the RAC, the consumer is less sensitive to the cost of tax-preparation. Finally, a 2010 study using “mystery shoppers” revealed that many tax-preparers automatically sell RACs to consumers without consumers’ knowledge.

The NCLC report also warns about the new nonbank RALs, which have been sold to a few hundred thousand consumers thus far. These RALs are being offered by high-cost non-bank lenders such as payday lenders and other non-bank businesses that have stepped in to replace the banks that can no longer finance RALs. Nonbank RALs are riskier and more expensive to consumers; however, according to the report, such products have yet to really take off.

The largest issue surrounding RACs is that they allow tax-preparers and banks to profit from the Earned Income Tax Credit (EITC). The EITC is the nation’s largest federal anti-poverty program providing nearly $58 billion to 26 million families in 2011. The EITC is meant for low-income people earning incomes near the federal poverty level. According to the NCLC, EITC recipient who purchased RACs and RALs paid a total of $2.2 billion to tax-preparation organizations. Theoretically 100% of the this money should be in the hands of low-income people, but because our tax system is so contrived, complex, and inefficient,  tax-preparation companies like H&R Block and Jackson Hewitt are able to siphon off a large chunk of this money (almost 4%).

Ultimately, the federal government needs to make it simpler for people to access their tax refunds faster and more easily. The Treasury Department ran a pilot program offering the unbanked and underbanked tax refund initiated bank accounts. This demonstration project showed a lot of promise and could be brought to scale. Additionally, the IRS now allows consumers to check the status of their tax refunds online at the “Where’s my refund” website. Consumers who file their taxes digitally can expect to receive their refund in fewer than 21 days—the same time frame for receiving a RAC. Finally, consumers should be encouraged to take advantage of the free Volunteer Income Tax Preparation (VITA) sites across the country, so that they don’t waste their hard-earned money on unnecessary tax preparation schemes. All consumers should be able to access 100% of their tax-returns.

To read more about the demise of RALs see our previous blogs.

The Tax-Time Savings Movement

Tax refundFor many Americans, especially low-income Americans, tax season is a great moment to save money. For many people, especially those receiving the Earned Income Tax Credit (EITC), this is one of the few times when they have extra cash in their pockets. A total of $115 billion is returned to Americans earning less than $40,000, averaging $1,680 per person. Thus, asset building advocates consider tax time a “savable moment” and have developed programs to nudge people into saving a portion of their tax returns.

In 2007, the IRS developed the 8888 tax return form through which people can have a portion of their tax returns deposited into savings accounts or used to purchase Treasury Bonds. According to the 2012 Tax Time Savings Bond Annual report by Doorway to Dreams (D2D), the tax time savings bonds program has allowed more than 78,000 tax filers to order Treasury Bonds and, because many people purchase bonds on behalf of others, more than 102,000 people have benefited from this program. 

This year D2D announced a new program to encourage saving called Save Your Refund. Consumers who deposit part of their tax refunds into their savings accounts will be entered into a lottery where they can win one of forty $250 prizes or the $25,000 grand prize. In order to qualify for this lottery, participants must complete an 8888 tax form and deposit at least $50 into their savings account or purchase a U.S. savings bond.

In 2011, the U.S Treasury Department launched a pilot program in which taxpayers had the opportunity to have their tax refunds placed on a prepaid debit card. This program was aimed at addressing the problem of the estimated 34 million underbanked and unbanked Americans without transactional accounts at mainstream financial institutions. 

The New York City Office of Financial Empowerment offers the Save USA program. Similar to the Treasury Department pilot program, Save USA is a pilot program that initiates a bank account from a tax return. Participants must deposit at least $200 into the account initially, and they can subsequently receive a 50% match on all savings deposits up to $1,000.

The New America Foundation has been promoting their tax-time savings policy proposal known as the Saver’s Bonus. This policy would create a program for people who deposit tax returns into savings products that would match up to $500 of those deposits annually. Savings products eligible for the match would be IRAs, 401(k)s, 529 College Savings Plans, Coverdell Education Accounts, U.S. savings bonds, and certificates of deposit.

More generally, to incentivize positive savings and financial behaviors, D2D developed a prized-linked savings account program in 2009. Participants in this program that deposited money in their savings accounts were rewarded with lottery tickets.

In recent years, policy and practice innovations have helped tax time become a critical asset-building moment for many low-income individuals and families. Each of these programs aim to incentivize people to save money. Hopefully, more of these tax-time savings opportunities will be brought to scale so that more people are encouraged to save.   

                  

How Much More Data Is Needed Before We Address the Discouraging Racial Wealth Gap?

Recently, the Census Bureau released an American Community Survey Brief that highlights poverty rates among different races and ethnicities. The data show a wide and growing racial wealth gap, especially in the black and Native American groups.   

The report looks at income poverty, which is based on the federal poverty level ($23,550 for a household of four). According to the report, the national poverty rate is 14.3%. American Indians and Alaska Natives had the highest average poverty rate at 27%; in nine states, the poverty rate among American Indians and Alaska Natives was more than 30%. African Americans had the second highest average poverty rate at 25.8%, while the Hispanic poverty rate ranked third at 23.2%.

These rates, which are more than twice the poverty rate of whites (11.6%), reveal the massive racial wealth gap in this country. Nearly 22 million American Indians, Native Alaskans, African Americans, and Hispanics are living in poverty, accounting for 51% of all people living in poverty despite the fact that they represent just 30% of the total population.  

While income poverty depicts part of the picture, it leaves out other important metrics such as net worth. According to the Pew Research Center, the median net worth of white households is 20 times that of African American households and 18 times that of Hispanic households. In fact, for every dollar that a white family owns, Hispanic households own 10 cents and African American households own 5 cents. According to a report by the Institute on Assets and Social Policy, over the past 25 years, for each $1 increase in income by white people, their overall wealth grew $5.19, while among black people, an increase of $1 in income led to a wealth growth of $0.69. White people were also able to grow their wealth more effectively when it came to inheritance and family financial support.

These Census Bureau and Pew statistics call into question the notion that we live in a country of equal opportunity. A study by the nonpartisan Congressional Research Service shows that, compared to other developed countries, the U.S. has one of the highest rates of economic inequality and this inequality has steadily and consistently risen over the past 43 years as the gap between rich and poor widens

The civil rights movement supposedly ended racial discrimination; however, historically minorities have always had less of an advantage than whites in building assets. For instance, the federal government has always subsidized asset building opportunities for Americans. 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. 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.

A recent report from the Institute on Assets and Social Policy examines the root causes of the widening racial gap by determining whether equal accomplishments are producing equal wealth gains for whites and African Americans. The report determines that homeownership is the biggest driver of the racial wealth gap, accounting for 27% of the gap. Whites have many advantages when it comes to real estate equity. First, due to residential segregation, the value of real estate in black neighborhoods is lower than the value of real estate in white neighborhoods. Second, due to family financial support and inheritance, white families are able to acquire real estate on average eight years earlier than black families. In addition, family financial assistance leads to larger down payments by white homeowners, which leads to lower interest rates and lending costs. Finally, black borrowers are consistently more likely to receive more risky loan products than white borrowers due to discrimination by financial institutions. The 2008 recession and subprime mortgage crisis, during which racial and ethnic minorities lost about a third of their net worth from 2007 to 2010, did not help this situation. A landmark lawsuit, the first suit to connect racial discrimination to the bundling of mortgage-backed securities, has been filed against Morgan Stanley for facilitating the production of risky loans that targeted African American borrowers. Yet, even if the suit is successful, any damages collected will not be enough to cover such losses. 

As a result of the government’s inaction, 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. Fortunately there are some tangible policy solutions that move us in the right direction. The Shriver Center and the Illinois Asset Building Group work to promote policy agendas that would allow all people equal opportunities to build assets. Such policies include universal retirement savings accounts, college savings accounts, elimination of asset limits on public benefits, and establishment of fair lending laws. By shifting government’s expenditures toward facilitating asset building among poor and minority populations, we can alleviate the legacy of racial inequality and provide needed fiscal stimulus for the American economy. After all, how much more data do we need before we start addressing this issue?

To learn 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.

To get involved with closing the racial wealth gap become a partner here.   

Illinois vs. California Universal Retirement Savings Programs

Piggy bankIn 2012, the California legislature passed a law that puts into motion the possibility of universal retirement savings. If the necessary steps are taken to implement the program, all full-time workers in the State of California will have access to retirement savings plans in the near future. 

The idea is simple and does not cost taxpayers anything. Unless they choose to opt-out, employees will have access to a retirement savings mechanism that is similar to an Individual Retirement Account (IRA). 

Under the law, employers that do not already offer retirement savings programs for their employees would be required to deduct a percentage from their employees’ paychecks for purposes of retirement savings. These deducted funds would be invested by the state on the employees’ behalf, and the state would provide a modest 3% annual guaranteed rate of return such that upon retirement employees would receive annuitized retirement payments. 

If implemented, this program would greatly benefit retirees who are currently over relying on Social Security and lack access to employer-sponsored retirement savings accounts. Unfortunately, the details of the law impose obstacles to implementation of the program. Before the program can be implemented, an appointed board must privately fund a feasibility study, which then must be approved by the California State Legislature through a separate authorizing statute.

As discussed in a previous blog, here is a summary of California General Assembly S.B. 1234, the California Secure Choice Retirement Savings Trust Act:

  • All California employers with more than five employees not offering a retirement savings option would be required to offer the new state IRA program.
  • Eligible employers not electing to offer their own savings option would be required to automatically enroll all employees into a 3% payroll deduction auto IRA plan, called the California Secure Choice Retirement Savings plan. 
  • Employees could opt-out of the program and/or change their deduction amount.
  • All investments would be placed in a pooled trust fund administered by an appointed nine-member board that contracts with third-party firms to manage, invest, and administer the funds. The trust fund would provide a modest guaranteed rate of return through the use of private insurers who would insure the return rate and bear any liability for losses.

Currently the Illinois General Assembly is considering a similar bill, S.B. 2400/H.B. 2461, the Illinois Automatic IRA Act. Like the California legislation, the Illinois legislation would automatically enroll full-time workers who lack access to employer-sponsored retirement savings programs in a state-administered IRA program. Just as in California, employees have the option to opt-out. The main differences between the Illinois and California bills are the proposed investment options and the implementation. The Illinois bill would allow participating employees to choose from three different investment options, none of which guarantee a return.  The three investment options are a principal protection fund, a target-date or life cycle fund, and a growth/equity fund.  Participating employees that do not select an investment option will be placed in the moderate risk target-date fund, where the funds start in more risky securities such as stocks and, as the employee approaches retirement, the funds are moved into safer securities such as bonds. The Illinois bill would not require a feasibility study so, if passed, the retirement savings program would immediately go into effect.

However constructed, automatic IRA programs are beneficial for both employees and employers. Employees would have the opportunity to efficiently grow their savings and have access to a retirement income beyond Social Security. Employers would have a significantly easier and less costly alternative for providing a much desired workplace benefit. Other than spending a little extra time and possibly incurring small fees for payroll deductions and direct deposits, there is very little burden on the employer. Employers simply need to ensure that one more deduction and direct deposit occurs for each participating employee. More importantly, employers would have no liability for the funds’ performance and would not need to comply with ERISA’s complicated requirements. Thus, it would be a win-win for employees, employers, and ultimately the state, since fewer retirees would rely on state government resources in retirement. 

To learn more about Automatic IRAs in general read our Clearinghouse Review article, Universal Voluntary Retirement Accounts: A Financially Secure Retirement, and watch our webinar.

To sign up to support the Illinois legislation click here.

Money Smart Week 2013

Money Smart week is an annual public awareness campaign around financial literacy created by the Federal Reserve Bank of Chicago. During the week of April 17th, organizations across the country coordinate events stressing the importance of financial literacy and providing consumer education to a range of people.

In addition, the Federal Reserve of Chicago announced the Money Smart Kids Contest, in which students in grades 5-12 in Illinois, Indiana, Iowa, Michigan, and Missouri are eligible to compete in an essay writing contest. In Chicago, BMO Harris Bank and Country Financial are providing prizes, including scholarships and laptops, for the top essay submissions. Teachers are eligible for prizes if they can convince their students to submit essays. 

This year’s question for Chicago students in grades 5-8 is: “What is the difference between an investment and an expense? And what would be a good investment in your community and why?” 

Submissions are due on March 21st.  

 

Illinois Automatic IRA Bill (98th General Assembly)

Nest eggFor many retired Americans, the potential for financial insecurity is great. Although our government provides a modest monthly Social Security check ($1,152 on average) to retirees, Social Security was never meant to be the sole source of an individual’s retirement income. While $1,152 might be just barely enough money for a young healthy individual, being elderly is much more expensive. Among people who reach the age of 65, 70% will eventually require long-term health care, and 30% will eventually receive nursing home care. The average cost of a semi-private nursing home room is $215 per day or $78,000 per year. Yet, according to the Social Security Administration, Social Security benefits constitute 50-90% of income for more than 33% of Social Security Recipients, and 90 to 100% for more than 31% of recipients. This means that about two out of three Social Security recipients over-rely on Social Security.

In order for retirees to avoid over-relying on Social Security, they must prepare during their working years. However, 49% of Americans say they are not saving any money for retirement. A 2012 Woodstock Institute Report shows that the lack of savings is primarily a problem of access to savings mechanisms. The report finds that, across all Illinois state legislative districts, at least 50% of full-time workers are not offered an employer-sponsored retirement savings plan.  

In order to address this widespread retirement problem, the Illinois Asset Building Group (IABG), along with the Shriver Center, AARP, SEIU and many other organizations, is working to pass S.B. 2400/H.B. 2461 The Automatic IRA Program Act. This bill, sponsored by Sen. Daniel Biss and Rep. Deborah Mell, would provide all full-time workers in Illinois access to retirement savings accounts. Unlike a classic 401k, employers would not contribute to these plans, would not be required to comply with the Employee Retirement Income Security Act (ERISA), and would not be liable for any investments. All employers with more than 10 employees that have been in business at least two years and have not offered a qualifying retirement plan for the past two years would be required to automatically enroll their employees in an automatic payroll deduction. The employer would, on behalf of the employee, deposit this deduction into an Individual Retirement Account (IRA) that is held by the state. Employees would have the ability to select their contribution rates and investment option or opt-out of the deduction entirely. If an employee did not make any selection then they would be automatically enrolled in a default target-date lifecycle investment option with a 3% income contribution rate.   

All investments would be overseen by the Automatic IRA Program Board established by the bill. This board would consist of seven members: The State Treasurer (serving as chair), the State Comptroller, and the Director of the Governor’s Office of Management and Budget, as well as two public representatives with retirement savings and or investment expertise, a representative of employers, and a representatives of enrollees, each of whom would be appointed by the Governor. The board would contract with third-party investment firms to invest and administer the fund. All interest and income earned from the investment fund would remain in the fund. Administrative fees charged on the interest on the fund would pay for initial startup costs and ongoing administration. 

This bill would provide Illinois workers with the opportunity to grow their savings efficiently and ultimately rely less on the state during retirement, thereby saving the government money and allowing retired individuals to live with dignity. 

Help the Illinois Asset Building Group (IABG) build the movement by supporting efforts to create an Automatic IRA program in Illinois. Take Action Now: Add your organization, financial institution or business to our list of supporters.

Consumers Pay for Credit Reporting Agency Errors

CreditRecently, the Federal Trade Commission (FTC) released a long-awaited report on credit reporting accuracy. The report, which is required under the Fair and Accurate Credit Transaction Act (FACT Act), shows that credit reporting agencies (CRAs) make errors that negatively affect millions of peoples’ credit scores. Without a good credit score, 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 credit scores. Overall in today’s society, a credit score has a major impact on a person’s financial life.

In conducting the study, the agency randomly selected roughly 1,000 people with credit histories at the three major national CRAs (Equifax, Experian, and TransUnion). Each study participant was paired with a researcher who assisted the participants in understanding their credit histories and identifying errors. Once the errors were identified, study participants were encouraged to challenge the errors using the Fair Credit Reporting Act’s (FCRA) dispute process.  

The study found that 26%, or about one in four consumers, identified at least one potentially material error among their three credits reports that could negatively affect their credit scores. Assuming the same ratio holds true for the population as a whole, 10 million consumers could be paying undeserved higher interest rates. Additionally, although 21% of study participants who reported errors were able to have their reports modified, only 13% had their credit scores changed as a result of such corrections. Among those that were lucky enough to have their scores changed, half of these changes were less than 20 points, which, in most cases, is not large enough to boost credit worthiness. Just 5.2% of participants had their credit scores increased enough to move to a lower credit risk score. 

The FTC’s report adds to the growing knowledge that the U.S. credit rating system is flawed. Previous research confirms the FTC findings that one in four consumers have errors in their credit histories that damage their credit scores. Most recently, the Consumer Financial Protection Bureau (CFPB) examined the credit rating system’s infrastructure and found that it is hard for consumers to resolve complaints because of the maze of contracted “data furnishing” companies. Data furnishers provide CRAs with information on over 1.3 billion consumer credit accounts on a monthly basis. The CFPB report found that CRAs pass along their requirements under the FCRA of reporting information accurately and responding to disputes appropriately, to data furnishers. Not only do CRAs pass their legal responsibilities to data furnishers, CRAs do not even verify the information contained in the furnishers’ records, which consumer advocates consider a breach of the FCRA.

The data is particularly concerning when viewed in the context of overall poverty in America. Over 130 million people (43.9% of Americans) do not have enough savings to cover basic expenses for three months if they were to lose their income. Nearly 15% of Americans live below the income poverty line, which is currently defined as $23,550 for a family of four. Additionally, a study by the Congressional Research Service shows that income inequality in the U.S., which has consistently risen since 1969 and is currently at its highest rate in the past 43 years, is such that the top 10% of earners hold 75% of all wealth. Even during the recession, the top 1% of incomes grew 11.6%, while all other incomes grew just 0.2%

Given such poverty, it is unacceptable that millions of people, due to credit rating agencies’ mistakes, do not achieve one of the key ingredients for getting ahead—a good credit score. CRAs must be required to ensure the accuracy of their credit information. Additionally, the credit reporting and scoring process needs to be more transparent so that consumers know how to review, evaluate, and improve their credit scores. Getting ahead in today’s economy is already hard enough. Shouldn’t consumers at least be able to rely on an accurate and fair credit score? 

Regions Bank Stops Offering Payday Loans in North Carolina

Bank clockSince their creation nearly 150 years ago, national banks have had to comply with state consumer protection laws. During the past two decades, however, an expansion of federal preemption of state consumer protection laws allowed banks to avoid state consumer protection laws.

In 2004, the Office of the Comptroller of the Currency (OCC) issued sweeping preemption rules providing that national banks and their operating subsidiaries were not subject to state laws that “obstruct, impair or condition” a bank’s exercise of its federally authorized powers to make loans or take deposits. This aggressive preemption of state consumer protection oversight and enforcement figured prominently in the recent economic crisis. In response, Section 1044 of the Dodd-Frank Act included preemption reforms to clarify when state consumer protection laws can be preempted.

The law now makes clear that state laws that provide greater protection than federal law are not necessarily preempted. According to the statute, the OCC may only preempt laws if (1) they discriminate against national banks; (2) a given law “prevents or significantly interferes with the exercise by the national bank of its powers,” as stated in the Barnett Bank case; or (3) the state law is preempted by another federal law. Additionally, the law requires that preemption determinations must be made on a case-by-case basis with respect to particular state laws and that regulators can no longer rely on blanket preemption determinations like the OCC’s 2004 regulations. Also, prior to making a preemption decision the OCC must consult with the Consumer Financial Protection Bureau (CFPB) and take its views into account.

In 2011, the OCC’s released its final preemption rules, which completely ignored the changes required under Dodd-Frank. These rules permit the OCC to preempt state laws if they merely “obstruct, impair, or condition” bank operations—a standard that is clearly broader than Dodd-Frank allows. Following the rulemaking, many believed that the OCC would merely revert back to its previous broad interpretation of its preemption authority.

It was therefore surprising when in September 2012 the OCC ruled that stricter state consumer protection regulations were not preempted by more lenient federal banking regulations. The OCC found that the Urban Trust Bank (UTB) of Florida violated state usury caps in Ohio and Arizona and that these usury caps were not preempted by the National Banking Act. UTB was issuing prepaid cards, called Insight cards, to the payday lender CheckSmart, which CheckSmart then used to make payday loans in Arizona and Ohio that exceeded the usury rates in those states of 36% and 28% respectively. The rate on CheckSmart’s credit product was 401%, and its overdraft loan had a 390% annual interest rate. In a settlement agreement by and between UTB and the OCC, UTB agreed to correct these legal violations and to submit to the OCC an analysis of its prepaid card program that “fully assesses the risks and benefits of this line of business.”

At the time, it was hoped that this decision might signify a new willingness by the OCC and courts to take their consumer protection responsibilities seriously. Unfortunately this doesn’t seem to be the case. In December 2012, a federal appellate court ruled that Wells Fargo bank could skirt a California consumer protection law because it is preempted by federal law. Thus, due to preemption, it is legal for national banks to reorder transactions in order to maximize overdraft charges even though the state explicitly bans this practice. 

In a somewhat similar situation, although North Carolina state law explicitly states that payday loans are illegal, Regions Bank began distributing payday loans in the state. As a national bank, Regions could offer such loans since the National Banking Act preempted North Carolina law’s prohibition against payday loans. 

Consumer rights advocates in North Carolina, finding no success in overturning the assumption of preemption, turned to a different approach. With help from the North Carolina Attorney General Roy Cooper and other state leaders, consumer rights advocates were able to convince Regions Bank to voluntarily stop offering its payday loan product. While for the moment Regions has stopped offering its loans, it could begin selling them again at any time and it would be perfectly legal. 

It is, therefore, important that the issue of federal preemption be addressed once and for all. The OCC and courts must be forced to comply with the Dodd-Frank preemption standard. Applying this standard to Regions Bank for instance, preemption should not apply.  First, banning payday loans does not discriminate against Regions Bank since all financial entities in North Carolina are equally prohibited from offering payday loans. In fact, allowing certain entities to offer payday loans while banning others should constitute discrimination against local banks. Second, banning payday lending does not prevent or significantly interfere with the exercise by a national bank of its powers. Banning payday loans in North Carolina will not significantly diminish the banks’ overall business. Moreover, payday lending isn’t even Region Bank’s primary financial product. Third, North Carolina’s law is not preempted by another federal law so there is no other basis for preemption. 

While it is great news for consumers that Regions Bank stopped offering payday loans on its own accord, it’s troubling that banks can maneuver around state laws so easily and that courts and the OCC allow them to do so despite Dodd-Frank’s clear test for preemption of state laws. Thus, while Regions Bank’s payday loans have ceased for the moment, as the recent Wells Fargo case shows, if Regions Bank elected to recommence its payday loan business in North Carolina, it is likely that a court would ignore Dodd-Frank’s preemption test. Since relying on banks to regulate themselves has never worked, we must work to ensure that state-specific consumer protection laws are not summarily preempted.  

Manipulating Overdrafts is Perfectly Legal?

Between 2005 and 2007, Wells Fargo earned over $1.4 billion in overdraft penalties. To realize these profits, the bank devised a clever way to maximize the number of overdraft fees—it reordered the chronology of transactions that occurred in any given day. For example, Wells Fargo would debit consumers first for their largest expenditures, even if, on that same day, consumers had made a smaller purchase prior to the largest. The likelihood of incurring overdraft penalties on larger expenditures is greater than the likelihood of incurring one on smaller purchases. Thus, Wells Fargo was able to hit customers with more overdraft fees by manipulating the order of purchases. 

As an example:

Jon Doe has $1,000 in his checking account. At 8:00 a.m. he uses his Wells Fargo debit card to purchase a $2 cup of coffee. At 12:00 p.m., he buys a $10 lunch. At 3:00 p.m. he purchases a $1,100 refrigerator. With his final purchase, Jon overdrafted his account and, as a result, should be charged an overdraft fee. Logically, the bank should charge him one overdraft fee because he only over-drafted once—when he purchased the refrigerator. However, by changing the chronological order of Jon’s daily purchases—debiting his account for the $1,100 purchase first, the $10 purchase second, and the $2 purchase third, Wells Fargo can charge Jon three overdraft fees instead of one.  

Wells Fargo was not the only bank doing this. Bank of America, Chase, and many other banks, big and small, engaged in this practice. Obviously this behavior seems unfair and unethical, and common sense says that such schemes should be illegal.

In 2010, a class action lawsuit was filed against Wells Fargo (Gutierrez v. Wells Fargo Bank). According to the plaintiffs, over 1 million customers were charged these unfair overdraft fees, and the bank made hundreds of millions of dollars from this practice. The U.S. District Court of Northern California ruled that Wells Fargo had to return $203 million to customers and enjoined the unfair overdraft practice. According to the court:

Well Fargo … devised a bookkeeping device to turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract from a single mistake…These neat tricks generated colossal sums per year in additional overdraft fees, just as the internal bank memos had predicted. The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure.

Wells Fargo appealed the district court's decision to the U.S. Court of Appeals, which held that the question of ethics and fairness was irrelevant. Specifically, the appellate court ruled that the National Banking Act does not prohibit this practice and, therefore, under federal regulation this practice is perfectly legal. Furthermore, the court stated that any law put in place to prohibit this practice on a local or state level would be invalid because the National Banking Act would also preempt such a law. 

Despite the appellate court’s decision, in order for preemption to apply, it must pass the test established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under Dodd-Frank, state banking laws may be preempted by federal law only if such laws (1) discriminate against national banks; (2) “prevent or significantly interfere with the exercise by [a] national bank of its powers,” as stated in the Barnett Bank case; or (3) are preempted by another federal law. 

According to the appellate court’s decision, California’s Unfair Competition Law was preempted because it prevented and significantly interfered with a national bank’s federally authorized power to choose a posting order. The court stated: “[A] federal court cannot mandate the order in which Wells Fargo posts its transactions. Therefore, we vacate the permanent injunction and the $203 million restitution award.” 

Unfortunately, the court’s rational for ruling in favor of federal preemption does not comply with Dodd-Frank’s requirements. The appellate court failed to explain how or why prohibiting the reordering of transactions prevents or significantly interferes with a national bank’s exercise of its powers under the National Banking Act. Instead, the decision seems to imply that because the National Banking Act doesn’t prohibit this practice, any state law that limits such powers is automatically deemed to prevent or significantly interfere with a national bank’s powers. This interpretation completely disregards Dodd-Frank’s requirements. 

The preemption test set forth in Dodd-Frank was intended to prevent broad preemption of state consumer protection laws, since previously federal banking regulators preempted most state consumer protection laws yet did nothing to protect such consumers on the federal level. Case in point: between 2000 and 2008, at a time when subprime mortgages and other mortgage abuses were proliferating, the Office of the Comptroller of the Currency took only two public enforcement actions against banks for unfair and deceptive mortgage practices. To remedy this, under the new Dodd-Frank test, only those state laws that significantly impact federally authorized bank powers can be preempted. Unfortunately, it appears that Dodd-Frank’s preemption provisions are widely being ignored.

The appellate court’s decision is problematic not only for states’ attempts to regulate overdrafts, but also for states’ efforts to provide consumer protections in banking laws in general. History tells us that federal regulators rarely take enforcement action against financial institutions for such practices. Disregarding Dodd-Frank’s preemption provisions and leaving all financial regulation in the hands of federal regulators, who did not protect consumers in the past, means that very little will continue be accomplished in the realm of consumer protection. Court decisions, such as the Ninth Circuit’s, cannot be allowed to stand. Such precedents imply that states cannot implement stricter and more comprehensive consumer protections than the federal government, which is exactly what Dodd-Frank attempted to prevent. Courts, like banks, must be held accountable for following the law.

Crippling Student Debt: A Major Asset Building Obstacle

http://www.flickr.com/photos/truthout/7598618262/The cost of a four-year college education is skyrocketing such that it is almost unreasonable to expect an average middle class family to afford without student loans. In fact, according to the Consumer Financial Protection Bureau (CFPB), 67% of bachelor’s degree recipients used student loans to pay for their education. As a result, the total outstanding amount of student debt surpassed $1 trillion in 2012

Students are not only borrowing more money than ever before, they are also defaulting more frequently than ever before. A new study by FICO found that in 2013 university student borrowers were at a much higher risk of defaulting on their loans than in previous years. According to this study the student loan debt was $17,233 and the default rate was 12.5% in 2005, but it grew to $27,253 and 15.1% in 2010. Due to the estimated $1 billion of defaulted federal loans in 2010-11, universities such as Yale, Pennsylvania, and George Washington are now suing graduates. These startling statistics bring to light the financial challenges students are facing both in terms of financing college and repaying their debt. 

Although the problem has many roots, the recent growth of for-profit colleges has exacerbated the issue. A study by the Senate Health, Education, Labor and Pension Committee revealed that students attending for-profit colleges have thousands of dollars more debt than students attending not-for-profit colleges. Another study showed that students who attended for-profit universities are much more likely to be unemployed compared to students who attended not-for-profit colleges. 

The CFPB, the consumer protection agency established by the Dodd-Frank Wall-Street Reform and Consumer Protection Act, has begun to examine ways to protect students from burdensome student loan debt. In 2012, the Federal Deposit Insurance Corporation (FDIC) and CFPB sued Higher One, a company that was handling financial aid disbursement in New Haven, Connecticut; the suit alleged that Higher One was charging students unfair insufficient-fund fees. Higher One agreed to $11 million in restitution to settle the agencies’ claims.

Recently, in order to protect university students from other unfair and/or predatory financial products, CFPB announced that it was launching an inquiry into the impact of financial products marketed to students through college and universities. Specifically the CFPB wants to learn about student identification cards that double as debit cards, cards used to access scholarships and student loans and school-affiliated bank accounts. CFPB is asking students, families and people affiliated with higher education institutions to provide input on their experiences. In particular, CFPB wants to know:

  • What information schools share with financial institutions when they establish these relationships;
  • How campus financial products are marketed to students;
  • What fees students are being charged to use these products;
  • How schools set up marketing agreements with financial institutions; and
  • Student experiences using campus financial products in their day to day lives.

Additionally, CFPB has created a webpage that explains to students what to expect when shopping for loans and how to seek out the best value for a student loan.

While CFPB’s actions are steps in the right direction, they do not address the primary problem: crippling debt from student loans. When our societal path to success includes obtaining a bachelor’s degree from a prestigious university, it is no surprise that the total outstanding student debt is more than $1 trillion. Even the smartest, thriftiest, most careful loan seekers can wind up with overly burdensome debt post-graduation if they are unable to obtain high-paying employment. Higher education has become far too expensive. We cannot continue to allow such costs to exceed inflation if we want to have a highly educated workforce. Similarly, we need to ensure that there are more public colleges and universities that offer equivalent educations to those of private institutions. There also needs to be a focus on creating jobs with salaries that will allow graduates to repay their debt. Thus the question is not what to do, but how do we do it?

Electronic Tax Refunds Add Additional Burdens for the Underserved

Credit card swipeVirginia has announced that effective January 2013 the state will provide all tax refunds electronically. In other words, receiving a tax refund in the form of a paper check will no longer be an option for Virginia residents. Instead tax filers will have the option of having their refunds directly deposited into their bank accounts or receiving their refunds on a prepaid MasterCard called the “Way2Go Card.”

The movement away from paper checks and towards electronic benefits payments is not surprising. In 2010 the federal government announced that effective March 2013, but for a few exceptions, everyone receiving federal benefits (such as Social Security and veterans benefits) will receive their benefits electronically either by direct deposit or on a MasterCard prepaid card called the Direct Express CardAs discussed in a recent Clearinghouse Review article, the new federal electronic payment requirements are just the next step in an evolving movement.

The Virginia prepaid card has a fee structure similar to that of the Direct Express card. If used properly, a cardholder could avoid all fees associated with the card. If not, however, cardholders could rack up fees. With the Way2Go Card, cardholders receive one free ATM withdrawal per month at any MoneyPass ATM; additional withdrawals cost $2.50 each plus any additional ATM surcharges. Cardholders who overdraft their accounts face an overdraft fee of $0.50. Since cardholders are charged $2 to talk to customer service representatives on the phone after the first two calls, cardholders need to use the Internet if they want avoid fees to check balances and transaction histories. While the State of Virginia claims that these prepaid cards will allow the unbanked to avoid check cashing fees, many consumers may incur card fees that end up equaling or even surpassing check cashing fees. 

Virginia is not the only state to contract with credit card companies in order to distribute tax refunds; Oklahoma, Louisiana, and Connecticut have similar programs. Although these programs may save the state money, they may not be the best for unbanked/underbanked tax filers. These cards are meant for people without bank accounts, but they do little actually bring these individuals into mainstream banking. Instead, a more productive approach would be to use these accounts to initiate savings or checking accounts for un/underbanked people.

The U.S. Treasury developed this idea in 2011 and piloted a program where people could have their tax refunds placed on a debit card that allowed for checking and savings capabilities. According to the evaluation of the pilot, this type of program could be feasible on a large scale. Moreover, in addition to still saving states money, it would address the problem of the 34 million Americans who are un/underbanked. It is these kinds of win-win situations that we should be pursuing.      

Federal Legislation To Stop Abusive Online and Bank Payday Loans Introduced

http://www.flickr.com/photos/andrewbain/524195139/Senator Jeff Merkley (D-OR), Richard Blumenthal (D-CT), Dick Durbin (D-IL) and Tom Udall (D-NM) recently reintroduced the Stopping Abuse and Fraud in Electronic (SAFE) Lending Act. This bill attempts to address the issue of online lenders who have designed abusive products in order to evade state consumer protections.

As state legislatures across the country continue to crack down on abusive practices, such as triple digit interest rates and unfair payment and debt collection practices, the SAFE Lending Act will ensure that consumers get the same protections regardless of whether they take out a loan from a storefront payday lender or a lender operating online.

According to the Pew Charitable Trusts’ newest report and the Pew's first-ever nationally representative telephone survey, Payday Lending in America: Who Borrows, Where They Borrow, and Why, Americans spend $7.4 billion per year on payday loans, including an average of $520 in interest per borrower for eight $375 loans or extensions. Payday loans, which are marketed as two-week credit products for temporary needs, are in fact predatory short-term, high-interest loans, with borrowers paying an average of $520 in interest for eight $375 loans or extensions. According to the report, average consumers are in debt for five months and are using the funds for ongoing, ordinary expenses—not for unexpected emergencies.

In order to prevent payday lenders from evading the growing number of state consumer protection laws capping interest rates, U.S. regulators and Congress have begun scrutinizing some of the ways that payday lenders do business. For example, a number of payday lenders have partnered with Native American tribes in an attempt to evade the increasing number of restrictions being placed on payday lenders through state legislation, since tribal enterprises are not subject to states or federal law. In other words, these online payday lenders claim immunity from enforcement of state laws that cap interest rates and provide other borrower protections based on their partnerships with Native American tribes. Similarly, national banks that offer deposit advance loans at high rates with short repayment terms are also currently not subject to state consumer protections. 

The SAFE Lending Act would allow states to petition the federal Consumer Financial Protection Bureau (CFPB) to stop lending by tribes in states where payday loans are illegal. That way, states would not directly litigate against tribes, thus preserving sovereign immunity. Specifically the SAFE Lending Act would:

  • Require all online small-dollar lenders (such as payday lenders) to comply with state law if it provides better consumer protections than federal law;
  • Prevent banks from making payday loans in violation of the state law where the consumer resides;
  • Provide new federal enforcement measures to protect consumers from online payday lenders that seek to evade state consumer protection laws, such as by locating their businesses off-shore, or affiliating with a Native American tribe and claiming the right to assert the tribe’s sovereign immunity; and
  • Empower Native American tribes to enlist the help of the CFPB where needed to protect their members from abusive payday lending on the reservation, and respect tribal laws that provide stronger consumer protections than are available under state law.

The SAFE Lending Act would also protect consumers’ bank accounts by:

  • Closing the single payment loophole in the Electronic Fund Transfer Act and ensure that consumers have control over how lenders access their bank accounts for payment and collections of high-cost loans;
  • Safeguarding consumers’ personal information by banning “lead generators” who collect information like Social Security numbers, income data, and bank account information; and
  • Prohibiting lenders from using a borrower’s bank account numbers to create unsigned checks used to withdraw funds, even when consumers have opted out of making payments electronically. 

New Consumer Protections on Remittances

The Dodd-Frank Wall Street Reform and Consumer Protection Act established many new provisions to protect consumers from unfair business practices by financial institutions. As part of these protections, for the first time ever, remittances and remittance providers became subject to regulation. Credit and debit cardholders have limited liability for lost or stolen cards, and banks are required to provide consumers with important information in the form of bank statements, receipts, and notifications. Regulation E, however did not cover all forms of electronic financing, especially when it came to products used by low-income people. Remittances, often used by low-income immigrants to send money to their low-income families overseas, were not protected under the original Electronic Fund Act. Moreover, consumers lack federal protections on lost or stolen Electronic Benefit Transfer (EBT) Cards, which are used by families receiving public assistance, such as Temporary Assistance to Needy Families (TANF) and the Supplemental Nutrition Assistance Program (SNAP). In addition, consumers lack protection regarding prepaid cards, which have become more and more common, especially in the last five years, among the un/underbanked. While Dodd-Frank did not work to protect EBT or prepaid cardholders, the law did put in place protections for people who send remittances.

Originally scheduled to be released by CFPB in January 2012, the final remittance rule was actually published eight months later on August 20th. Like most regulations of Dodd-Frank, the remittance rule was released way past the deadline. As of January 2, 2013, 59.9% of all Dodd-Frank rulemaking deadlines have been missed. As discussed in a previous blog post, this is probably due to the intense Dodd-Frank obstruction efforts. 

The regulation requires remittance transfer providers to provide written disclosures to remittance senders. These disclosures must contain information regarding exchange rates, fees, taxes, and the final amount that the designated recipient will receive. The remittance provider is also required to provide a written receipt to the sender that states when the remittance will be received. Remittance consumers have 30 minutes (and sometimes more) to cancel a transfer and receive a refund. Companies must investigate if a consumer reports a problem with a transfer, and for certain errors consumers can receive a refund or have the transfer resent without charge if the money did not arrive as promised.

In December 2012, CFPB announced it was proposing to “narrowly” revise a few aspects of the final rule. The proposed revisions relate to foreign taxes and errors on the part of the sender. They would require providers to disclose foreign taxes imposed by the foreign central government receiving the remittance. Providers would not, however, be required to disclose taxes imposed by foreign regional, provincial, state, or other local government. Additionally, the revisions would protect providers from being liable for lost funds that are the result of consumer errors in providing an account number. 

Although the final remittance rules originally were expected to be implemented fully on February 7, 2013, on January 22 CFPB announced that the effective date is being temporarily delayed since the comment period on the proposed revisions has not ended yet. The deadline for comments is February 7, 2013.

The new consumer protections on remittances are a step in the right direction to protect remittance consumers for the first time. Yet, Regulation E still lacks protections for EBT and prepaid cards. Credit and debit cardholders have limited liability for lost or stolen cards, and banks are required to provide consumers with important information in the form of bank statements, receipts, and notifications. These protections do not extend to government-issued prepaid cards (i.e.,  Electronic Benefit Transfer (EBT) Cards ) that are lost or stolen. Although the government uses EBT cards to disburse public assistance benefits, such as TANF and SNAP, if a beneficiary’s card is stolen the beneficiary does have the same protections that others do. Similarly, prepaid cards, which, especially in the last five years, have become more and more common among the un/underbanked, are also not covered by Regulation E.

In order to assist people to escape the cycle of poverty, prepaid and EBT cardholders also need to be protected. 

Are Banks Doing Enough for the Un/Underbanked? New FDIC Survey Says No

Bank clockIn December, the Federal Deposit Insurance Corporation (FDIC) released the 2011 Survey of Banks’ Efforts to Serve the Unbanked and 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 (AFS)

In September 2012, the FDIC released its 2011 National Survey of Unbanked and Underbanked Households, updating its findings from its original 2009 report, and found large increases in the number of unbanked and underbanked households. According to the report, 8.2% of all households in the U.S., 17 million adults, are unbanked; and 20% of all households, 51 million adults, are underbanked. This is a 7% and 16% increase from 2009 respectively. 

The FDIC report released in December examines how banks interact with unbanked and underbanked (un/unbanked) and underserved people and updates the survey that was done in 2009. The purpose of this new report is to understand the current banking practices that affect un/underbanked people, and the extent to which insured depository institutions reached out to the un/underbanked. Unfortunately, since the 2011 survey instrument was considerably revised from the 2009 one, it is largely impossible to compare results from the two surveys. Thus, while the number of un/underbanked households has continued to grow, it is unclear whether or not banks’ efforts to bring these households into mainstream banking has kept pace. 

The report shows that 48% of banks required a minimum $100 deposit to open a basic checking account. While the minimum opening deposit may serve as an entrance barrier for people living paycheck to paycheck, 65% of banks did not charge monthly maintenance fees for their basic checking accounts, which can be of great benefit to many low-income people. Based on the report it appears that a large percentage of banks surveyed have low-cost checking and savings products that would greatly benefit people relying on costly AFS products, such as check cashing and payday loans. However, as the FDIC’s September report on unbanked and underbanked people shows, these low-cost products are not being utilized by the millions of un/underbanked people. The high rates of un/underbanked appears to be largely related to shortcomings on the part of the banks in marketing these low-cost checking and savings products to the un/underbanked.

Only 37% of banks in the survey said they actively marketed products to underserved populations. Of these banks, a plurality, 39%, said that their primary tool for marketing was forming community partnerships. Community partnerships are valuable when trying to reach underserved populations, because many community organizations are in direct contact with un/underbanked clients. Bank-On programs across the country have shown that such a partnership strategy is very effective. In 2011 nearly 70 cities/states/municipalities used the Bank-On model, which is driven by partnerships between municipal leaders, community organizations, financial institutions, and other community stakeholders, in order to provide low-income consumers access to mainstream financial services. The primary strategy of Bank-On is to market low-cost checking and savings products to the un/underbanked. Community organizations coordinate with banks to provide their clients the opportunity to feel comfortable walking into a bank and opening a low-cost checking and savings account. The community organization educates its clients about the opportunity to open a bank account and encourages clients to visit the partnering bank. Yet, according to the FDIC’s December report, too few banks, approximately 14% of all banks surveyed, are involved with community partnerships in an effort to bank the un/underbanked. Overall the survey shows that banks have affordable checking and savings product yet they appear to be avoiding marketing these products to underserved populations. The question is why? The answer lies in misperceptions held by banks. In the survey, banks reported that they believed obstacles for offering financial products and services to the underserved were fraud (32%), underwriting (28%), and profitability (24%). However there is no evidence that underserved people cause a burden to a bank’s bottom line. In fact there is evidence suggesting that the un/underbanked market would be safe and profitable for banks. In 2011, the FDIC launched the Model Safe Accounts Pilot in which banks offered low-cost savings and checking account products to un/underbanked participants. The results of the pilot study showed that these accounts were safe and profitable for the banks. Thus, the anxiety that banks have about the un/underbanked population appears to stem more from ingrained prejudice and stigma than from reality. 

Since 2011, the FDIC has produced several research studies and reports that build an extremely compelling case for why banks should reach out to un/underbanked people. The studies have shown that millions in the U.S. lack access to mainstream financial services, that many banks already have low-cost products, and that un/underbanked people would in fact be a valuable market for the banks to tap into. It seems to be a win-win situation for everyone involved. Yet, banks are not acting on this opportunity. More work must be done to encourage and facilitate partnerships between banks and community organizations.  

Chicago-area community organizations interested in participating in Bank-On Chicago can contact Alex Hoffman at the Shriver Center or the visit the City of Chicago Treasurer’s Office’s Bank-On Chicago website.  

New Payday Lenders: Are They Any Better?

Payday lenderAsset building advocates talk a lot about the predatory nature of payday loans and other alternative financial services. The alternative financial services industry generates $320 billion a year. Nationally there are just 3 Starbucks coffee shops and 4.3 McDonalds restaurants for every 10 payday lenders. Payday lending sites are especially pervasive in low-income, high-crime areas, and payday lenders are known to target low-income, minority, and underserved communities. By charging exorbitantly interest rates, such loans trap people in a cycle of debt seriously hindering their asset building potential. 

To combat this problem, asset building advocates have thus far focused on two primary strategies: (1) passing laws that cap interest rates on payday loans, and (2) encouraging more people to move into mainstream financial services, also known as “banking the unbanked.” Unfortunately only 19 states have capped payday lending interest rates at or below 36%, and there are still 34 million Americans who are unbanked or underbanked. Yet, a new method for dismantling the predatory loan industry using free market principles appears to be gaining traction. Specifically, entrepreneurs and computer specialists coming out of high tech companies like Google are developing low-cost payday loan products that purport to be safe and transparent for the borrower and profitable for the lender. 

The key to these new payday loan products is that they do not rely on traditional credit rating techniques or underwriting. They work on the assumption that the riskiness of the loans, and the high interest rates and annual percentage rates (APRs) that must be charged to make the loans profitable, decrease if lenders are able to more accurately assess borrowers’ risks of default and credit worthiness. Currently, in order to determine a person’s credit worthiness, most payday lenders rely solely on two points of data: income and expenditures. This information does not provide a clear picture of credit risk, so payday lenders charge everyone interests rates that are through the roof. 

To facilitate better credit decisions by payday lenders, new firms, such as ZestFinance, have developed alternative credit rating systems to judge potential borrowers' credit worthiness. Approximately 50 to 70 million Americans are currently un-scored or have a thin credit file, meaning that the credit bureaus do not have enough information about these individuals' finances to assign them a credit score. Following Google’s model of gathering thousands of points of public data on users in order to carefully target advertising, ZestFinance uses 70,000 variables in order to determine credit worthiness. For example, ZestFinance examines phone numbers as a sign of credit worthiness, since individuals’ whose phone numbers are constantly changing may be letting their phone accounts lapse. According to ZestFinance, examining factors that don’t play into standard credit scoring — and are therefore ignored by traditional banks — can help bring the underbanked into the financial mainstream.

Another payday loan model that uses large data sets to determine credit worthiness is LendUp. Some of the nontraditional variables that LendUp uses to determine credit worthiness are borrowers’ Facebook profiles and utility bills payment records. Additionally, LendUp provides transparent pricing information. The first thing you see when visiting their website is a movable sliding scale of loan amount and loan length. Prospective borrowers can quickly and transparently see how much various loans will cost. LendUp also provides incentives for borrowers to exhibit responsible financial behaviors. Borrowers can earn lower interest rates for future loans if they make payments on time or complete a financial education course.   

While these new developments may be promising, existing strategies may still be better. For example, instead of using these new broader underwriting systems to provide payday loans, perhaps they could be used by traditional financial institutions to provide to access mainstream banking products?  As the FDIC’s Small Dollar Pilot Loan program demonstrated un/underbanked people are actually a profitable market to tap into — something that payday lenders already know and continue to capitalize on. Yet, as the recent FDIC survey of banks’ efforts to serve the unbanked indicates, banks are not taking the time or dedicating the resources necessary to provide such products. Thus, while these new companies may be better than existing payday lenders, it is still important that mainstream financial institutions be encouraged to meet the needs of this market as well. 

"Swipe Fees" Being Passed Through to Consumers

Credit card swipeIn July 2012, a class action settlement was reached between retailers, nine major banks, and Visa and MasterCard that allows retailers to pass interchange fees, also known as credit card processing fees or “swipe fees,” directly to consumers. Credit card issuers charge retailers a fee, typically ranging from 1.5-3% of the purchase for each credit card swipe, for using the credit card issuer’s network to authorize payments. Yet, under their contracts with the credit card companies, retailers were specifically prohibited from directly passing such fees along to their customers. The settlement, which was a result of a 2005 antitrust law suit filed by six retail organizations alleging that MasterCard and Visa conspired with banks to fix prices on swipe fees, allows retailers to pass along credit card fees to customers. It also requires credit card companies to pay $6 billion to the retailer merchants’ class action members represented in the lawsuit and to cut credit card swipe fees for an eight-month period.

The Dodd-Frank Financial Reform and Consumer Protection Act, passed in June 2010, included a provision capping  interchange fees at 12 cents. Previously such fees were unregulated, and credit card issuers were allowed to charge whatever they wanted. In 2009, credit card companies earned $16 billion in revenue from interchange fees, an average 44 cents of revenue per swipe. However, a report issued by the Federal Reserve found that the median total processing cost for debit and prepaid card transactions was only 11.9 cents per transaction. The cap on fees has cost banks and card issuers billions in lost revenue. In the final quarter of 2011, revenues dropped 43% as average revenue per swipe dropped to 24 cents. Even though these fees are now capped, saving the retailers money, the new settlement agreement allowing such fees to pass through to consumers will cost consumers greatly.

Consumer Action, a national not-for-profit consumer protection agency, released a guide to consumer rights and responsibilities regarding these new checkout fees. The guide explains that the settlement does not apply in 10 states because in those states it is statutorily illegal for retailer to pass the fee to consumers. In addition, the fees are only allowed to be placed on credit or charge card purchases, not on debit cards. The guide emphasizes that passing fees through to consumers is not required, but that some retailers will definitely choose to do so. How many retailers will opt to pass these fees through to consumers is yet to be seen, but may be high as retailers continue to struggle in a down economy. For those that do choose, they must clearly disclose the fees to consumers on the store entrance, point of sale, website, and receipts.

Clearly, Dodd-Frank’s cap on swipe fees was intended to stop banks and card issuers from garnering huge profits through anticompetitive price fixing, the same result desired by the antitrust lawsuit. Unfortunately, while Dodd-Frank’s fix was neutral for consumers, the settlement agreement will likely be negative. However, given that retailers will be required to disclose information about passing fees to consumers, consumers will have the opportunity to make decisions about where they shop and whether they use cash, credit, or debit. Enforcement of fee disclosures will be key in ensuring that retailers who pass swipe fees to consumers are not unfairly taking advantage of their customers.

This blog post was coauthored by Alex Hoffman.

  

Consumer Financial Protection Bureau Analyzes U.S. Credit Reporting Systems

CreditIn December, the Consumer Financial Protection Bureau (CFPB) released a report examining the United States’ credit reporting system with a special focus on the infrastructure and processes currently used by national credit rating agencies (NCRAs) to collect, compile and report consumer credit data. 

Access to credit is increasingly important to an individual’s ability to build assets. Good credit reports  and scores enable people to secure affordable loans such as mortgages, student loans, and small business loans. Increasingly, even employment and rental housing decisions hinge on a credit score. Having a poor credit score can seriously hinder the efforts of people to get ahead financially. Thus the goal of the report, according to Richard Cordray, Director of the CFPB, is to both provide regulators with more information as to how these agencies determine people’s credit scores and provide consumers with information about how their credit scores are determined so that they may have more control over their scores.

The report focuses on the three largest credit reporting firms, Equifax, Experian, and TransUnion, and provides an overview of how these firms collect and collate consumer credit information. Each of these firms has more than 200 million files on individuals’ financial behavior, such as consumer accounts for a car loan, credit card or a mortgage. This data comes from 10,000 “data furnishers” that provide information on 1.3 billion consumer credit accounts on a monthly basis.     

Additionally, the report examines how inaccuracies can arise in credit reports. According to previous research, 80% of credit reports contained mistakes of some kind, and one in four credit reports contained errors large enough to result in the denial of credit. The CFPB explains that there are multiple points at which errors can occur. Consumers can provide inaccurate data to the institution that furnishes data to the NCRA. Data furnishers could input the wrong consumer information. NCRAs could mismatch the data of different consumers. The government might provide inaccurate or incomplete data. Or, the consumer might be a victim of identity theft. The Federal Trade Commission is expected to release a report from a decade-long study on credit report accuracy that should also shed more light on the accuracy of credit reports.   

Consumer interactions with NCRAs were also studied in the CFPB report. First, the study found that just one in five people actually obtain copies of their credit report each year. Second, according to the study, NCRAs received eight million contacts from consumers in 2011 with disputes about accuracy of their credit files. Eighty-five percent of consumer disputes were handled by the data furnishing companies as opposed to the NCRAs themselves. In other words, NCRAs rely primarily on these data furnishers to meet their obligations under the Fair Credit Reporting Act (FCRA) to report information accurately and to respond to disputes appropriately. Moreover, it appears that NCRAs do not even independently validate information contained in furnishers’ records which consumer advocates see as a breach of NCRAs’ responsibilities under the FCRA. 

With so many errors occurring and so few people checking their credit scores on a regular basis, let alone filing disputes and such disputes being mostly pushed over to data furnishers, it is important for the CFPB to serve as an intermediary on behalf of consumers that have disputes. Recently the CFPB announced that it will take complaints regarding consumer reports. So consumers will no longer have to move through the complex bureaucracy of NCRAs and data furnishing companies alone. 

This CFPB study is very valuable in that it provides insight into the extremely complicated and closed-off credit reporting system that affects almost every citizen of this country. The report illustrates the fact that the entire credit rating system remains too complicated for the non-expert to understand. It begs the question of whether or not this massively complex system even represents us well?  Finally, it also ignores the issue of the estimated 50 to 70 million Americans who are un-scored or have a thin credit file, meaning that the credit bureaus 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 score, these individuals can be locked out of the mainstream credit industry and forced to rely on predatory lenders and the fringe financial market. How these individuals can be given access to credit, whether through alternative credit reporting or some other mechanism, must be answered if all Americans are to have the opportunity to achieve financial stability and economic mobility.

This blog post was coauthored by Alex Hoffman.

Tax Refund Initiated Bank Accounts

In January 2011, the U.S. Treasury Department launched a pilot to offer taxpayers a safe, convenient, and low-cost financial account for the electronic delivery of their federal tax refunds. Specifically, Treasury sent letters to low- and moderate-income taxpayers who were likely to be unbanked or underbanked inviting them to participate in the MyAccountCard pilot program. 

Under the pilot program, Treasury randomly gave taxpayers several different variations of a Visa® branded MyAccountCard card in order to evaluate which product features, fee structures, and marketing messages generated the greatest positive response from taxpayers. These features, which helped cardholders limit the costs of using the card, included free point-of-sale transactions, free online bill pay, free ATM cash withdrawals at more than 15,000 ATM machines nationwide, and free cash back at participating retail stores.  

This month the Urban Institute released the results of its evaluation of the pilot in a study entitled Tax Time Account Direct Mail Pilot Evaluation. The report, which evaluated the pilot program’s effectiveness at streamlining the tax refund process and expanding access to banking for the unbanked and underbanked populations, will help determine the benefits and feasibility of a card account as an integrated part of the tax filing and refund process.  

Similar to other federal programs that already use electronic money delivery systems, such as Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP), Supplemental Security Income (SSI) and Social Security, the MyAccountCard pilot program provided taxpayers the option to receive their tax refunds electronically. In addition to providing taxpayers with a debit card on which receive their tax refund, this program offered some taxpayers a traditional savings account linked to the card that could hold their tax refund, as well as any other money individuals choose to place into their accounts.  

While the option to receive tax refunds electronically already exists, it can only be utilized by people who already have bank accounts and is mainly utilized by upper-income families. Given that 17 million adults are unbanked and 43 million are underbanked, this direct deposit tax refund option is underutilized by most low- and moderate-income families, hence the need for the pilot that, according to the report, would provide people with a “safe, low-cost” bank account.

In addition to benefiting the individual, this proposed program would benefit the government by cutting costs. Electronic payments are cheaper to administer than paper checks ($1.02 to issue a paper check compared to $0.10 for an electronic payment) and electronic payments are safer and more reliable than paper checks. As a result, Treasury has begun increasing its use of electronic payments. In December 2010, for instance, Treasury issued a final rule to require anyone applying for Social Security benefits after May 2011 to receive payments electronically (either via direct deposit or a Direct Express prepaid card). Those already receiving benefits are required to switch to electronic payment by March 2013. Also, in addition to this tax refund pilot program, last year Treasury launched another pilot program to encourage current and potential payroll card users to have their 2010 federal tax refunds deposited directly onto payroll cards

Opponents, on the other hand, believe that the Urban Institute’s evaluation proves that the pilot program is a failure and that Treasury should not continue with its efforts to increase electronic payments. In fact, even before the report was released, Rep. Dave Camp (R-MI), Chairman of the House Committee on Ways and Means, and Rep. Charles Boustany, Jr. (R-LA), Chairman of the Oversight Subcommittee of the House Ways and Means Committee, wrote a public letter to Treasury Secretary Timothy Geithner expressing their disappointment with this pilot program, saying it was a waste of $1.5 million in taxpayer money since only 0.3% of the target population took up the offer. Yet, as the authors of the report note, the 0.3% uptake rate is typical for bank or credit card solicitations and does not indicate that the pilot was unsuccessful. In fact, the take-up rate was significantly higher for people who were most likely in unbanked households—nearly 0.8%. Moreover, as the report also notes, in an actual program, information about the prepaid card would be distributed directly in the tax filing and refund process rather than through direct mail offers thereby increasing the take-up rate.

Overall, the report concludes that there is an apparent demand for this product and that, with the proper fee structures and marketing, many people would utilize these accounts. By leveraging government electronic payments and bringing more Americans into the financial mainstream, this and similar programs could benefit both consumers and the government. 

This blog post was coauthored by Alex Hoffman.

 

Children's Savings Account Programs Gaining Traction

Piggy bankA major item on the asset building agenda for many influential asset building advocacy organizations such as the Illinois Asset Building Group (IABG) and the Corporation for Economic Development (CFED) is Children’s Savings Accounts (CSAs). 

CSAs are inclusive, long-term asset-building accounts established for children as early as birth and allowed to grow over the child’s lifetime. Accounts are seeded with an initial deposit by the government and can be built through contributions from family, friends, and the children themselves. Since saving can be difficult for lower income households, the accounts of lower income children can be supplemented by the government through a larger initial deposit, savings matches, and other “benchmark” incentives through public or private sources. CSAs are often linked to age-appropriate financial education so that savings behaviors are further encouraged and developed as the account grows. CSA funds are restricted to financing higher education, starting a small business, buying a home, or funding retirement.  

Research shows that kids with a savings account in their name are six times more likely to attend college. Furthermore, the amount actually in the account is not significantly related to whether or not the child goes to college. In other words, simply having the account, regardless of the amount in it, is important factor. Research also shows that, compared to income level, a family’s asset accumulation is more accurate in predicting college education outcomes. Thus, providing families with access to CSAs would greatly benefit millions of Americans.

The Corporation for Economic Development (CFED), in partnership with community organizations around the country, conducted a ten-year demonstration project on CSAs. Through the Saving for Education, Entrepreneurship and Development (SEED) pilot, CFED, along with the W.K. Kellogg Foundation, provided funding to community organizations to implement local CSA pilot programs. The final SEED report evaluated twelve pilot programs and showed that, among all enrollees, the average family deposited $30 per quarter which, including incentives, came to $1,500 in three years. The report estimates that, if these savings patterns remained consistent for 18 years, the child would be able to save $6,000, which can pay for two years at community college.  

More recently, CFED partnered with the San Francisco Mayor’s Office to implement a new citywide CSA program called “Kindergarten-to-College” or KtoC. As of September 2012, all kindergartners entering a San Francisco public school are eligible to receive a CSA account with a $50 seeded deposit. Students who qualify for the free or reduced lunch program will get an additional $50 initial deposit. Currently, the city will match deposits of up to $100 in the first year. Families will also earn an additional $100 if they agree to automatically deposit $10 per month into the account.

The State of Colorado and the Aspen Institute have also announced that they are beginning to explore a statewide CSA for Colorado. The Colorado Department of Human Services will begin developing a children’s savings pilot that will offer a two-generation asset-building approach—including children’s savings accounts—to families receiving Temporary Assistance for Needy Families (TANF) benefits in select counties throughout the state. The study will also make recommendations for how to help parents of these children build financial security. This two-generation strategy offers the promise of scalability and a whole-family approach to fostering economic empowerment and mobility. Similarly, the U.S. Department of Education has announced that it will launch a CSA demonstration project through the GEAR UP program, a discretionary grant program designed to increase the number of low-income students who are prepared to enter and succeed in postsecondary education. This $8.7 million demonstration will provide CSA accounts and matching opportunities for up to 10,000 students.

Nationally, movement surrounding CSAs seems to be gaining traction. Pilot programs are popping up in many states, as well as on the federal level. As these programs continue to demonstrate the effectiveness of such accounts, soon every American family may be given the opportunity to achieve economic mobility through college savings accounts. 

This blog post was coauthored by Alex Hoffman.

 

City of Chicago and Consumer Financial Protection Bureau Announce Collaboration

On December 5, Chicago Mayor Rahm Emanuel announced that the City of Chicago would collaborate with the Consumer Financial Protection Bureau (CFPB) to protect people from “financial scams and bad practices.” The agreement between Chicago and the CFPB is the first ever information-sharing agreement between the CFPB and a city. The efforts will focus specifically on cracking down on predatory lending and alternative financial services (AFS). 

In addition to the collaboration agreement, Mayor Emanuel has pledged to introduce an ordinance in the City Council that aims to regulate and license debt collectors in order to make sure that they are complying with fair lending practices and not engaging in unfair debt collection practice. The city also plans to gather information on predatory and deceptive acts associated with home repair loans, payday loans, small dollar loans, reverse mortgage products, and mortgage origination and servicing. Mayor Emanuel is also pledging to use new zoning policies in order to limit AFS locations and other predatory financial services, which tend to be concentrated in low-income, high crime areas.

These measures are definitely a step in the right direction. Asset building advocates have long realized that AFS, specifically predatory loans, keep low-income families in a cycle of debt. Yet, AFS businesses earn an estimated $320 billion annually and are known to disproportionately rely on business from low-income, minority, and immigrant communities. These products charge high fees and exorbitant interest rates that drain thousands of dollars from those who can least afford to lose it. Federally regulated and insured financial service providers are capable of offering the same products at lower prices. In fact, current programs to encourage people to change their behaviors and join the financial mainstream include Bank On, the FDIC Affordable Small Dollar Loan Program, and Citi Credit Building Coalition. The combination of such programs with the structural changes made by Mayor Emanuel’s activities will provide new opportunities for Chicagoans to become financially stable and economically mobile.

This blog post was coauthored by Alex Hoffman. 

Gambling as a Draw for Asset Building

ChanceMasterCard and PayPerks have announced that they will be teaming up to create a lottery-based rewards system for Direct Express cardholders.

In 2010 the U.S. Treasury finalized new regulations requiring recipients of federal nontax payments to receive payment by electronic funds transfer (EFT). Under the regulations, individuals who do not choose direct deposit of their payments to an account at a financial institution would be enrolled in the Direct Express® Debit MasterCard® card program, a prepaid card program.  Thus, recipients of federal benefits, such as Veterans’ Assistance compensation/pension, Railroad Retirement Benefits’ annuities, or Office of Personnel and Management (federal retirement) benefits, are required to have their benefits loaded electronically on this card, unless they have a bank account.  Although the rule became effective in March 2011 for some individuals, all federal benefits will be required to be paid electronically by March 2013. 

A recent Clearinghouse Review article, Federal-Benefits Paper Checks--Soon to Be a Relic, discusses the new electronic payment requirements in more detail.  In general, however, the Direct Express Card functions in the same way as a standard prepaid card, except that the funds on a Direct Express Card are deposited by the government instead of an individual. Direct Express cardholders are assessed ATM withdrawal fees for all out-of-network ATMs and for all ATM withdrawals made more than one per month following deposit. In addition there are fees for receiving a paper balance statement, transferring personal funds onto the card, and replacing lost or stolen cards beyond the first replacement.

Government use of prepaid card programs as a method for disbursing government benefit program funds has increased significantly in the last few years.  Since its launch in 2008, three million people,  two thirds of whom did not have traditional bank accounts, have been enrolled in the Direct Express Card program. However, as the March 2013 deadline looms closer, many of the 5.2 million federal benefit recipients who currently receive paper checks will be enrolled in the program. 

Beginning in 2013, Direct Express cardholders will have access to a customized version of PayPerks: a financial education platform that rewards users for engaging with its web- and mobile-based financial literacy curriculum. This is the first implementation of PayPerks as an optional feature on MasterCard's federal, state, and local government prepaid programs, and was originally announced at the White House Summit on Financial Capability and Empowerment. Under the program cardholders will qualify for the chance to win prizes if they engage in positive savings practices. People who earn “chances” will be entered into a lottery to win these rewards.

There are many different ways to earn chances, but the whole concept is based around incentivizing positive savings behaviors. One way to earn chances will be to participate in modular online financial education programs. Topics will include: benefits of the cards, managing finances, how the pay is loaded onto cards, how to use the card at a point of service (POS), what happens if you lose the card, and how the card can help with asset building. Cardholders will also be able to earn chances by taking surveys that require people to focus in on their own financial behaviors. For example, the survey will ask “How much money do you having in savings?” Or, “How many times have you borrowed money in the last 12 months?” Cardholders can also earn chances by telling family and friends about the products and by using the card at POS. Cardholders will lose chances when they withdraw cash at ATMs.

The model for encouraging positive savings behaviors using lottery-based reward incentives stems from the Doorways to Dreams (D2D) prize-linked savings accounts program. In 2009 D2D began offering prized-linked savings accounts in Michigan. For every deposit of at least $25, participants are entered into a lottery with an annual jackpot of $100,000 as well lotteries for smaller, regularly awarded prizes. The more deposits that participants make, the larger their chances of winning the raffles are. According to the D2D website, eleven months after its launch more than 11,500 Michigan residents opened and saved $8.5 million in Save to Win PLS accounts. The average prize-linked savings account has grown from $817 to $1,779 over three years

Now that Direct Express is partnering with PayPerks, people who receive government benefits on the Direct Express card will have the incentive to engage in smart savings behavior.  Perhaps this model will draw people away from state lotteries, which are known to prey on low-income people and offer no benefit to those who play. According to a PBS report, people earning under $13,000 per year spent on average 9% of their income on lottery tickets in 2008. Moreover, researchers have found a common belief among lower income people that playing the lottery is their only chance to escape poverty. Given the appeal of lotteries, providing an incentive similar to lottery may be an effective tool to recruit more savers. Also, unlike buying a lottery ticket and not winning, under the PayPerks and D2D models people will always get back the money they have saved thereby building their future financial security.  

This blog post was coauthored by Alex Hoffman. 

 

Economic Inequality in the U.S.: New Report

We are the 99 percentSince the Great Recession, issues of economic inequality have been on the minds of many people. The Occupy Wall Street movement highlighted the massive wealth controlled by the “1 percenters.” It is often said that the gap between the rich and the poor is high in the U.S., but how does it compare to other countries? And how does the wealth gap today compare to previous decades?

A new study from the nonpartisan Congressional Research Service (CRS) contextualizes the current state of economic inequality in the U.S. and answers these questions. The report shows that, compared to other developed countries, the U.S. has one of the highest rates of economic inequality. In terms of time, economic inequality in the U.S. has steadily and consistently risen over the past 43 years as the gap between rich and poor widens. 

The CRS report divides the population into five economic quintiles. In a totally equal society, each quintile would account for 20% of the total income. However in the U.S., this is not the case. In 1968, the top wealth quintile earned 42.6% of total income, while the bottom quintile only earned 4.2% total income. In 2011, the top quintile’s share of total income increased to 51.1%, while the bottom quintile’s share actually shrank to 3.2%. Meanwhile, income of the top 5% increased from 16.3% to 22.3% of total income. The total share of income within the middle class (the middle three quintiles combined) fell from 53.2% in 1968 to 45.7% in 2011. 

In addition to examining income as an indicator of economic inequality, the report examines the Gini coefficient. This statistic quantifies inequality on a scale of 0 to 1; 0 means the society is perfectly equal and 1 means the society is perfectly unequal. In the U.S., the Gini coefficient has steadily risen over the past 43 years from 0.386 in 1968 to 0.477 in 2011. According to the study, between 1990 and 2011 “almost all of the increase in overall inequality appears to be due to an increase in top-half inequality.” In other words, the increase is due to the top quintiles gaining more wealth while the bottom quintiles remain stagnant.

The study also examined the overall wealth distribution among 18 different countries in order to gauge how the U.S. stands within a global context. Compared to the 18 other countries examined in this study, the U.S. ranks 16th above only Mexico and Colombia.               

There are two reasons for the growing gap between the rich and everyone else in the U.S. according to the report. First, in the new global economy, American companies can outsource labor, which significantly reduces manufacturing costs and reduces the supply of domestic labor. Second, technological advances have made many jobs unnecessary and have increased the capacity of companies to manage overseas manufacturing operations. Such globalization and technological advances appear to be hurting the bottom quintile much more than the top quintile. Yet, whatever the true cause of this income inequality, it is clear that the overall picture looks good for the wealthy and bad for the poor and middle.

This new report corroborates the evidence of previous studies looking at the wealth gap. A 2011 Congressional Budget Office report revealed that the income of the top 1% grew 275% since 1979, while income grew just 18% for the bottom 20%. In addition, the racial wealth gap in this country has quadrupled since 1984. As discussed in a previous blog post, most people are no longer surpassing their parents in wealth, and the classic vision of the American Dream seems less and less realistic. The problem is not that the wealth gap exists; it is that the wealth gap is growing and people at the bottom seem to be stuck. Hence, the Asset Opportunity Unit at the Shriver Center has as its mission the elimination of the structural barriers preventing people from climbing the economic ladder by advocating for policies that encourage and incentivize asset building. 

Data Show Eliminating Asset Limits Works

Building blocksThere are many different types of poverty, but the Asset Opportunity Unit at the Shriver Center focuses on asset poverty. Asset poverty means having insufficient funds to meet one’s needs for three months if income were to disappear for those three months. Focusing on asset poverty is important because assets are the building blocks for economic mobility and financial stability. While income poverty looks at whether people have enough to get by, asset poverty looks at whether people have enough to get ahead.

One way to measure the asset poverty level of a family of four, for example, is to multiply the Federal Poverty Level (FPL) by three months. Based on this calculation, an Illinois family of four would need $5,762.50 in savings to live for three months if they had no other source of income. Putting aside whether the current FPL is a sufficient measure of poverty, the question is whether most families, let alone low-income families, have even this much set aside.

For low-income families receiving public benefits the answer is likely no. This is because asset limits in public benefit programs prevent such families from building a level of resources necessary for future needs. For instance, in Illinois, the asset limit for Temporary Assistance to Needy Families (TANF) is $2,000. Thus, if a family has more than $2,000 in savings, they are not eligible for TANF. In other words, Illinois’s TANF asset limit is only about one third of what a family would need to stay above the asset poverty level. Given such archaic limits, it is no wonder that families remain in poverty and reliant on public benefit programs.  

For years, advocates have argued that states should either eliminate their public programs’ asset limits entirely or, at a minimum, increase them to limits more reflective of today’s economic realities. As advocates correctly note, asset limits are a relic of entitlement program policies that no longer exist. Cash welfare programs, for example, now focus on quickly moving individuals and families to self-sufficiency, rather than allowing them to receive benefits indefinitely. Since personal savings and assets are precisely the kinds of resources that allow people to move off public benefit programs, continuing to utilize asset limits runs counter to this policy.

Nevertheless, states have been reluctant to reform asset limits. Although most states have eliminated asset limits in the Supplemental Nutrition Assistance Program (SNAP), and some states have eliminated them in Medicaid, the majority of states still have them in TANF. Most often, fear about increased numbers of people who have significant assets enrolling in public benefit programs is given as a reason for not changing such limits. Yet, a recent study from the New America Foundation shows that in states where asset limits have been eliminated no such increases have occurred. Moreover, the study shows that eliminating asset limits actually reduces administrative costs and time per cases, which allows caseworkers to take on more cases, without increasing workload or administrative costs.

The report, which analyzed the results of interviews and surveys of public benefit administrators in eight states, confirmed previous research that found that most applicants to SNAP and TANF have very few assets anyway and that eliminating asset tests would not significantly increase eligibility. In fact, currently in the majority of states studied very few families were denied program participation due to excess assets anyway. In Idaho, only 2.2% of SNAP application denials were due to excess assets. Thus, an overwhelming increase in cases is unlikely. This is true despite widespread belief that eliminating asset tests will allow wealthy individuals to “game” the system. 

The report also noted that eliminating asset limits reduces administrative costs, and the fiscal benefits to the state can outweigh any costs incurred. In Iowa, for instance, direct state costs for eliminating asset limits in its SNAP program were estimated at $702,202, but the overall benefit to the state would be $12.3 million from additional SNAP benefits and increased state employment. Oklahoma determined that eliminating the Medicaid asset limit in 1997 saved approximately $1 million in administrative costs.

The study provides powerful data that advocates can use to convince policy makers that their perceptions about the benefits of asset limits are incorrect. Additionally, these data support advocates’ assertions that, despite what states such as Pennsylvania and Michigan apparently believed when they reinstated asset limits in their public benefit programs, eliminating asset limits is not only necessary for the economic stability of low-income families, but also cost effective for. As the economy begins to improve, now is not the time for states to regress in important policy reforms that will help families become financially self-sufficient.

This blog post was coauthored by Alex Hoffman. 

 

New Poverty Data, Still Not Looking Good for Millions

The Census Bureau recently released new data capturing the state of poverty in the U.S. using the Supplemental Poverty Measure (SPM). The U.S. government uses two measures for quantifying poverty: (1) the official poverty measure and (2) the SPM

The official measure, also known as the Federal Poverty Level (FPL), is used to determine the eligibility of individuals applying for means-tested public benefit programs, such as the Supplemental Nutrition Assistance Program (SNAP), Medicaid, and Temporary Assistance for Needy Families (TANF).  

In March 2010, the U.S. Census Bureau announced that it would develop an alternative way to measure poverty and created the SPM. The SPM is an attempt to update the official poverty measure or FPL; it is generally agreed that the FPL is outdated and therefore underestimates the level of poverty in the U.S. The SPM is not intended to replace the FPL, but rather to supplement it. Thus, the FPL will continue to be the measure for determining eligibility for public benefits.

The SPM is a more robust tool for examining the overall picture of poverty in the U.S. For years, statisticians, policy analysts, and advocates argued that the official poverty measure was overly simplistic, as it is simply calculated by looking at gross pre-tax income. The SPM, on the other hand, takes into consideration geographic location, necessary expenses, taxes, and alternative forms of income such as public benefits. The final calculation of the SPM is the “sum of cash income; plus in-kind benefits that families can use to meet their food, clothing, shelter and utilities needs; minus taxes (or plus tax credits); minus work expenses; minus out-of-pocket medical expenses and child support paid to another household.”   

According to the first SPM data, which was released last November, 49.1 million, or 16%, Americans lived in poverty in 2010, significantly more than the official poverty measure for the same time period, under which 46.6 million people, or 15% of Americans, were living in poverty.

The new SPM data released earlier this month found that approximately 49.7 million or 16.1% of Americans were living in poverty in 2011 versus 46.6 million, or 15%, under the official poverty measure.  Although the report shows that there was no statistical change in the overall SPM poverty rate between 2010 and 2011, the data is still grim. According to the new SPM data, African American and Hispanic populations have significantly higher poverty rates than whites and Asians; 25.7% of all African Americans and 28% of all Hispanics were living poverty in 2011, compared to 14.3% of whites and 16.9% of Asians. Women were also more likely to be living in poverty compared to men;  53.5% of people living in poverty in 2011 were women versus 47% of men. As for poverty levels by age, according to the official poverty measure, 22.3% of children (under 18), 13.7% of adults (ages 18-64), and 8.7% of seniors (65 and above) were living in poverty in 2011. While under the SPM, 18.1% of children (under 18), 15.5% of adults (18-64) and 15.1% of seniors (65 and above) were living in poverty in 2011

Most importantly, the SPM examines the impact of various government programs on poverty. The new SPM data reveal that without Social Security the overall poverty rate would increase from 16.1% to 24.4%. Similarly, without refundable tax credits the overall rate would grow from 16.1% to 18.9%. Alternatively, if people didn’t have expenses such as child support, income and payroll taxes, work-related expenses, and medical out-of-pocket expenses, the overall poverty rate would decrease from 16.1% to 12.7%

The 2011 SPM data allow us to understand the current poverty levels in our society more clearly. There are somewhere between 45 and 50 million Americans living in poverty according to the SPM and the official measure. Yet, these measures still understate the number of people in poverty, since they focus solely on income poverty and do not even consider asset poverty. Asset poverty means having insufficient funds to meet one’s needs for three months if income were to disappear for those three months. According to the Urban Institute, 1 in 5 people, or 60 million Americans, were asset poor in 2010. Unfortunately in the 2012 election, tackling domestic poverty issues was not on either the candidates’ agenda or the media’s agenda. In a country with so much wealth and an overall increasing wealth gap as well as a worsening racial wealth gap, it is totally unacceptable that so many people are living in or on the edge of poverty, and we as a country need to bring this issue to the forefront.

This blog post was coauthored by Alex Hoffman.

 

Prepaid Cards Continue to Lack Consumer Protections

Regulation E of the Electronic Fund Transfers Act provides consumers of mainstream financial services robust protections on their credit and debit cards. Protections include limitations on consumer liability for lost or stolen cards and requirements that banks provide consumers with important information in the form of bank statements, receipts, and notifications. In addition to Regulation E, people utilizing mainstream financial services have the benefit of having the Federal Deposit Insurance Corporation (FDIC) insure their bank accounts up to $250,000 and perform bank examinations in which the FDIC tests the safety and soundness of financial institutions.  Since the establishment of the FDIC in 1933, no depositor has ever lost money from FDIC-insured funds.

The protections provided to those utilizing mainstream financial services do not extend, however, to people using alternative financial services (AFS). There are 34 million unbanked or underbanked Americans. These people rely heavily on AFS products such as check cashing, prepaid cards, and payday loans. In particular, the use of prepaid cards has seen enormous growth in recent years. According to the Consumer Financial Protection Bureau (CFPB), the dollar amount loaded onto prepaid cards from 2007 to 2011 grew 477% ($12 billion in 2007 compared to $57.2 billion in 2011). 

Prepaid cards function similarly to debit cards in that they can be used to withdraw cash at ATMs, purchase goods in stores, purchase products on the internet or pay bills; however unlike debit cards they are not attached to bank accounts. Since prepaid cards are not subject to Regulation E, consumers of prepaid cards often find themselves paying fees without receiving clear notices or explanations.  For example, many of these prepaid cards automatically initiate a line of credit to people that overdraft their cards, thus turning a prepaid card into a credit card without notifying the consumer. A Pew Charitable Trust study found that just 5 out of 52 prepaid card plans disclosed overdraft fees and overdraft credit plans. 

The study also found discrepancies among the various prepaid card plans on a range of fees including lost or stolen card fees, fees for obtaining a card, and fees for speaking to a live customer services representative. Because these cards are not subject to Regulation E, consumers are not always notified of the complicated fee structures that vary significantly from card to card. This is one reason why consumer protection advocates are pushing for greater protections for prepaid card consumers.

In October, Wal-Mart and American Express launched a new prepaid card called Bluebird. This new product is better than some prepaid cards on the market in that it complies with most of the consumer advocate recommendations regarding fees. Yet, like many prepaid cards, it is not insured by the FDIC. And even if it complied with the FDIC’s pass-through insurance requirements (which would allow the card to be covered by FDIC insurance), there would be no easy way for a consumer to determine whether or not such coverage is indeed in place. 

Thus, while Wal-Mart’s card might be a good product within the realm of the alternative financial services industry, it is not as good as a mainstream, regulated, and insured debit account. Instead, more banks should be encouraged to offer Model Safe Accounts and participate in Bank-On programs that can provide the 34 million un- and underbanked households with affordable bank accounts. 

This blog post was coauthored by Alex Hoffman. 

Connecting the Dots: First Lawsuit Linking Investment Banks to Racial Discrimination in the Subprime Mortgage Crisis

House for saleOn October 15, a landmark lawsuit was filed in the United States District Court for the Southern District of New York against Morgan Stanley for facilitating the production of risky loans that targeted African-American borrowers. The suit, which was filed by the American Civil Liberties Union (ACLU), the ACLU of Michigan, the National Consumer Law Center, and San Francisco-based law firm Lieff Cabraser Heimann & Bernstein on behalf of five Detroit residents and the nonprofit legal aid organization Michigan Legal Services, is unique for two reasons. First, according to the ACLU, the suit is the first to connect racial discrimination to the bundling of mortgage-backed securities. Second, unlike previous lawsuits where the named defendants were subprime lenders that originated the loans, this is the first lawsuit where victims of the subprime lending crisis have sought to hold an investment firm accountable for its role in providing a subprime lender strong incentives to originate risky mortgages.

Specifically, the three-count suit alleges that Morgan Stanley violated the federal Fair Housing Act (prohibiting discrimination in housing transactions and unfair lending practices), the Equal Credit Opportunity Act (banning discrimination for credit transactions such as mortgages loans), and the Michigan Elliott-Larsen Civil Rights Act (prohibiting discrimination in making or purchasing of loans secured by residential real estate). Plaintiffs contend that Morgan Stanley was the principal financer for the now bankrupt New Century Mortgage Company, providing the funding that enabled New Century to make mortgage loans to borrowers located in Detroit’s African American communities. Morgan Stanley then “dictated” the types of loans that New Century issued by requiring that a substantial percentage of New Century’s loans bear a combination of high-risk terms (e.g., adjustable interest rates that increase significantly after an initial year of low interest rates and prepayment penalties), effectively placing borrowers at an elevated risk of default and foreclosure. Plaintiffs further allege that Morgan Stanley encouraged New Century to abandon standard fair lending practices that focus on whether borrowers can meet their obligations under the terms of the mortgages and, instead, focused solely whether the loans New Century originated could be processed and sold as securities. The complaint also states that an African American borrower was 70% more likely to obtain a high-cost loan from New Century than a white borrower. 

Although the case concerns lending abuses in Detroit, these practices were common among financial institutions and had a disproportionally adverse affect on Latino and African American borrowers across the country. In this past year alone, the Department of Justice has successfully negotiated residential fair lending settlements against Countrywide Financial (now a subsidiary of Bank of America) and Wells Fargo for African American and Hispanic minority borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin.

Morgan Stanley has issued a statement that it will defend itself "vigorously" against the lawsuit. If successful, however, this suit could introduce a new avenue of justice aimed at holding investment institutions accountable for their role in helping to craft the lending policies that resulted in the subprime mortgage crisis.

This blog post was coauthored by Stephanie Patterson.

Dodd-Frank Obstruction Efforts Continue

Wall Street SignIt is no secret that many powerful interests are working hard to obstruct implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank calls for up to 400 new regulations and for a host of new regulatory and watchdog agencies, such as the Financial Stability Oversight Council, the Office of Financial Research and the Consumer Financial Protection Bureau. Unfortunately, as of October 1, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed, and just 37.1% of the required deadlines have been met with finalized rules. This is due in large part to continued efforts to repeal or, at the very least, significantly limit the banking supervisory authority conferred by Dodd-Frank. 

Historical Laws and Regulations

In the wake of the 1929 stock market crash, after thousands of banks failed and public trust in the banking system collapsed, as part of the New Deal, the Banking Act of 1933 (also known as the Glass-Steagall Act because it was introduced by former Treasury Secretary Sen. Carter Glass (D-VA) and Chairman of the House Banking and Currency Committee Rep. Henry B. Steagall (D-AL)), sought to limit speculation and make banks safer repositories for public money. One of the main provisions of the law was to separate commercial banks from investment banks in order to protect people’s bank accounts from risky investments. In 1999, after a decade of increasing financial industry deregulation as the result of bank lobbying efforts, this “wall” was torn down by the Financial Services Modernization Act, or as it is frequently called the Gramm-Leach-Bliley Act. This paved the way for the creation of banking behemoths like Citigroup, Bank of America, and JPMorgan Chase, which is widely considered a major cause of the 2008 financial collapse.

After the repeal of Glass-Steagall and prior to the “Great Recession,” large financial institutions such as Bank of America, Goldman Sachs, and JPMorgan Chase, were essentially able to gamble with their customers’ money. It is generally acknowledged that Glass-Steagall's repeal certainly contributed to the financial crisis, as banks took risks with their customers' deposits and debts that were previously illegal.

Yet, banks themselves were never at risk. Instead they were in a win-win situation: If their investments grew, they profited, but if their investments failed, taxpayers bailed them out. This paradigm was clearly lopsided. Dodd-Frank was meant to change this, but lobbyists’ and others’ efforts to eviscerate Dodd-Frank and maintain the status quo have limited its effectiveness.

The Volcker Rule

A perfect example of these delay tactics can be seen with the Volcker Rule, which is considered a cornerstone provision in Dodd-Frank. This rule prohibits banks that have access to Federal Reserve funds and have federally insured deposits from engaging in proprietary trading and other risky investment practices. This rule does not go as far as Glass-Steagall did in separating commercial and investment banking; instead it bars banks from making proprietary trades—using their own money to place directional market bets that are unrelated to serving customers. It does not, however, separate banking functions from investment functions. 

Nevertheless banks have lobbied hard against the Volker Rule. So much so that in April the Federal Reserve issued a press release stating that the final version of the Volcker rule is still in the commenting period and therefore extended compliance with the rule until July 21, 2014. Only one month later JPMorgan Chase lost $5 billion on a failed financial gamble: the exact type gamble that the Volker Rule was supposed to prevent. Specifically, on May 10, 2012, JPMorgan Chase announced that it had $2 billion in trading losses on mistakes made in hedging the market. A hedge is an investment position intended to offset potential losses/gains that may be incurred by a companion investment. While these losses came from deals that began as a standard hedge, they morphed into speculation as the bank layered bet on top of bet. In sum, two years after the passage of Dodd-Frank, banks are still able to engage in risky investment practices. It appears the banks are winning this battle.

H.R. 2827

On September 19th, 2012, the House passed H.R. 2827. This bill was a response to Dodd-Frank’s provision regulating the practices of municipal advisors, which itself was a direct response the bankruptcy of Jefferson County, Alabama. JPMorgan Chase sold Jefferson County a bad financial product that eventually led the city to file for the largest municipal bankruptcy in U.S. history. As a result, Dodd-Frank now requires municipal financial advisors to file with the Securities and Exchange Commission (SEC) and to comply with a fiduciary duty to respect the best interests of the taxpayers and the municipal client. H.R. 2827 creates loopholes and exemptions to these requirements allowing municipal financial advisors much more leeway to continue profiting at taxpayers’ expense: yet another victory for banks.  

S. 3468, Independent Agency Regulatory Analysis Act of 2012

Senators are also working to adjust the regulatory process to slow-down and derail implementation of Dodd-Frank’s overall rulemaking authority. S. 3468, Independent Agency Regulatory Analysis Act of 2012, would impose additional hurdles for independent regulatory agencies. Under the proposed law, the President could, by executive order, require agencies to increase their cost-benefit analysis of proposed rules and specifically tailor rules to be the least burden on businesses. Since many of the Dodd-Frank regulatory agencies are independent, including the Consumer Financial Protection Bureau, this would slow down the implementation process of Dodd-Frank, which as mentioned, is already failing to meet deadlines.

Lawsuit

In addition to legislative- and executive-focused obstruction efforts, there are efforts to kill Dodd-Frank on the judicial level. As of September 20, 2012, three state attorneys general have joined in a lawsuit challenging the constitutionality of Dodd-Frank. These states are challenging the provision that empowers the Treasury Secretary to liquidate financial institutions that are essentially “too big to fail.” Under Dodd-Frank, if a financial institution’s collapse would threaten the stability of the banking system as a whole, the Treasury Secretary has the right to dismantle it. According to the written complaint filed on September 20, plaintiffs allege that this new treasury power “denies the subject company and its creditors constitutionally required notice and meaningful opportunity to be heard before their property it taken.” Like the constitutional battle over the Affordable Care Act, this suit has the potential to reach the Supreme Court—a currently free-market oriented Supreme Court. 

We can expect banks to oppose the law because the status quo suits them just fine. But if we are going to provide financial stability and economic mobility to American households, we must get past the current broken system. We must move into a system where bankers are actually held accountable for bad financial decisions. We must implement Dodd-Frank before bankers invent a new way to swindle us again. 

This blog post was coauthored by Alex Hoffman.

 

Consumer Financial Protection Bureau Now Accepting Consumer Credit Report Complaints

CreditCredit reporting agencies provide people with a credit score in order to determine their credit worthiness. For example, if someone wants to borrow money, the bank will check the person’s credit score in order to gain a sense of the likelihood that the person will fulfill his or her side of the loan agreement. The largest credit reporting companies have files on more than 200 million Americans and issue over 3 billion credit scores per year.

Credit is a fundamental part of our country’s economic DNA, and establishing a good credit score is one form of asset building. A good credit score enables an individual to secure a loan for a home, school, or small business, in addition to accessing funds and capital. Yet, problems with inaccurate information in credit reports have been well documented. In fact, one study found that 80% of credit reports contained mistakes of some kind and that 1 in 4 credit reports contained serious errors that could result in the denial of credit, such as false delinquencies or accounts that did not belong to the consumer. 

Such inaccuracies in credit reports can have significant financial impacts on households. For instance, 60% of employers report that they conduct credit checks on applicants. Yet, research has shown that there is no connection between poor credit scores and bad behavior on the job. Moreover, the recent recession and the continuing weak economy have created a credit catch-22. Last month, the national unemployment rate was 7.8%. Minorities and low-income workers are experiencing even higher rates of unemployment—while white unemployment is around 7.0%, the African American rate is at 13.4%. The credit scoring developer FICO reported that over 25% of consumers have credit scores under 600, considered a poor score, as opposed to only 15% of the population before the Great Recession. That means that one-quarter of American workers are at risk of losing out on a job—or even being fired—over their credit histories. As unemployment continues and families continue to fall further behind on their bills, more and more Americans, particularly low-income people and minorities, are losing (if they had it in the first place) their economic mobility and stability.

Additionally, approximately 35 to 54 million Americans have either no credit score or a thin-file credit score, meaning that they have fewer than three sources of payment information on their credit history. Without a credit score, consumers are often excluded from the financial mainstream and relegated to finding other ways of accessing credit (such as borrowing from family or friends, or paying usuriously high interest rates to secure loans from unregulated payday lenders). Low-income consumers, in particular, are less likely to have the sources of traditional credit that are reported to credit reporting agencies. This gives them low or no scores. If access to credit is a fundamental way that families move into the financial mainstream, and low-income individuals are less likely to have these sources of credit, then changes to the credit industry are necessary.

On October 22, 2012, the Consumer Financial Protection Bureau (CFPB) began accepting consumer complaints against credit reporting companies. As CFPB Director Richard Cordray stated, one of the main reasons for this initiative is because “credit reporting companies exert great influence over the lives of consumers ... [and consumers] need an avenue of recourse when they feel they have been wronged.” Unfortunately, many consumers with errors in their reports do not dispute the information because of barriers such as lack of time or resources, educational barriers, and not knowing their rights. Even when they do dispute inaccuracies, many consumers are frustrated by the credit reporting bureaus’ failure to conduct proper disputes or investigations. The CFPB’s new complaint process attempts to help consumers who face such problems.

In a press release, the CFPB explained the process of filing a complaint. If consumers feel they have been wronged by a credit reporting company, they must first file a complaint directly with the company. If the issue remains unresolved, consumers can submit complaints to CFPB. Examples of issues that may be brought to CFPB are:

  • Incorrect information on a credit report;
  • A consumer reporting agency’s investigation;
  • The improper use of a credit report;
  • Being unable to get a copy of a credit score or file; and
  • Problems with credit monitoring or identity protection services.

While not a panacea to either the credit catch-22 or the millions without access to a credit score, hopefully this new action by CFPB will force credit reporting agencies to be more accurate and responsible when providing consumers with credit scores and reports. In the meantime, other reforms to the credit reporting industry are also necessary to ensure that consumers are protected.  

First, states must enact legislation prohibiting companies from using credit scores in employment decisions. Currently, only eight states (California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont and Washington) have laws regulating how employers can use credit information in hiring decisions. Although 40 bills in 19 states and the District of Columbia have been introduced or are pending in the 2012 legislative session, clearly more states need to enact such legislation. There's even a federal effort by U.S. Rep. Steve Cohen (D-TN), to amend the Fair Credit Reporting Act, which provides certain consumer rights with respect to credit reporting, to keep businesses from using credit checks to make adverse decisions against current and prospective employees. Such legislation must be enacted.

Similarly, efforts must be made to bring those Americans who are either thin file or no file into the mainstream credit industry. Consumer advocates, credit analysts, and lenders have been exploring different options for calculating creditworthiness, including the reporting of nontraditional or alternative credit data. 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. As we have indicated previously, additional research into what alternate credit reporting and scoring methodologies might be appropriate should be conducted. For example, what types of data predict creditworthiness and should therefore be reported? Should it be limited to utility payments, or should it also include things such as rent, telecom, 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? While the effect of alternative credit reporting is still unknown, one thing is clear: to be financially stable members of the U.S. economy, families must have access to credit. Thus, such reporting is worth investigating.

Mobile Banking--Is it for the Un- and Underbanked?

Mobile bankingIn the search for new creative ways to expand access to banking among the un- and underbanked, the idea of mobile banking has generated momentum among asset building advocates.  

Currently 34 million Americans are either unbanked or underbanked constituting more than one in four (28.3%) of households. Consumers who are “unbanked” do not have a checking or savings account, while those who are “underbanked” may have a checking or savings account but rely primarily on alternative financial services for their financial needs. Unbanked and underbanked Americans pay a high price for not being banked—they pay high fees to cash checks and are unable to earn interest on savings, develop credit, or obtain loans from mainstream financial institutions. This population is forced to use expensive alternative financial service products such as payday loans, refund anticipation checks, check cashiers, and auto title loans.

Yet this population does have cell phones. Approximately 83% of U.S. adults have mobile phones; last month, a new report indicated that by 2013 smartphones will account for half of the mobile phone market. While mobile phone penetration is less in lower income levels, nearly 75% of U.S. adults in households earning less than $20,000 a year have a mobile phone, and 20% have a smartphone. Among individuals who are unbanked, 65% have access to a mobile phone, and 91% of the underbanked have a mobile phone. Thus, mobile banking has taken on a new urgency in the U.S.

In fact, over the last five years, mobile banking options offered by large banks and other companies have proliferated. In general, electronic or mobile banking refers to a broad spectrum of services and products that are delivered electronically. Often a distinction is made between “mobile banking,” which refers to using a mobile phone to access a bank account, credit card account, or other financial account, and “mobile payments,” which refers to any type of payment made using a mobile phone including purchases and bill payments

Currently 92% of the top twenty-five banks in the United States offer mobile banking services.  Under the bank-based model, established banks offer mobile banking as another way for existing customers to access their accounts. The most frequent services used by bank-based mobile banking customers were checking financial account balances or transaction inquiries (90%), followed by transferring money between accounts (2%), or receiving text alerts from banks (33%). Unfortunately, since these uses are tied to an already existing account, this type of mobile banking does nothing to help bank the un- and underbanked.

Linking existing programs and strategies to bank the unbanked to mobile access technologies would yield increased opportunities for reaching the unbanked and underbanked. For example, Bank On programs, which are available in many cities and states across the country, offer low- or no-cost bank accounts to individuals who are unbanked as an incentive to bring them into the financial mainstream. Offering Bank On USA accounts through mobile phones could significantly reduce the number of unbanked and underbanked Americans.

The growth in digital technology and the use of technological advancements to expand banking options will continue to expand access to the financial mainstream. However, unless special care is taken to make sure that such access is also available to the un- and underbanked, this technology could potentially create an even greater divide between the banked and the unbanked, thereby decreasing opportunities for financial security among the un- and underbanked.

To learn more about mobile banking and its implications for low-income and un/underbanked communities view our webinar and read our law review article.

This post was coauthored by Alex Hoffman.

OCC Rules Against Bank in Preemption Issue

On September 24, 2012, the government overseer of large banks, the Office of the Comptroller of the Currency (OCC) exercised its enforcement authority against a bank and ruled that stricter state consumer protection regulations were not preempted by more lenient federal banking regulations. The OCC found that the Urban Trust Bank (UTB) of Florida violated state usury caps in Ohio and Arizona and that these usury caps were not preempted by the National Banking Act.

In recent years consumer protection advocates have criticized the OCC for its lax enforcement of banks; many blame the failure of financial regulatory agencies such as the OCC to adequately enforce consumer protection laws for contributing to the recent financial crisis. Between 1987 and 2009, the OCC brought just four formal enforcement actions under the Equal Credit Opportunity Act, and between 1997 to 2007 it took only nine enforcement actions banks under the Truth in Lending Act. And most shockingly of all, between 2000 and 2008, at a time when subprime mortgages and other mortgage abuses were proliferating, the OCC took just two public enforcement actions against banks for unfair and deceptive mortgage practices.  

Thus the OCC’s recent enforcement action against UTB is important not only for the consumers that were directly affected by the bank's loan product, but also for consumers in general. In part, it may signify a new willingness by the OCC to take its consumer protection responsibilities seriously.    

Among other reforms, the Dodd-Frank Wall Street Reform and Consumer Protection Act made it more difficult for the OCC to declare that stricter state consumer protection regulations are preempted by more lenient federal law. Under Dodd-Frank, the OCC may only preempt laws if (1) they discriminate against national banks; (2) a given law “prevents or significantly interferes with the exercise by [a] national bank of its powers,” as stated in the Barnett Bank case; or (3) the state law is preempted by another federal law. Yet, in its final rule implementing this provision of Dodd-Frank, it was not clear that the OCC was actually going to adopt this statutory preemption test. According to critics, the OCC’s final rule seemed to indicate that the OCC intended to ignore the Dodd-Frank preemption test and simply continue using its old test as embodied in its previous preemption regulations issued in 2004. Specifically, under these regulations, the OCC could preempt a state law if it “obstructs, impairs, or conditions” bank operations. Since the language in the new final regulations mirrored a lot of that in the old regulations, many critics believed that the OCC would continue to side with banks by continuing to broadly apply its preemption authority. The ruling against UTB, however, shows that the OCC might be taking steps to allow stricter state regulations to be enforced.

On September 24, 2012, the OCC found that Florida-based UTB was engaging in “violations of law and regulations and unsafe and unsound banking practice.” The bank was issuing prepaid cards to the payday lender CheckSmart in order to evade state payday and usury laws. The National Consumer Law Center (NCLC) and other supporting advocacy organizations detailed the fraudulent activity in a Letter to OCC on May 3, 2012. This letter urged the OCC to take action in protecting consumers against predatory lending practices. According to this letter, CheckSmart was using Insight prepaid cards to make loans in Arizona and Ohio that exceeded the usury rates in those states of 36% and 28% respectively. The annual interest rate for the CheckSmart credit product was 401%, and the overdraft loan had a 390% annual interest. On August 23, Thomas Curry, Comptroller of the OCC, responded directly to NCLC letter, stating that the OCC “share[s] your concerns” and that the OCC planned to take action. The OCC subsequently released a settlement agreement by and between UTB and the Comptroller of the Currency wherein UTB agreed to correct legal violations and to submit to the OCC an analysis of its prepaid card program that “fully assesses the risks and benefits of this line of business.”

By determining that Arizona’s and Ohio’s state interest rates caps were not preempted, the OCC ruled on the side of advocacy groups and strict consumer protections against predatory lending. While we will need to continue monitoring the OCC’s enforcement actions in order to know if it will continue to follow Dodd-Frank’s preemption provisions, its enforcement action against UTB is a step in the right direction and can be seen as an early sign that the OCC will no longer continue its trend of ruling that every state consumer protection law is preempted by federal law. 

California Moves Ahead with Automatic IRA Law

Piggy bankThe U.S. is facing a growing debt crisis, the baby boomer generation is entering retirement, people are living longer today than ever before, and long-term health care costs are rising to unmanageable levels for many older Americans. Given the retirement demands facing the nation and its retirees, saving more for retirement has never been more important, yet not enough Americans save enough for a retirement free of financial hardship and worry.

A major cause of this lack of long-term savings, according to a recent Woodstock Institute Report, is a lack of opportunity: 50% of workers in Illinois lack access to employer-sponsored retirement savings plans. To increase access to retirement plans, several states have stepped in to provide workers with an option to save for retirement through state-sponsored private employer retirement savings plans in the absence of an employer-offered plan. California recently became the first state to pass a law creating an automatic enrollment individual retirement account (IRA) program, and Illinois is currently considering similar automatic IRA legislation. 

The California Source Choice Retirement Savings Trust Act would create a statewide retirement savings plan for private sector workers who do not have access to an employer-sponsored retirement savings plan. Under the law:

  • All California employers with more than five employees not offering a retirement savings option would be required to offer the new state IRA program.  
  • Eligible employers not electing to offer their own savings option would be required to automatically enroll all employees into a 3% payroll deduction auto IRA plan, called the California Secure Choice Retirement Savings plan. 
  • Employees could opt-out of the program and/or change their deduction amount.
  • All investments would be placed in a pooled trust fund administered by an appointed nine-member board that contracts with third-party firms to manage, invest, and administer the funds. The trust fund would provide a modest guaranteed rate of return through the use of private insurers who would insure the return rate and bear any liability for losses.

Unfortunately, before the law can be implemented several conditions must be met. First, a preliminary market analysis must be paid for by an entity other than the state. Second, the proposed plan must be approved by the Internal Revenue Service and be deemed, by the U.S. Labor Department, not to be an employer-sponsored plan subject to the Employee Retirement Income Security Act (ERISA). Finally, the California legislature would need to enact legislation approving the final plan.

The Illinois General Assembly is currently considering a similar bill, S.B. 3278/H.B. 4497.  Although the Illinois bill is still in its early stage and therefore lacks the detail of the California law, it too would create a statewide automatic IRA program for workers in Illinois. All employers not currently offering a retirement plan that employ between 10 and 100 employees would be required to automatically enroll their employees into a 2% payroll deduction IRA type account administered by the State Treasurer’s office. Similar to the California program, employees would be able to opt-out or change their contribution amount. Similar to the California board, the state treasurer would contract with third-party investment firms to invest and administrate the fund. Unlike the California plan, employees could choose from a limited range of investment options or be put into a default investment. Most importantly, unlike California, the Illinois plan does not establish a guaranteed rate of return.

Both pieces of legislation address a growing problem of retirement insecurity by developing a concept that promotes both progressive and conservative values. They address equal access, while simultaneously promoting personal responsibility and individualism. Although there is concern that states should not enact such programs given their current budget crises, states should remember that there are benefits beyond those enjoyed by enrollees. These types of investment strategies ultimately pay dividends to the states in reduced reliance on government aid and greater wealth owned by their citizens.

The Illinois Asset Building Group (IABG)’s efforts to pass automatic IRA legislation in Illinois will increase access to a vital tool people need to build financially secure retirements. Learn more about IABG’s work and the importance of automatic IRAs at IAGB’s upcoming conference in Champaign, Illinois, on November 15th & 16th. The conference will highlight automatic IRAs in a workshop featuring Karen Harris, Director of Asset Opportunity at the Shriver Center; Spencer Cowen, Vice President of Applied Research at the Woodstock Institute; and David John, Senior Research Fellow in Retirement Security and Financial Institutions at The Heritage Foundation.

Protecting EBT Cards from Theft: New Law in California

The California state legislature recently passed a law protecting Electronic Benefit Transfer (EBT) cardholders from theft. Prior to its passage, when benefit money on an EBT card was stolen, public benefit recipients had no recourse, and funds were not replaced. Specifically, EBT cards are not covered by the Electronic Funds Transfer Act and Regulation E.

In the mid-1990s, when most EBT systems were implemented, many states opposed extending Electronic Funds Transfer Act protection to EBT systems on the grounds that the potential liability under Regulation E would make EBT systems more costly to states. Despite intense industry pressure, the Federal Reserve initially included EBT within Regulation E. However, states urged as part of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 that Congress statutorily exempt EBT from Regulation E. Congress agreed to this amendment, and Regulation E was revised to exempt needs-based government electronic benefit payments. The term “account” under Regulation E therefore does not include accounts distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency. Therefore when an EBT card is stolen, the benefit recipient cannot reclaim the stolen benefit money.

The new California law amends California’s Welfare and Institutions Code to provide, among other things, that a 24-hour toll free telephone hotline for reporting lost or stolen cards be available, that recipients will not incur any loss of benefits after reporting a lost or stolen card, and that money that was not withdrawn using an authorized ID number for the account will be promptly replaced.

While these provisions will protect California public benefit recipients, beneficiaries in other states still don’t have the necessary consumer protections. Instead of states being forced to adopt piecemeal legislation, federal legislation is needed. For example, the Benefit Card Fairness Act (H.B. 4552), which was proposed last year, should be reintroduced. This bill would repeal the exemption of electronic benefit transfer systems established by a government agency and would provide public benefit beneficiaries with the same protections that regular Americans receive on their credit and debit cards. 

Not being able to recover stolen benefit money is just one of many barriers that public benefit recipients face on a regular basis. For example, nine states have restrictions as to where people can access TANF benefits, making it difficult for beneficiaries who do not have banks in their neighborhoods to access their funds. Additionally, unbanked benefit recipients are forced to pay ATM fees when accessing their benefits at ATMs, thereby reducing the amount available to them to meet the very needs for which the funds were intended. Finally, asset limits in public benefit programs create disincentives for saving money and building assets and ultimately keep people in a cycle of poverty. These barriers, which are built into public benefit programs, make life more difficult for people who are already struggling.

Such barriers to public benefit program access seem to be based on the same underlying reasoning used to pass the recent voter ID laws. Supposedly, they are all in place to prevent fraud and abuse, as well as to save the state money. However, the need for many of these barriers has not been proven. For instance, the laws restricting EBT card use at bars and casinos were enacted to prevent the less than 0.1 percent of TANF transactions that occurred at these locations. Although many lawmakers have expressed anxiety about fraud and system abuse when it comes to programs that serve people in lower socioeconomic levels, there is no conclusive evidence that these barriers are effective. Perhaps, instead of being so concerned about fraud and abuse among low-income communities, lawmakers should focus on the fraud and system abuse occurring among the wealthy.

To learn more about EBT cards and their lack of protections, view our webinar, The Next Frontier in Public Benefits:  Electronic Benefit Cards.

Where Have All The Free Checking Accounts Gone?

Checking accountFor many Americans, a checking account is the basic building block of assets building and establishing a long-term financial history. Although the consumer benefits of full-service checking accounts are well known by banks, the country’s top five banks (Chase, Bank of America, Citibank, U.S. Bank, and Wells Fargo) are making it harder to maintain these accounts by attaching fees to the most basic banking transactions.

Prior to the collapse of the economy, banks focused heavily on building relationships with customers by offering incentives such as free checking. Free consumer checking accounts were issued with the expectation that they would develop into deeper banking relationships with customers who also needed mortgages, loans, and credit cards. However, the recent trend among big banks has been to try to recoup lost revenue, resulting from the government restrictions promulgated under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, by increasing the amount and type of fees on checking and other accounts. This is despite the fact that annual reports from each of the five major banks show a steady increase in profits since the $700 billion bank bailout in 2008.

A closer look at the new checking account fee structures adopted by the major banks shows that they provide incentives only for the most profitable account holders. According to Moneyrate.com’s 2012 rate survey, the average amount required to open a checking account was $408.76, up from $391.41 in 2011. The higher this minimum becomes, the more low-income customers are forced to go unbanked. In fact, the 2011 FDIC survey of the unbanked and underbanked showed that the number of unbanked households increased from the results of the 2009 survey. It also noted that, of those households that are underbanked (meaning that they have at least one account with a financial institution but also use alternative financial services), 29.3% do not have a savings account, while about 10% do not have a checking account.  

Banks have also increased monthly fees. Among banks that charge a monthly fee, the average cost was $12.08, up from $11.28. Yet, all major banks waive monthly maintenance fees if a customer has direct deposit, has multiple financial relationships with the banking institution, or has high account balances—the 2012 survey data showed banks required an average balance of $4,446.57 to get a monthly fee waived, up from $3,590.83. Most low-income account holders, however, do not qualify for fee waivers and can spend up to $145 a year just to maintain their accounts. Thus, banks are simultaneously making the fees harder to avoid for low-income clients, while offering wealthier account holders free full-service checking accounts.

Unsurprisingly, customers who do not have enough cash assets to qualify for a fee waiver or who cannot afford the new monthly fees associated with basic banking accounts are looking to new ways to manage their money. This has resulted in many low-income consumers switching to prepaid cards as an alternative to traditional banking. In 2001, an estimated $57 billion was loaded onto prepaid cards, and this figure is projected to grow 47% to $167 billion by 2014. Prepaid cards work like debit cards, except they do not require a bank account. Although originally offered by non-bank entities, four of the five major banks are now marketing prepaid cards as an attractive alternative to full service bank accounts, and advertising them as a low-cost alternative to traditional checking accounts. What most customers do not know is that prepaid cards are not as regulated as banks and leave customers vulnerable to financial insecurity. According to a study by the PEW Foundation, most of these cards carry between 7 and 15 different kinds of fees. Additionally, depending on how they are structured, many of these cards may not have FDIC insurance, which protects deposits up to $250,000.

The current state of customer-bank relations further highlights the need to provide low-income consumers with low-cost alternatives to traditional banking, while also providing the financial protections missing from prepaid cards. In response to these needs, in 2011 the FDIC launched a Model Safe Accounts Pilot. This pilot was a case study designed to evaluate the feasibility of financial institutions offering safe, low-cost transactional and savings accounts that are responsive to the needs of underserved consumers. Safe Accounts are checkless, card-based electronic accounts that allow withdrawals only through automat­ed teller machines, point-of-sale terminals, automated clearinghouse preauthorizations, and other automated means. The final report on the pilot, which was released in April of this year, showed that most institutions reported that the cost of offering Safe Accounts was roughly the same if not lower than the costs of offering other accounts because the pilot accounts do not have any paper check-related costs. 

More recently, the California Reinvestment Coalition designed the SafeMoney account as another template for use by banking institutions across the country. SafeMoney accounts are geared toward low-income households and offer safe and affordable full-service checking account services for a flat monthly rate. SafeMoney accounts provide customers access to a debit card, money orders, bill pay, and remittances so that customers can do all of their financial transactions through one account, while also providing the necessary consumer protections missing from prepaid cards, such as liability from theft, fraud, or unauthorized use. SmartMoney accounts also prohibit overdraft fees and provide customers with real time information on account balances.

Unfortunately, “free checking” is likely a thing of the past; however, if the major banks utilize models such as the Safe Account or the SafeMoney account, low-income customers will have access to one of the basic building blocks of financial stability and economic mobility. 

This blog post was coauthored by Stephanie Patterson.

EBT Card Administration Is a Highly Profitable Business

In a 2011 Shriver Brief post, we discussed the new phenomenon of banks profiting off of administering Electronic Benefit Transaction (EBT) cards in public benefit programs such as Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and Women, Infants and Children programs (WIC). A recent Government Accountability Institute (GAI) report, “Profits from Poverty: How Food Stamps Benefit Corporations,” provides new data on the massive amount of earnings, as well debatable assertions of unsavory political dealings, with regards to the administration of SNAP benefits.  

The Players. The report reveals that only three third-party contractors provide all state SNAP EBT services in the U.S. JP Morgan, the largest contractor, contracts to provide EBT services for 24 states and two U.S. territories. Affiliated Computer Services (ACS) has 15 state contracts, and eFunds Corporation contracts with 10 states and one U.S. territory.  

The Earnings. In 2004, 18 out of the 24 states contracting with JP Morgan Chase paid $560,492,596.02 to administer their SNAP EBT programs. New York’s contract with JP Morgan Chase alone was worth $126,394,917.

The Contracts. According to the report, the standard SNAP EBT contract allows the third-party contractor to earn money in five distinct ways. In the first two ways, the state and retailers pay the contractor directly. In the final three ways, the contractor can earn money directly from public benefit program recipients.

  1. The bulk of a contractor’s profits come from the state payments of between $0.65-$1.45 (depending on the contract) per public benefit recipient enrolled in the program for each month. This fee can be higher if a person is in enrolled in multiple programs at once, but uses one EBT card for all programs. 
  2. Point of Service (POS) machines that process transactions at retailers when beneficiaries use their cards also generate revenue for an EBT contractor. Federal regulations allow only federally authorized retail establishments to accept EBT cards, so states typically rent a POS machine (the machines used to make EBT purchases and transmit the purchasing information) for each authorized retail location and pay a monthly fee to the contractor for use of the machine. As an example, Arizona pays a monthly fee of $14.95 per month per machine.
  3. ATM fees are the first way that contractors earn money directly from enrollees in benefit programs. As discussed in a recent Shriver Brief post, 88% percent of TANF recipients are subject to transaction fees when accessing their benefits. The most troubling aspect of this ATM fee is that the money is being diverted from poor people to wealthy institutions like JP Morgan Chase.
  4. Another way that contractors earn money directly from public benefit recipients is through card replacement fees. Replacement fees for lost or stolen cards are typically around $5.
  5. The final way that contractors earn money from benefit recipients is by charging for customer services phone calls. In New York, for example, benefit recipients are charged $0.25 per customer service phone call.

The Politics. SNAP is administered by the Department of Agriculture; therefore, the House and Senate Agriculture Committees are influential in the SNAP program. The report reveals that JP Morgan Chase significantly increased its political donations to members of both the Senate and House Agriculture Committees since becoming a SNAP EBT service provider. Between 1998 and 2002, JP Morgan Chase’s total contribution per election cycle was $82,897 on average; however, that amount ballooned to an average cycle contribution of $215,120 between 2004 and 2010. The report implies that these political dealings in Washington, D.C., directly affect state contracting decisions, however the report offers no evidence to support this claim. 

The report goes onto to argue that JP Morgan Chase bought out President Obama. JP Morgan Chase donated $807,000 to the 2008 Obama campaign, which was substantially more money than was donated to the McCain campaign. The GAI report argues that Obama was thus driven to expand SNAP because he knew it would benefit JP Morgan. While there has been an expansion of SNAP benefits under Obama’s presidency, it seems unlikely that Obama’s social policymaking was motivated by a desire to please JP Morgan Chase. Instead, it is more likely the result of a deep recession in which more families needed the food safety net support that SNAP provides.

Conclusion. People enrolled in SNAP are enrolled because they do not have enough money to pay for food. Is it fair that these essential public benefit funds are being paid to third-party administrators, both by states and recipients? While contracting EBT administration to third-parties theoretically saves states more money than it they were administering EBT services internally, the hundreds of millions of earnings by private entities, including JP Morgan Chase, which received a $12 billion dollar bailout back in 2008, raises the question of whether these fees are reasonable. Are the ATM, lost card, and phone call fees necessary for JP Morgan Chase to meet its bottom-line? Does that bottom-line include large bonuses and profits? These and other questions must be answered in order to determine whether SNAP benefits are unfairly enriching companies at the expense of poor families. And, if so, how do we design a system where benefits actually reach those they are intended for? 

This blog post was coauthored by Alex Hoffman.

 

FDIC Updates Survey of Unbanked and Underbanked Households

The Federal Deposit Insurance Corporation (FDIC)’s recently released report, 2011 National Survey of Unbanked and Underbanked Households, updates the FDIC’s findings from its original 2009 report and has found large increases in the number of unbanked and underbanked households.

Specifically, the new report finds that 8.2% of all households in the U.S., 17 million adults, are unbanked; this is a 7% increase from 2009. In addition, 20% of all households, 51 million adults, are underbanked; this is a 16% increase from 2009. “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 (AFS).

The report also examines the demographics of unbanked and underbanked populations. Young, minority, and low-income households were found to be the most likely to be unbanked and underbanked. African Americans have the highest unbanked and underbanked rate: 21.4% and 33.9% respectively. Hispanics also have a high unbanked and underbanked rate compared to the overall population: 20.1% and 28.6% respectively. Unmarried female-led households are also more likely to be unbanked (19.1%) and underbanked (29.5%) compared to the overall population (8% unbanked and 20.1% underbanked).

Most notably, the 2011 survey added questions about the types of accounts held by a household, as well as the reasons households do not have accounts. Twenty-nine percent of all households lack a savings account, while 10% lack a checking account. The most common reasons why households reported for not having a bank account is that they feel they do not have enough money for an account, or they do not need or want one. Yet, households that have previously had an account are less likely to report that they do not need or want an account relative to those that have never had one.

The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday lenders, rent-to-own stores, or pawn shops. This year’s report also revised the definition of AFS to include remittances, and revised questions related to the timeframes during which households used AFS. The number of households that have used AFS has increased. In 2009, only 36.3% of U.S. house­holds had used an AFS product, whereas in 2011, 40.9% of households had used AFS products. Specifically, almost two-thirds (64.9%) of unbanked households had used at least one AFS product in the last year, and close to half (45.5%) used AFS in the last 30 days. The proportion of households that use AFS is higher among younger, less educated, and lower-income populations, and higher proportions of black and Hispanic households use AFS than white households.

While overall AFS use has increased since 2009, the report found that transaction AFS services (non-bank money orders, non-bank check cashing, and non-bank remittances) were more widely used than AFS credit products (payday loans, pawn shops, rent-to-own stores, and refund anticipation loans). Among unbanked households, 45.8% used only transaction AFS, 2.7% used only credit AFS, and 14% used both transaction and credit AFS. Among underbanked households, 75.7% used only transaction AFS, 9.4% used only credit AFS, and 13.5% used both. For example, 1.6% of unbanked and 7.9% of underbanked households had used payday loans within the past 12 months. Such results are consistent with Pew’s recent report on payday lending, Who Borrows, Where They Borrow, and Why: Payday Lending in America.

In terms of non-bank remittances, 3.7% of all U.S. households, including 9.2% of unbanked and 14.4% of underbanked households, used a non-bank remittance in the last year. Not surprisingly, convenience (32.5%) and speed (23.5%) were the most common reasons why households use non-bank remittances. The fact that unbanked households do not have a banking relationship is another common reason why these households use AFS providers for remittances (29.5%). The Consumer Financial Protection Bureau (CFPB) did, however, issue final regulations requiring AFS remittance providers to enact certain consumer protections. Moreover, since banks have only recently started offering remittances, many households may not even know banks provide such services.

While the report provides an in-depth analysis about the current prevalence of underbanked and unbanked households and individuals across a range of demographics, the report does not provide a clear explanation of what leads to these outcomes. This could mislead people into blaming the victims instead of understanding the structural and societal problems that contribute to banking behaviors. The importance of this report lies in the wealth of data describing the unbanked and underbanked populations. As the report correctly notes, unbanked and underbanked households come from many different cultures, communities, and background, and understanding these differences will allow banks and advocates to tailor bank access programs to fit the needs of specific communities.

In terms of transactions, the FDIC should continue to encourage banks to capitalize on the opportunity to take business away from AFS businesses by offering consumers a safer, cheaper, and higher quality product, such as the FDIC’s Model Safe Account. More banks should also be encouraged to participate in Bank-On programs wherein local banks and communities partner to provide low-cost comprehensive bank accounts for the unbanked. Although the data show that the use of AFS transactions is more common than credit, the FDIC should require more banks to provide affordable and responsible small dollar loans, similar to the ones the FDIC piloted to illustrate how banks could profitably offer affordable small-dollar loans as an alternative to high-cost credit products, such as payday loans and fee-based overdraft protection.

Hopefully advocates and banking regulators can leverage this message in order to convince banks to reach out to greater numbers of people who are unbanked and underbanked. 

This blog post was coauthored by Alex Hoffman.

 

Federal Payday Lending Law Coming?

The Protecting Consumers from Unreasonable Credit Rates Act, S. 3452, introduced in the Senate by Senator Dick Durbin (D-IL) would create a national interest rate cap of 36 percent. The bill, which would affect payday and car title loans, along with various other types of credit, is a response to the persistent triple digit interest rates common among payday loan and other high-cost loan products.

Essentially, Durbin’s bill establishes a new FAIR, Fee and Interest Rate calculation that includes all fees and creates a rate cap at 36%. The rate is similar to usury caps that are already active in many states and in place for the military and their family members.

To protect consumers from predatory lending practices and to help consumers use credit more wisely, the legislation would:

  • Establish a new Fee and Interest Rate (FAIR) that incorporates all interest, fees, finance charges, and related costs of credit.
  • Institute a federal maximum annualized FAIR limit equal to 36% and apply this cap to all open-end and closed-end consumer credit transactions, including mortgages, car loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans.
  • Encourage the creation of responsible alternatives to small dollar lending, by providing tolerances for initial application fees and for ongoing lender costs such as insufficient funds fees and late fees.
  • Ensure that this federal law does not preempt stricter state laws.

At the same time that Senator Durbin is proposing this needed legislation, the payday loan industry is attempting to deregulate payday lending at the national level. Two proposals, H.R. 6139 and H.R. 1909, have picked up support in the House on the false grounds that they will expand access to credit in underserved communities. Both bills propose to create a new national charter for payday lenders similar to the national bank charter that would allow payday lenders to operate throughout the country, evade existing interest rate caps, and curtail disclosure requirements.

Yet, simply legitimizing payday lenders and other fringe financial services without reforming their products will not provide safe and viable banking solutions to the unbanked/underbanked.  Similarly, these bills, unlike Durbin’s bill which would encourage banks to make alternative small dollar loans, do not ensure credit opportunities.  

Unfortunately, a similar rate cap proposal that was introduced by Senator Durbin in 2009 failed.  Given the payday loan industry’s current attempts to enact pro-industry federal legislation, advocates and consumer groups will need to rally support to ensure that S. 3452 passes instead of  H.R. 6139 or H.R. 1909. So contact your senators and representatives today to support fair lending!

What's Up with Vermont? Exploring the American Community Survey Poverty Data

VermontOn September 12, the Census Bureau released official poverty data that showed that the national U.S. poverty rate did not significantly change since 2010. While the poverty rate did not increase, but it also did not decrease, which is bad. There are still 46 million people in America who live in poverty, including one in every five children. That’s 25% more people than at the start of the recession in 2007 and is still the highest number in the 52 years that this data has been collected.

This past week, the Census Bureau released The American Community Survey (ACS), which provides more detailed poverty data on the state and local level.  According to the ACS data, the number of people with incomes below the poverty line grew by 0.6 percentage points between 2010 and 2011. This was the fourth consecutive increase in the poverty rate, however, this year’s increase was smaller than the increases between 2008 and 2009 (1.1%), and between 2009 and 2010 (1.0%).

According to the ACS, among large metropolitan areas, poverty rates ranged from 8.3% to 37.7% in 2011. Additionally, 27 states and the District of Columbia saw no statistically significant change in their poverty rate since 2010, while 22 states saw increases in their poverty rates. Only Vermont had a decrease in its poverty rate, from 12.7% in 2010 to only 11.5% in 2011.

Nationally, real median income dropped 1.3 percentage points since 2010, from $51,144 to $50,502. According to the ACS, 27 states had median household incomes lower than the national median, while 19 states and the District of Columbia had higher median incomes. Median incomes ranged from a high of $70,004 in Maryland to a low of $36,919 in Mississippi. Vermont, where median income rose from $50,707 in 2010 to $52,776 last year, was the only state to have an increase in median income.

The data also show that, nationally, the percentage of people without health insurance coverage decreased (16.3% in 2010 to 15.7% in 2011). In particular, the Patient Protection and Affordable Care Act provision enabling adult children under age 26 to obtain coverage under their parents’ policies, which went into effect in 2010, decreased the number of uninsured young adults aged 19 to 25. Coverage of this group increased from 68.3% to 71.8%.  Overall, 37 states and the District of Columbia saw increases in health coverage, while 13 states had no significant change. And, once again, Vermont was the state that had the highest increase in coverage in the young adult (aged 19 to 25) group, going from 75.2% in 2009 to 89.1% in 2011. Vermont was also one of only nine states whose increase was greater than the national average.

Maybe one question to ask is “What’s up with Vermont?” since, in all of the reported poverty measures, Vermont is on the top. What specifically is the state doing to reduce poverty, and how can these efforts be translated to other states?

While it is impossible to draw a direct causal link between poverty reduction efforts in Vermont and decreases in the state’s poverty rates, there are some possible drivers of this correlation. For example, Vermont has the third highest minimum wage in the U.S. ($8.46).  Wages are one of the basic determinants of income so, logically, a higher minimum wage should reduce poverty.

Vermont has also enacted policies and programs that promote saving and asset building and protect consumers. For instance, with respect to education, Vermont allows savings in its 529 college savings program without a fee, and the state provides incentives for savings in the state’s 529 college savings program for residents. It has also developed content standards for personal finance courses that schools must implement when teaching financial education.  For business development, Vermont provides state funding through the use of federal block grant funding to support microenterprise development.  To protect homeowners from foreclosure, Vermont provides access to judicial review, regulates mortgage servicers, and limits deficiency judgments. In terms of health care policies, in Vermont, both parents and childless adults earning below 300% of the Federal Poverty Level (FPL) are eligible for Medicaid. Additionally, the state's Medicaid program covers basic dental care for adults and provides an extension of COBRA coverage for small firm employees.  Finally, Vermont has strong asset building policies. It has eliminated asset limits in its Supplemental Nutrition Assistance Program (SNAP) program and excludes at least four categories of assets in its Temporary Assistance for Needy Families (TANF) program. Vermont also has a strong state funded Individual Development Account (IDA) program. It provides tax incentives for working families such as a refundable state Earned Income Tax Credit (EITC) which is 32% of the federal EITC, as well as a Child and Dependent Care Tax Credit.  Finally, Vermont has strong consumer protections against predatory lending.  It caps payday lending and short-term installment loan rates (18% and 24% respectively) and prohibits car-title lending entirely.

Overall the 2011 poverty data show that there is a lot of work to be done when it comes to fighting poverty on both the local and federal level. However, poverty reduction is possible if states begin changing their public policies to promote asset building and savings opportunities and strong consumer protections to protect such savings and assets.  

This blog post was coauthored by Alex Hoffman.

 

New Poverty Measure Claims to Capture Poverty More Objectively

There are many schools of thought on how to fairly allocate resources to those in need.  A fundamental issue is deciding who qualifies for assistance. One of the federal government’s tools for determining who is truly “poor” and who is not is the Federal Poverty Level (FPL) measure. For years, human rights and antipoverty advocates have criticized this measure for being an inaccurate tool.  

When the Social Security Administration first released the FPL in 1963, it was based on the annual baseline cost for an inexpensive, nutritious diet. The cost of this “thrifty food plan” was then multiplied by three, since in 1955 food constituted one third of total household expenditures. Almost since its inception, the FPL has been criticized by human rights and antipoverty groups for not accurately measuring poverty. Among other problems, under the FPL a family's income is calculated using pre-tax income levels; however, the poverty thresholds that have been established use estimated income available after taxes. Thus, the measure assumes that families have more income than they do in reality, thereby underestimating the level of poverty.   

Throughout the years, various proposals to update the FPL have been proposed. Finally, in 2011, the federal government adopted the so-called Supplemental Poverty Measure (SPM). Although this measure is supposed to provide a more detailed picture of poverty, it is not meant to replace the FPL. The SPM is more complex than the FPL because, when calculating income, the SPM excludes various expenses such as taxes, medical bills, child care, and work expenses. In addition, the SPM includes non-cash elements such as public benefits and tax credits. Finally, the SPM takes geographic location into consideration.  

In November 2011, the first SPM data were released. Under the SPM, 49.1 million, or 16 percent, of Americans lived in poverty in 2010, significantly more than under the official measure, which found that 46.6 million people, or 15 percent, lived in poverty. Given that the number of people in poverty in 2010 under the existing measure was the highest that it has been in the 52 years since this information has been collected, this new measure’s estimate is even more dramatic.

A recent article, Identifying the Disadvantaged: Official Poverty, Consumption Poverty, and the New Supplemental Poverty Measure, is critical of the SPM. The authors state that the use of any income-based poverty measurement is flawed. Instead, they advocate for the use of a consumption-based measurement; a metric that considers what people consume rather than what people earn. The authors argue that:

income-based measures of well-being will not capture differences over time or across households in wealth accumulation, ownership of durable goods such as houses and cars, or access to credit. . . . Another advantage of consumption is that it appears to be a better predictor of deprivation than income; in particular, material hardship and other adverse family outcomes are more severe for those with low consumption than for those with low income. Yet another advantage is that consumption appears to be more accurately reported than income for the most disadvantaged families.

Under the consumption-based measure, poverty rates would decrease. That is not to say that poverty in absolute terms would decrease, but rather that many people who qualify as poor under the SPM and FPL would not qualify as poor under a consumption-based measure. Importantly, under the proposed consumption-based metric, many people who currently qualify for benefits like Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) would no longer qualify. 

Determining an objective line for poverty, regardless of the measure used, assumes that poverty is quantifiable. In real life, however, poverty is determined by a lack of both quantifiable and unquantifiable resources.

Many other countries do a better job than the U.S. in considering needs in their poverty definitions. Great Britain looks at factors including whether or not children have the opportunity to celebrate their own birthdays. In Germany, poverty is approached in relative terms, defined as earning less than 50% of the median income. The United Nations focuses on human development when examining poverty and considers factors such as life expectancy and schooling. Maybe the U.S. needs to look towards other countries in developing a more comprehensive system for defining poverty. 

In her book, A Framework for Understanding Poverty, Ruby Payne lists eight resources necessary to escape poverty. Although financial resources are significant, many others, such as emotional, mental, spiritual, and social capital, are unquantifiable, but also very important.

In other words, objectifying poverty simply in terms of income is intrinsically flawed. While such a measure provides valuable insight, we also need to take a step back and realize that the ultimate goal of all government programs is maximizing well-being in society. Focusing solely on financial resources limits the definition of “well-being” to merely having material possessions and money. It is only when all of the determinants of poverty are viewed together that it is possible to develop a quantifiable metric for determining who is poor and who is not. Maybe the real question is not which of the FPL, SPM, or consumption-based poverty measures is the best, but rather whether we should redefine poverty entirely. After all, if the fundamental purpose of a poverty measure is to identify, as fairly and efficiently as possible, those individuals in our society who truly need government assistance, shouldn’t we examine all of their needs?  

This blog post was coauthored by Alex Hoffman.

 

   

Saving at the Post Office, While Saving the Post Office

According to a 2009 FDIC survey, about one in four U.S. households are unbanked or underbanked. Without access to conventional financial services, people turn to an alternative banking market of bill pay, prepaid debit cards, and check cashing services, as well as payday loans. The unbanked pay excessive fees for basic financial services, are susceptible to high-cost predatory lenders, and have trouble buying a home and other assets because they have little or no credit history.

The now-defunct U.S. Postal Savings System was set up in 1911 to get money out of hiding, attract the savings of immigrants accustomed to saving at post offices in their native countries, provide safe depositories for people who had lost confidence in private banks, and furnish depositories that had longer hours and were more convenient for working people than private banks provided. The minimum deposit was $1 and the maximum was $2,500. The postal system paid two percent interest on deposits annually. It issued U.S. Postal Savings Bonds in various denominations that paid annual interest, as well as Postal Savings Certificates and domestic money orders. Savings in the system spurted to $1.2 billion during the 1930s and jumped again during World War II, peaking in 1947 at almost $3.4 billion.

The U.S. Postal Savings System was shut down in 1967, not because it was inefficient but because it became unnecessary after the profitability of catering to the unbanked and underbanked became apparent to the private financial sector. Private banks then captured the market, raising their interest rates and offering the same governmental guarantees that the postal savings system had.

In 2008, when the FDIC studied banks’ initiatives to bank the unbanked it found that many of these initiatives were lacking. For instance, although “73% of banks were aware that significant un/underbanked populations were in their service areas, less than 18% of banks identified expanding services to un/underbanked individuals as a priority in their business strategy.”

Given banks’ unresponsiveness to the banking needs of the unbanked and underbanked communities, reinstating the postal banking system could be a win-win situation, providing jobs and income for the post office along with safe and inexpensive banking services for underserviced populations. Other countries have already begun expanding and/or adapting their existing postal systems to provide such banking services.

In China, for example, the People’s Bank of China (the central bank) helped to reestablish China’s Postal Savings Bureau in 1986 after a 34-year lapse. Savings deposits flooded in, showing an extraordinary growth rate of over 50% annually in the first half of the 1990s and over 24% annually in the second half. By 1998, postal savings accounted for 47% of China Post’s operating revenues; and 80% of China’s post offices provided postal savings services. Importantly, the Postal Savings Bureau has been able to leverage income and profits from the private sector to provide credit to finance local development. In 2007, the Postal Savings Bank of China was separated from the Postal Savings Bureau as a state-owned limited company, which continues to provide postal banking services.

Japan has also leveraged its postal system to provide banking services such that, by 2007, Japan Post was the largest holder of personal savings in the world, boasting combined assets for its savings bank and insurance arms of more than ¥380 trillion ($3.2 trillion). It was also the largest employer in Japan. As in China, Japan Post uses income from the private sector to fund the government at low interest rates.

Brazil instituted a postal banking system in 2002 based on a public/private model between the national postal service (ECT) and the Bank of Brazil. ECT (also known as Correios) is one of the largest state-owned companies in Latin America, with an international service network reaching more than 220 countries worldwide. 

In Switzerland, postal financial services are by far the most profitable activity of Swiss Post, which suffers heavy losses from its parcel delivery and only marginal profits from letter delivery operations.

Most recently countries such as Russia and India are exploring full-fledged lending services through their post offices. India’s Post Office Savings Bank (POSB) is India’s largest banking institution and its oldest, having been established in the latter half of the 19th century following the success of the postal savings bank system in England, the first nation to offer such an arrangement in 1861. Operated by the government of India, it provides small savings banking and financial services, but is now seeking to expand these services by obtaining a license for the creation of a full-fledged bank that would offer full lending and investing services. Similarly, Russia is also seeking to expand its post office services. The head of the highly successful state-owned Sberbank has stepped down to take on the task of revitalizing the Russian post office and create a post office bank that would operate in the Russian Post’s 40,000 local post offices. The post office will function as a banking institution and compete on equal footing not only with private banks.

On July 27, 2012, the National Association of Letter Carriers adopted a resolution at its National Convention in Minneapolis to investigate establishing a postal banking system. Bringing back postal banking could be a win-win-win, providing income for the post office, safe and inexpensive depository and checking services for the underbanked, and a reliable source of public funding for the government.  

Bank Accounts for People on TANF

Debit cardHaving a bank account is foundational to building financial security. Unfortunately, the lower your income, the more likely you are to be financially insecure and the less likely you are to have a bank account. According to the FDIC, about 20 percent of households earning less than $30,000 are unbanked.

This can be especially problematic for families receiving public benefits, such as Temporary Assistance for Needy Families (TANF), who can face significant fees to access their benefits in the absence of a bank account. Today, most public benefits are issued either directly into a participant's existing bank account or onto an electronic benefit transaction (EBT) card, which functions in some ways as a debit card.

Low levels of account ownership among participants, however, make the EBT card the default option. According to a new report, only 12 percent of TANF recipients have their benefits deposited into a bank account. The rest, who have their benefits placed on EBT cards, are subject to transaction fees at ATMs when they wish to withdraw funds. Assuming these transaction fees are 85 cents, and most are actually higher, this amounts to $1.2 million a year diverted from poor families to financial institutions. This is in addition to the $10 million a year that states pay to the financial institutions for administering states’ public benefit program, as well as surcharges beneficiaries must pay for use of out of network ATMs, which amounted to almost $900,000 in the first quarter of 2011. Consequently, families can be subject to a range of fees, depending on the terms of the contract between the state and the financial institution managing the public benefits program.

Several things can be done to combat these fees. First, EBT cards could be made more like debit cards so they can function as bank accounts for families who don't have them. That way, every TANF recipient who gets an EBT card will effectively also be getting a bank account. One way to do this is by transitioning from current EBT cards, which are typically closed loop, to so-called electronic payment cards (EPC) which are EBT cards branded with the Visa or MasterCard logo that are accepted almost everywhere, and by making the cards reloadable so they can store money in addition to benefits.

The shift towards EPC systems is already occurring, but it too raises challenges. While an EPC system allows beneficiaries to use their cards virtually anywhere that a MasterCard or VISA logo is displayed, and decreases the stigma associated with being recognized as a public assistance beneficiary because EPCs have the appearance of commercially recognized credit cards, there are potential negative ramifications for low-income families. Most importantly, effective consumer protection measures must be implemented because benefit recipients are more likely than general consumers to need these protections. Currently, 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. 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.  

Another option is to simply eliminate fees for EBT card transactions. State and federal governments shouldn't be subsidizing financial institutions with resources dedicated to helping very low-income families. Contracts with banks that administer the accounts should mandate a no-fee structure, or states could reimburse participants for fees they incur. As many states’ contracts are almost ready for renewal, this may be the appropriate time for states to take action.

A third option is for states to encourage savings by including a savings "bucket" as part of the card features and eliminating assets tests in public benefit programs that explicitly restrict the amount of savings a family can have and be eligible for the program.

Finally, there should be a broader overall effort to increase access to affordable banking options for low-income consumers. For example the FDIC’s Safe Accounts pilot, which offered basic, low-fee accounts through partnerships with several financial institutions, could be adopted more widely. At the end of the one-year pilot, retention rates for new accounts were high, 80 percent for transaction accounts and 95 percent for savings accounts, and banks reported that the cost of offering the account was comparable to that of other accounts. These outcomes suggest that there is a demand for these products and that this model could provide a sustainable way to expand availability in a way that works for consumers and financial institutions.

Senator David Frockt (D-WA) and Representative Bill Hinkle (R-WA) advocated for the need to connect TANF recipients to bank accounts to enable recipients to make safe financial transactions, build savings, and avoid EBT fees. It is clear that efforts to address the financial security of low-income families can be an area with many opportunities for bipartisan agreement. It's exciting to see that both sides of the political party recognize this important issue. 

To learn more about EBT and EPC systems in general, listen to the Shriver Center’s webinar, The Next Frontier in Public Benefits: Electronic Benefit Cards, and read the Clearinghouse Review article, The Next Frontier in Public Benefits: Electronic Benefit Cards.

 

Payday Loans: From Research to Reform

Payday lenderAn estimated 12 million Americans take out payday loans each year spending $7.4 billion annually. 

The Pew Charitable Trusts’ newest report and the Pew's first-ever nationally representative telephone survey, Payday Lending in America: Who Borrows, Where They Borrow, and Why, examines payday lending and reveals findings that contradict general perceptions about borrowers and their reasons for borrowing. 

Payday loans, which are marketed as two-week credit products for temporary needs, are in fact predatory short-term, high-interest loans, with borrowers paying an average of $520 in interest for eight $375 loans or extensions. According to the report, average consumers are in debt for five months and are using the funds for ongoing, ordinary expenses—not for unexpected emergencies.

The report's findings challenge much of the conventional wisdom on short-term loans, such as the assumption that people have no other options. In fact, a majority of borrowers report having several alternatives they would use if payday loans were not available.

Other findings that contradict general perceptions include:

Who: Most borrowers are employed, white, female, and 25 to 44 years old. More than half, or 55%, of payday loan borrowers are white, and 52% are female. However, consumers who disproportionately use these products are those who lack a four-year college degree, are home renters, African-American, earn less than $40,000 per year, or are separated or divorced. African-Americans are 105% more likely than other races or ethnic groups to take out a payday loan, for example.

Why: Consumers use payday loans to cover everyday living expenses—not emergencies. Pew found that 69 percent of first-time borrowers needed funds for recurring expenses, such as utilities, credit card bills, or rent or mortgage payments. Only 16 percent sought money for unexpected expenses, such as a medical emergency. If payday loans were not available to them, 81 percent of borrowers reported they would cut back on other expenses instead.

Where: Of the 5.5 percent of adults nationwide who used a payday loan in the past five years, three-quarters went to storefront lenders—which can include big banks or smaller companies—and nearly one-quarter went online. Online loans are typically more expensive—coming with average fees of $95 per $375 loan, compared to $55 fees for storefront loans, the study found. Interestingly, in states with regulations that have eliminated storefront payday lenders, Pew found much lower payday loan usage overall; people did not borrow from online lenders instead. Ninety-five percent of would-be borrowers elected not to use payday loans at all, and only five percent went online or elsewhere in these states.

The report comes at the same time that the Consumer Financial Protection Bureau (CFPB) has begun exercising the authority given to it to regulate payday lenders at the federal level.  The CFPB recently requested comments on a proposed rule to establish procedures for determining whether a nonbank, such as a payday lender, is engaging in activities that pose risks to consumers and, therefore, should be supervised. Additionally, the CFPB has gathered information and is conducting on-site audits about the business practices of these lenders using Short-Term, Small-Dollar Lending Procedures—a field guide CFPB examiners will use to make sure payday lenders—banks and nonbanks—are following federal consumer financial laws that the CFPB published in January. The CFPB has indicated that it is also examining banks offering payday-like loans, which consumer groups say can trap borrowers in similar cycles of debt. 

U.S. regulators and Congress are also joining the fray by scrutinizing partnerships between payday lenders and Native American tribes in an attempt to evade the increasing number of restrictions being placed on payday lenders through state legislation since tribal enterprises are not subject to states or federal law. Congress is also considering legislation to regulate payday lending in general and online payday lending in particular. The Protecting Consumers from Unreasonable Credit Rates Act, S. 3452, introduced in the Senate by Senator Dick Durbin (D-IL) would create a national interest rate cap of 36 percent. The bill, which would affect payday and car title loans, along with various other types of credit, is a response to the persistent triple digit interest rates common among payday loans and other high-cost loan products. The Stopping Abuse and Fraud in Electronic (SAFE) Lending Act, S. 3426, which was introduced at the same time, would allow states to petition the CFPB to stop lending by tribes in states where payday loans are illegal. That way, states would not directly litigate against tribes, thus preserving sovereign immunity. 

As the first in a series of reports that will provide research for policy makers as they consider the best ways to ensure a safe and transparent marketplace for small-dollar loans, PEW’s report confirms previous reports on the predatory nature of payday lending and come at just the right time to inform policy decisions.

Automatic IRAs: A Great Solution to a Growing Problem

Nest eggThe world is experiencing an unprecedented era of human longevity, with life expectancies reaching 80 in many developed nations. In the U.S., people who reach the age of 65 can expect to live an average of 20 additional years. Among people who reach the age of 65, 70% will eventually require some form of long-term health care, and 30% will eventually receive nursing home care. The costs of long-term care are staggering, and our entire society shoulders the burden as evident by the fact that Medicaid and Medicare account for 21% of the federal budget. Health care of course is just one of many costs that burden the elderly.  

This new era of longevity requires the elderly to save huge sums of money in order to support themselves in their retirement years. A person must save $1 million in order to generate an annual income of $40,000 in retirement. In order to accumulate this type of savings, people need more than access to savings accounts—people need access to retirement accounts. Currently, 49% of Americans say that they are not saving anything for retirement. In fact, half of workers have no access to an employer-sponsored retirement savings plan.

The Woodstock Institute released a report this week entitled Coming up Short: The Scope of Retirement Insecurity Among Illinois Workers. This report presents data revealing the declining financial state of retirees and the need for an efficient and accessible retirement savings program for the average American worker, such as an Automatic Individual Retirement Accounts (Automatic IRA) program. Automatic IRAs would be government-sponsored, defined contribution retirement plans for workers who lack access to an employer-sponsored retirement plan. Employers not offering a retirement plan would be required to give their workers the opportunity to enroll in an Automatic IRA. Employees would contribute to these accounts through regular payroll deductions administered by their employers.  

According to the Woodstock report, since 2005, the median net worth of households has dropped by more than 28%, social security replaces on average just 39% of pre-retirement income, and only 49% all wage and salary workers currently have retirement accounts. In Illinois, the report found that over half of all private sector workers lack access to an employment-based retirement savings plan. In fact, only 2.2 million private sector workers in Illinois, or 46.6 percent, had access to an employment-based retirement plan in 2010, while 2.5 million, or 53.4 percent, did not have access to such a plan.

Studies have found that the benefits of Automatic IRAs outweigh the administration costs of operating such a program. It is estimated that this form of financial security would cost just $25 per person to implement and administer. Additionally, an AARP study shows that a national Automatic IRA program would “boost national savings” and expand access to retirement accounts among the middle class.

Legislation to create a national Automatic IRA program was introduced in the 2006, 2007, and 2010 Congresses and was reintroduced again this year. It has also been included in several of the Obama Administration’s budget proposals including its FY 2013 budget request. Several states, including Illinois, have introduced Automatic IRA legislation, although none has passed thus far. While not yet law, there appears to be bipartisan support for this concept. Both Republicans and Democrats have supported the Congressional proposals, as have groups such as The Heritage Foundation, Brookings Institution, and the AARP. The reason for such bipartisan support is that the concept promotes both progressive and conservative values. On the progressive side, it promotes equality and social justice. On the conservative side, it promotes personal responsibility, merit, and individualism.  

The Shriver Center advocates for this type of program and will lobby members of the Illinois General Assembly to pass a comprehensive Automatic IRA law in this coming legislative session. We believe that providing everyone with the opportunities to accumulate long-term savings is a major step in building a more equal and fair society. 

Once Upon a Time in America: Rags to Riches Gone

Once upon a time in America, it was expected that most children would surpass their parents on the income ladder. However, a new study released by The Pew Charitable Trusts has found that although most Americans are earning a bit more than their parents, only a meager one-third of the current generation will surpass their parents in wealth and income and climb to a new rung on the economic ladder.

This recent Pew report, which is a follow-up to its seminal 2008 work on the topic, investigates absolute mobility (whether a person has more or less income and wealth than his/her parents did at the same age) and relative mobility (whether one is ranked higher or lower on the income and wealth continua than his/her parents). In particular, the study, entitled "Pursuing the American Dream," delineates five income and wealth categories, or "quintiles" in the economic ladder and divides families into each quintile in two ways, based on their family income and family wealth.

 

Eighty-four percent of Americans exceed their parents’ family income. Surprisingly, those at the bottom of the income ladder are the most likely to exceed their parents’ income as adults—93 percent do so.  Yet, the extent of income growth varies by quintile. Thus, even those at the bottom are more likely to surpass their parents’ incomes they do so by the smallest absolute amounts, while Americans raised in the top who surpass their parents’ incomes do so by the largest absolute amounts.

 

In terms of wealth, fifty percent of Americans have more wealth than their parents did at the same age, ranging from 72 percent of those whose parents were at the bottom of the wealth ladder to just 25 percent of those whose parents were at the top. While it may initially appear surprising that those raised in the bottom of the wealth ladder are the most likely to have more wealth than their parents did, it makes sense when one realizes that this occurs because their parents had few or no assets. In the parents’ generation, the bottom wealth quintile contained people with less than $31,110 in wealth and 5.6 percent of those reported having less than $1,000 in family assets. Thus, the bar for surpassing the previous generation’s wealth is much lower for these families.

Those coming from the top quintile of the wealth ladder, on the other hand, have the greatest range in their own wealth quintile as adults, with many holding fewer assets than the previous generation. Of course, those whose parents were at the top of the wealth distribution face the highest bar to exceed their parents’ wealth, at $270,218 or more.

Less surprising is the fact that in terms of relative economic mobility, the American dream of “rags to riches” is more fantasy than reality. Only four percent of people raised at the bottom quintile will ever make it to the top, while only eight percent of those raised on the top rung will fall to the bottom. In fact, only a mere thirty-five percent of people will achieve both absolute and relative mobility, both making more money than parents and climbing a ladder rung. In other words, Americans who started in the top and the bottom of the economic ladder, tend to remain stuck there themselves as adults. Thus, the forty-three percent of Americans who begin on the bottom rung stay there.

It is also not surprising that there is a huge gap between blacks and whites. Sixty-five percent of blacks were raised on the bottom quintile, whereas only eleven percent of whites were. Similarly, only two percent of blacks were raised at the top rung, versus twenty-three percent of whites. In fact, the percentage of black families at the top two rungs of the family income and wealth ladders is so small that median and absolute mobility estimates cannot be calculated with statistical certainty.

In terms of economic mobility by race, half of blacks who were raised on the wealth ladder’s bottom rung stay there as adults, compared to a third of whites. And downward economic mobility is much more likely for African Americans. Half of all blacks raised on the middle rung will fall to the bottom two rungs, whereas thirty-two percent of whites will.

The report also confirms what the Occupy Wall Street and “99 percenters” have been claiming: the rich are getting richer while the poor are getting poorer. According to the report, the wealth compression is especially notable at the bottom: Median wealth for those in the lowest wealth quintile decreased from just under $7,500 in the parents’ generation to less than $2,800 in the children’s generation. Conversely, at the top of the wealth distribution, median wealth increased from just under $500,000 in the parents’ generation to almost $630,000 in the children’s generation.

As the middle class shrinks, more and more Americans are finding themselves in the “low-income” or poor category -- roughly one-in-two Americans fall into those categories. At the same time, the richest one percent of Americans saw their income, adjusted for inflation; balloon up by 275 percent between in 1979 and 2007.

These findings also corroborate the latest findings on the racial wealth gapIn 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.

 

In sum, the entire notion of the American Dream is being eradicated as a new nightmare emerges of the average everybody being unlikely to rise through the system.   For policy makers seeking to promote and protect the American Dream for generations to come creating more opportunities for saving and asset building for all Americans will be crucial. 

 

 

Illinois Asset Building Group: Request for Conference Workshop Proposals

The Illinois Asset Building Group (IABG) is a diverse statewide coalition invested in building the stability and strength of Illinois communities through increased asset ownership and asset protection. IABG believes that every person deserves the opportunity to save and build wealth across his or her lifetime. Through its advocacy efforts IABG is committed to addressing the asset opportunities for low-income individuals and families, including the growing racial wealth gap, and creating safe opportunities for Illinois families to save for their future and the future of their children.   

As part of its mission to highlight the importance of asset building, IABG will host a conference, Assets Matter: A Bridge to Economic Security, in Champaign, Illinois, on November 15-16, 2012. Registration is open now! Registration is only $50 for nonprofit organizations and $80 for for-profit organizations. This fee covers admittance to the conference, meeting materials, a cocktail reception on Thursday evening, lunch on Thursday and Friday, and breakfast on Friday. Be sure to register early as there is limited space at the conference venue. Scholarships are available to assist with the cost of registration and travel. Register now.

IABG also invites you to submit a workshop proposal for the conference. Specifically, IABG is seeking workshops that highlight new research in the field, promising asset building practices, products, and/or programs, and policy innovations. IABG encourages proposals from:

  • Community organizers and educators working on campaigns to promote asset-building and financial stability issues.
  • Program staff and practitioners providing or developing asset-building innovations.
  • Researchers/program evaluators conducting research on asset building programs and/or policy issues.
  • Advocates engaged in policy development to promote financial stability or consumer protections.
  • Financial institution staff offering innovative products and services.

Workshop proposals are due to IABG by COB on September 21st.

Don’t miss out on this great opportunity to learn from experts in the asset building field and network with colleagues from around the country.

Help Protect Elders from Economic Abuse

Senior citizenThe Consumer Financial Protection Bureau (CFPB), which recently celebrated its first anniversary, continues to start new initiatives and programs. Most recently the CFPB’s Office for Older Americans issued a request for information asking for public input on issues affecting seniors.

The Office for Older Americans’ responsibilities include:

  • Monitoring certifications or designations of financial advisors who serve seniors and alerting the Securities Exchange Commission and state regulators of certifications or designations that are identified as unfair, deceptive or abusive;
  • Making legislative and regulatory recommendations to Congress on best practices for disseminating information to seniors regarding the legitimacy of certifications and designations, and methods through which a senior can identify the financial advisor most appropriate for the senior’s needs; and
  • Conducting research to identify best practices for educating seniors on personal finance management in order to develop goals for programs that provide financial literacy and counseling to seniors.

The CFPB’s request for information is seeking comments on: (1) evaluation of senior financial advisor certifications and designations; (2) provision of financial advice and planning information to seniors; (3) senior certification and designation information sources; (4) financial literacy efforts; and (4) financial exploitation of older Americans, including veterans of the Armed Forces.

The CFPB is encouraging comments, which must received by August 20, 2012, on any and/or all of these issues.

Please tell CFPB your thoughts.

Happy Birthday to the Consumer Financial Protection Bureau

Birthday cakeThe Consumer Financial Protection Bureau (CFPB), which was created when Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, recently celebrated its one-year anniversary. The CFPB, which officially opened on July 21, 2011, has the sole mission of ensuring that markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. To achieve this mission, the CFPB has the authority to write and enforce consumer protection rules for banks and non-bank financial firms such as payday lenders, debt collectors, and consumer reporting agencies.

The CFPB had a slow start. The confirmation of the appointment of its Director, Richard Cordray, was held hostage by 44 Republican senators, who refused to confirm anyone unless the agency’s powers were weakened. In fact, although the agency officially opened its doors July 21, 2011, until Cordray was confirmed it was unable to fully protect consumers since, by statute, it could not enforce laws against “non-bank financial intuitions such as payday lenders” and other members of the predatory fringe financial markets until a director was confirmed. President Obama finally appointed Cordray in a recess appointment in January of 2012. Since then, the CFPB, despite continued attempts by some legislators to diffuse its power, has been actively looking out for American consumers, something that previous banking regulators had clearly failed to do

Among the CFPB’s many accomplishments, the following ten are noteworthy examples of its efforts to support consumers:

1. Financial Product Complaint System: The CFPB established a system for complaints about mortgages, student loans, bank accounts, car loans, and credit cards that is already getting results. The credit card complaint system is the first to be added to a new publicly available complaint database so consumers can not only have their complaints investigated, but can also compare firms based on complaints. Soon, this searchable database will add mortgage, overdraft, debit card, payday loan, and other consumer complaints.

2. Remittance Rules: Each year immigrants send, or remit, a portion of their income to family members in their home countries. Yet, the regulations, if any, governing remittance providers were lax. The CFPB recently issued new regulations regarding remittances, making it safer for consumers sending money to their families in other countries. The rules require companies to disclose the exchange rate, fees and the total amount being delivered. Other protections enable consumers to cancel a payment within 30 minutes, require companies to investigate consumer reports of problems with transfers, and mandate that companies are responsible for mistakes made by employees.

3. Credit Bureaus and Debt Collectors: The CFPB has the authority—the first time any agency has been given such authority—to investigate and examine the largest credit bureaus. Credit bureaus—and the credit reports they generate and the credit scores derived from such reports—help determine whether and how much a consumer will pay to get credit, insurance, a bank account, a place to live and, increasingly, whether they can even get a job. Yet, studies have shown as many as 25% of credit reports contain errors serious enough to prevent a consumer from obtaining a loan, home, or a job. Using this new authority, the CFPB can ensure that there is accurate credit reporting. 

Similarly, the CFPB is completing a rule to allow it to fully regulate the largest debt collectors, whose unfair practices usually lead the “Top Ten” complaint lists at both the Federal Trade Commission and state attorneys general offices. About 30 million Americans have debt under collection, and the average amount under collection is $1,400. Under the proposed rule, debt collectors with more than $10 million in annual receipts from debt collection activities would be subject to supervision. Based on available data, the CFPB estimates that the proposed rule would cover approximately 175 debt collection firms—or 4 percent of debt collection firms—and that these firms account for 63 percent of annual receipts from the debt collection market.

4. Student Loans: The CFPB has helped students with its “Know Before You Owe” loan tool, which helps students understand their options and provides answers on how to repay student loans. The CFPB, in conjunction with the Department of Education, just released a report examining the private student loan industry. According to the report, private student loan debt has become a tremendous burden on American families, and there is more than $8.1 billion in defaulted private loans and even more loans that are delinquent.   

5. Veterans: The CFPB’s Office of Service Member Affairs, along with states’ attorneys general and the Department of Defense, have also created the Repeat Offenders Against Military Database (ROAM) to track companies and individuals who repeatedly target the military community with financial scams. They have also stepped up mortgage and servicing protections for service members who are facing problems with their loans because they are required to move for military duty.

6. Mortgage Reforms: The CFPB is also preparing important mortgage servicing reforms so that companies’ responsibilities to borrowers are clear. These reforms will require firms to respond to mortgage modification requests in a more timely fashion. The forthcoming CFPB ability to pay rule (Qualified Mortgage) and other mortgage reforms will ensure that lenders cannot market unaffordable, unsustainable, unfair mortgages.

7. Payday and Other Lenders: For the first time in history, a federal agency—the CFPB—has full supervisory authority over high-cost non-bank payday lenders. The CFPB has already issued an examination manual and collected public comments on payday loan issues. For bank payday loans (often called Direct Deposit Loans), the CFPB also has authority to supervise and examine the largest banks that offer these products for compliance with federal credit protections. 

8. Enforcement Actions and Penalties: On July 18th, the CFPB announced its first enforcement action, requiring Capital One to pay $140 million to two million of its customers and pay a $25 million penalty for using deceptive marketing strategies, including misleading customers to purchase “add-ons” such as credit monitoring and payment protection when they called to activate a credit card.

9. Prepaid Cards: Despite their popularity, the prepaid card market is unregulated at the federal level and leaves many consumers vulnerable. Prepaid cards often have high fees and, depending on how they are structured, may not have FDIC insurance, which protects deposits up to $250,000. Recently the CFPB requested comments on general purpose reloadable prepaid cards (GPR). In particular, the CFPB asked for comments about the appropriate scope of regulatory coverage, product fee disclosures, product features, whether a savings component should be required, and other GPR-specific consumer protections.

10. Overdrafts: Consumer groups have urged CFPB to ban overdraft fees for debit card purchases and ATM withdrawals, urged use of reasonable and proportional penalty fees, and urged full coverage under the Truth in Lending Act. The CFPB is completing an investigation into such unfair overdraft practices.

In sum, the CFPB has achieved a lot during its first year, but much more remains to be done.  Let’s hope year two is even better than year one. 

Report Raises Questions Over Mortgage Lending Discrimination

House for saleThe sixth annual report in the Paying More for the American Dream series was recently released, and the data show signs of inequities in mortgage lending, with minorities receiving government-backed Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans significantly more often than their white counterparts.

The report, which includes data from seven metropolitan areas (Boston, Charlotte, Chicago, Cleveland, Los Angeles, New York City, and Rochester), shows disparities in the provision of conventional, prime mortgages to African American and Latino borrowers and communities of color, indicating that banks and other mortgage lenders continue to engage in redlining.    

Some key findings include the following:

  • In the seven cities combined, FHA and VA loans accounted for 74.5% of all home purchase loans made to African Americans, 66.3% of loans made to Latino borrowers, and 35.9% of loans made to white borrowers.
  • FHA and VA loans accounted for three out of every four home loans made to black borrowers, and two out of every three loans made to Latino borrowers, compared to one out of every three made to white borrowers.
  • Two out of every three home loans made in neighborhoods of color were FHA or VA loans.

As we have previously reported, America’s racial wealth gap has continued to increase, and the recession has only made matters 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 prior to the Great Recession.

As a recent Pew research study explained, decreasing home values were the main cause for the decline of household wealth among minorities, hitting Hispanic and black families the hardest. The Pew study also showed that, due to the foreclosure crisis, homeownership rates are highest for whites and lowest for blacks; in between are Hispanics, who experienced the greatest decline in the homeownership rate, from 51% to 2005 to 47% in 2009.

During the housing boom, there seemed to be loans for anyone who wanted them, but for some these loans came at a high cost. Since the recession, the availability of loans, especially conventional loans, seems to have waned. FHA and VA loans have helped to fill the void. Yet, while FHA and VA loans are valuable resources since they require smaller down payments and borrowers can qualify with lower credit, they are typically more expensive than conventional loans, can take longer to get approved, and take longer to pay off. Thus, it is essential that conventional loans also be available to those who qualify, and regulators must require lenders to affirmatively market and make available such mortgages in minority neighborhoods. Without such obligations it is likely that this two-tiered lending market will continue. 

In order to restore fairness in the mortgage lending markets and prevent discrimination, changes need to be made and stricter protections need to be set in place and enforced. Financial Institutions need to step up and make more loans available to people of color. The Community Reinvestment Act (CRA) gives credit to banks that invest and provide services in low- and moderate-income communities. The CRA is long overdue for reform. Among the reforms that should be implemented is a requirement that financial institutions must document not only the incomes of loan applicants, but also their race and ethnicity and that of the neighborhoods as well.

As the country struggles with financial stability and sustaining economic growth, the financial well being of its citizens is key. Helping families reclaim their lost housing equity and continuing to provide access to affordable lending to finance the American Dream of homeownership are important to the nation’s financial recovery.


This blog post was coauthored by Alison Terkel. 

 

Register Now for IABG's Assets Matter: A Bridge to Economic Security

Illinois Asset Building GroupThe Illinois Asset Building Group (IABG) is a diverse statewide coalition invested in building the stability and strength of Illinois communities through increased asset ownership and asset protection. IABG believes that every person deserves the opportunity to save and build wealth across his or her lifetime. Through its advocacy efforts, IABG is committed to addressing the asset opportunities for low-income individuals and families, including the growing racial wealth gap, and creating safe opportunities for Illinois families to save for their future and the future of their children.   

As part of its mission to highlight the importance of asset building, IABG will host a conference, Assets Matter: A Bridge to Economic Security, in Champaign, Illinois, on November 15-16, 2012. Registration is open now!

IABG is also requesting proposals, which are due by August 31st, for workshops for the conference, as well as offering scholarships for those organizations needing financial assistance in order to attend the conference. To apply for a scholarship to attend the conference complete the short application and submit it before October 1st.

Registration is only $50 for nonprofit organizations and $80 for for-profit organizations. This fee covers admittance to the conference, meeting materials, a cocktail reception on Thursday evening, lunch on Thursday and Friday, and breakfast on Friday. Don’t miss out on this great opportunity to learn from experts in the asset building field and network with colleagues from around the country.

Sign up now for IABG’s Assets Matter conference.

Prepaid Utility Services: A Risky Business

Electric meterA new trend among utility companies is offering consumers the option of prepaying for their utility services. Unfortunately this service is not as good a deal as it sounds and often ends in disconnections and interruptions in services.   

Prepaid utility payment options are usually targeted toward low- and moderate-income consumers and are marketed in predominately minority neighborhoods. By targeting these communities, utility companies are essentially creating a two-tier system, thereby widening the racial wealth gap.

A recent National Consumer Law Center (NCLC) research paper showed that most prepaid users pay in small increments throughout the month in order to keep their utilities connected. They often find out too late that their account balance has reached zero—instead of the usual 14-day notice, prepaid customers only receive 4 days’ notice—and that their services are about to be turned off. There are even talks of new a new product called a Smart Meter, which would shut off power immediately if a customer owed more than $20

Some states, including California, are holding hearings about the legality of these arrangements; others, including Maryland, have made the practice illegal. In other states, such as Texas, companies are pushing for the use of prepaid utility services. NCLC has created a map of states that currently offer and/or have proposed prepaid utility programs. The National Association of State Utility Consumer Advocates has also expressed concerns about prepaid utility plans.

Prepaid plans are attractive to low- and moderate-income consumers because they typically do not require credit checks or security deposits. While these are big draws for low-income consumers, these features can allow companies to prey on vulnerable populations. To prevent this, some cities, like San Diego, are protecting at risk populations by adding provisions that prohibit these companies from offering prepaid options to elderly and disabled consumers who would suffer greatly if their utilities were shut off with short notice due to insufficient funds.

Advocates are demanding that the same level of consumer protections be applied to these prepaid utility service plans as are to traditional plans. For example, prepaid customers should have the opportunity to pay their outstanding balance over time and should be mailed shutoff notices within the same time period, 14 days, as traditional utility customers. Consumer protection is a must for prepaid utility services if they are allowed to exist. 


 

This post was coauthored by Alison Terkel.

 

CFPB Issues Proposed Rules on Mortgage Disclosures

Home mortgagesRichard Cordray, the Consumer Financial Protection Bureau (CFPB) Director, has made it clear that one of his main goals is to restore trust in the mortgage market, which was hurt after the burst of the housing bubble during the 2008 economic recession. One important step toward this goal is creating a simplified mortgage application form and making mortgage procedures and fees more transparent. Reforming the mortgage market is critical to the clean up from the 2008 recession and even before then, when the housing bubble began to burst in 2006 due to subprime lending.

Since the housing crisis began, nearly 8 million Americans have faced foreclosure. It is now more important than ever to provide consumers with adequate information so that they can get a mortgage they can afford and understand the fees outlined in their loan terms. The subprime mortgage crisis was devastating to loan applicants who were not aware of the fees associated with their mortgages or who were told they were eligible for mortgages that exceeded what they could actually afford.

The CFPB’s “Know Before You Owe” project comes two-fold. The first simplifies loan estimates, and the second makes the closing disclosure process more transparent. The CFPB’s proposed rules would require lenders to provide mortgage applicants with an outline of loan terms within three days of application. These terms would include information such as how much interest the applicant would pay and how the interest rate could change over time.

Not surprisingly, in recent testimony before Congress, representatives of the Mortgage Bankers Association said they favored a slow approach to reform and oppose the requirement of a settlement disclosure to be delivered three days before closing. Although the association agrees that faulty disclosures led homeowners to carry loans they were unable to afford, association members have apprehensions about other sections of the proposed rules. Some industry members have also expressed concern that the time frame for comments on the proposed rules is too short for the over 1,000-page proposal.

In the meantime, the CFPB is calling upon advocates, industry members, and the public for comments on the proposed rules regarding shopping for a mortgage, closing on a mortgage, and paying off a mortgage. Advocates and industry members agree that it is important to protect consumers and energize the housing market again. Additionally, the CFPB will be finalizing the “ability to repay” rule, which implements another Dodd‐Frank Act provision that requires lenders to verify income information to prevent mortgages that are destined to fail quickly.  

The rules regarding loan estimates and closing disclosures are open to public comment until November 6, and are available on the CFPB’s website. The CFPB expects to finalize them in January 2013.

Subprime Mortgage Crisis Widening the Racial Wealth Gap

ForeclosureAmerica has long been experiencing a growing racial wealth gap, however, the 2008 recession and mortgage crisis widened the gap.   

Household wealth is the sum of assets such as a home, car, savings, stocks, etc., minus the sum of debt. The Federal Reserve has released an analysis of U.S. family finances that showed that racial and ethnic minorities lost about a third of their net worth from 2007 to 2010. Overall, median family worth dropped from $126,400 to $77,300 in just four years, and medium income dropped 7.7%. This dramatically unbalanced wealth disparity is the largest since the government began collecting and documenting the data over 25 years ago. The racial wealth gap is twice the size it was 20 years before the 2008 recession.

A recent Pew research study explains that decreasing home values are the main cause for the decline of household wealth among minorities, hitting Hispanic and black families the hardest. The Pew study also showed that homeownership rates are highest for whites and lowest for blacks; in between are Hispanics, who experienced the greatest decline in the homeownership rate, from 51% to 2005 to 47% in 2009. A leading cause of the decline in homeownership was the foreclosure crisis.   

During the housing boom, there seemed to be loans for anyone who wanted them, but for some these loans came at a high cost. The boom enabled a boost in homeownership in minority neighborhoods because of the availability of risky loans at high interest rates. As the bubble burst, borrowers defaulted on these loans, and home prices fell at record rates. Investigations into the cause of the housing collapse revealed that many mortgage companies were discriminating against minority borrowers or otherwise engaging in suspect practices. SunTrust, for instance, was sued for charging African American and Latino borrowers significantly more than white borrowers with similar credit backgrounds for loans in Atlanta. The judge in that case called the lender's actions a “racial surtax.”

The recession also had a trickledown effect on other important aspects of families’ financial health, especially their credit scores. A foreclosure can remain on a credit report for up to seven years and drop a credit score by 86-160 points leaving a lasting scar on one’s financial well being. A low credit score, in turn, can limit a person’s ability to get a job and increase the interest rates one pays for loan products. According to FICO, nearly 50 million people saw their scores drop more than 20 points at the height of the financial crisis, and over 15 million people’s scores dropped 50 points in 2010-11. A low credit score due to a subprime mortgage, foreclosure, or the inability to pay bills on time can prevent one’s achievement of the American Dream, which, for minorities, was once a reality but is now out of reach. 

Read more about the growing racial wealth gap in Clearinghouse Review: Journal of Poverty Law and Policy

Main Street Getting a Boost from Small Banks

Bank BuildingAlthough lending has declined over all since the economic downturn, a closer examination of the numbers shows that small banks have stepped up and actually increased their small business lending programs. Small bank lending has jumped 5% since May 2011, and bigger institutions like CitiBank are feeling the pressure to keep up their lending. As Biz2Credit.com recently reported, small banks increased their approvals of SBA(7) express loans, which are backed by the U.S. government (meaning they are less risky for the lender in the event that the bank defaults) to small businesses. These loans, which were once the domain of larger banks, have increasingly been offered by smaller banks that are closing in on the market and filling the gaps to meet the needs of small business owners.

According to Banking Grades, a tool that grades banks based on their lending practices to small business, big banks largely received failing grades because they are not equipped to lend to small business due to their complex bureaucracies. It is easier for small businesses to obtain loans from small banks. Smaller banks are more likely to look beyond credit scores and financial statements and into a business’s practices and other qualities. Small banks can also afford to dedicate more time to small businesses. Additionally, unlike bigger banks that made bad investments and offered risky products, small banks remained stable during the recession.

Another reason we are seeing a boost in small business lending overall is thanks to the Volcker Rule, a section in the Dodd-Frank bill. This rule restricts banks from making speculative investments that do not benefit the customer, such as propitiatory trading, where banks trade with their own money as opposed to their customers’ money to make a profit for the bank. Due to these restrictions, which become effective on July 21st, all banks will be forced to increase their small business lending in order to make money to replace the revenues lost from propitiatory trading. 

The Community Reinvestment Act (CRA) also has a part to play in the uptick of small business loans. The CRA requires financial institutions to invest in distressed or underserved areas. A small business in a low-to-moderate-income community can ensure that it borrows from a bank receives CRA credit. One way to ensure that big banks increase their lending in low-to-moderate income neighborhoods is to reform the CRA to reward community banks for their efforts while requiring big banks to do more. For instance, H.R. 1662, the Bank Accessibility Act, would require federal financial supervisory agencies, in determining whether or not a bank has met the credit needs of low- and moderate-income neighborhoods, to consider factors such as (1) the branch distribution of such institutions in such communities, and (2) the services provided to borrowers in these communities by such institutions, including free check cashing and debit card and ATM services. This bill would also require the consideration of such factors to be weighted to account for approximately 33% of an institution's rating. Other bills have sought to amend the CRA to, among other things, improve its grading methodology and explicitly require examinations into a bank’s minority lending practices. 

In sum, it appears that small business lending is on the rise with small banks leading the way. Yet, federal regulators must be encouraged to expand the scope and enforcement of the CRA to encourage larger banks to further increase their lending activities in low- and moderate-income communities.

Full Utility Reporting: Panacea or Scourge for Low-Income Consumers?

Credit has taken on an increasingly important role in our economy. Accumulating assets is necessary for low-income families to move out of asset poverty and become financially secure. But 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. Yet, estimates indicate that 32 million consumers have credit files that are too thin to score, and 22 million have no files at all, 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. Many of the “un” or “under” scored are minorities, young adults, and women. 

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. In particular, in the past few years there has been an aggressive effort to promote monthly reporting of all customer utility payments, including late payments. 

Currently, the vast majority of electric and natural gas utility companies only report to those three credit reporting agencies when a seriously delinquent account has been referred to a collection agency or written off as uncollectible. Supporters contend that full utility credit reporting will assist thin file or no-file consumers to build credit histories and gain access to credit.

Yet, the National Consumer Law Center (NCLC) recently released a policy brief, Full Utility Credit Reporting: Risks to Low-Income Consumers, examining the effects of full utility reporting on low-income consumers. According to the report, a 2008 national study of utility arrearages found that over 22% of electric utility and almost 20% of gas utility accounts were overdue at year’s end in 2007. Yet, only 1.3% of electric utility and 4.3% of gas utility accounts were written off as uncollectible during the entirety of 2007. As a result, under full utility credit reporting, many low-income customers would receive negative credit reporting marks. Since a single, 30-day late payment damages a credit score by as much as 60 to 110 points, NCLC claims that full utility credit reporting of such accounts would actually result in millions of new negative reports in instances where late utility payments currently go unreported.

A low credit score can often be worse than no credit score. Credit scores and reports are not solely used for lending decisions. Many employers use credit reports in hiring and other employment decisions. Although research has shown that credit histories do not predict job performance or turnover, more employers are using credit scores in the hiring process to screen applicants—60 percent of employers recently surveyed by the Society for Human Resources Management said they run credit checks on at least some job applicants, compared with 42 percent in a somewhat similar survey in 2006. This ignores the obvious Catch-22 situation—job applicants are behind on their bills because they don't have a job, but they can't get a job because they're behind on their billsSimilarly, over the last decade, a growing number of insurers have reported using credit insurance scores to determine rates, including over 92 percent of auto insurers. As a result, those with poor credit could be charged with insurance rates from 40 percent to several hundred percent more in premiums. Full utility credit reporting could, therefore, result in consumers being denied employment or forced to pay higher insurance rates.

NCLC also notes that low-income consumers could suffer disproportionately from full utility reporting. First, states across the country have adopted consumer protections intended to shield vulnerable populations from loss of electric and natural gas utility service during high cost months and times of illness or financial hardship. These consumers may sometimes defer full payment of utility bills, knowing that they are protected from shutoff. Enacting full utility credit reporting would undermine these health and safety protections. Second, because the cost of utilities depends so much on the weather, consumers generally have little control over these costs, as compared to other debts that appear on credit reports. The costs also vary by region of the country. A particularly harsh winter or summer could create significant financial strain for low-income consumers, and full utility credit reporting would exacerbate that harm. There is also wide variability between states in credit and collection rules, energy prices, and the availability of energy assistance programs. Low-income consumers living in states with unfavorable rules and inadequate low-income bill payment assistance and energy efficiency programming would be unfairly penalized, as full utility credit reporting will not reflect these disparities.

As the Shriver Center has previously noted, 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, including NCLC, argue that alternative reporting could prove to be harmful and could be used to further marginalize low-income families. The Shriver Center addressed these issues 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.

The Shriver Center believes that a closer look at the credit reporting system itself seems appropriate before incorporating any form of alternative reporting data. Since the current credit system’s lack of transparency and inaccuracy already discriminates against low-income families, perhaps the first step should be for advocates to work on making the credit bureaus accountable and transparent, before adding more information into a seemingly vacuous and obscure system.  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 utility payments or should it also include things such as rent, telecom, 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?

To be financially stable members of the U.S. economy, families must have access to credit.  Until these questions regarding alternative data reporting are answered, it remains unclear whether or not such reporting is the appropriate way to ensure low-income and asset-poor families’ successful entry into the mainstream credit industry. 

Funding Update: Federal Asset Building Programs in Fiscal Year 2013

Since President Obama released his Fiscal Year 2013 Budget Request in February, both chambers of Congress have drafted funding bills. Although the President’s budget was generally supportive of asset building programs, not all Representatives and Senators are supportive.  Here is a list of some of the current asset-building programs and proposals and how they are faring in the appropriations process:

Assets for Independence (AFI): 

  • President requested $19.9 million for FY 2013, equal to FY 2012 funding level.
  • Senate Appropriations Committee approved $19.9 million.
  • House Appropriations Committee has not released a draft bill yet.

 Low Income Energy Assistance Program (LIHEAP):

  • President requested $3.02 billion for FY 2013, less than the FY 2012 level, $3.472 billion.
  • Senate Appropriations approved $3.472 billion.
  • House Appropriations Committee has not released a draft bill yet.

Community Services Block Grant (CSBG): 

  • President requested $350 million, more than $300 million less than FY 2012 levels.
  • Senate Appropriations approved $677 million, equal to FY 2012 funding levels.
  • House Appropriations Committee has not released a draft bill yet.

Program for Investment in Micro-Entrepreneurs (PRIME): 

  • PRIME is at risk of elimination. The President requested that PRIME be eliminated and the Senate Appropriations Committee voted to cut its funding to zero. 
  • The House Appropriations Committee has funded PRIME at $3.5 million, maintaining FY 2012 levels.

Microloan Program Loans:

  • President requested $18 million for FY 2013, down from the FY 2012 level of $25 million.
  • The Senate Appropriations Committee approved $25 million.
  • The House Appropriations Committee approved $18 million.  

Microloan Program Technical Assistance:

  • The President requested $19.8 million for FY 2013, slightly less than the $20 million in funding in FY 2012.
  • The House Appropriations Committee approved $20 million.
  • The Senate Appropriations Committee approved $24 million, an increase of $4 million. 

Women’s Business Centers:

  • The President requested $12.6 million for FY 2013, down from $14 million enacted in FY 2012.
  • Both the House and the Senate Appropriations Committees approved $14 million.

The New Veterans Entrepreneurship Training Program:

  • The President requested $7 million in funding for this program, which combines and expands two existing Small Business Administration programs that serve veterans, to provide online technical assistance to veterans who want to start businesses.
  • The House Appropriations Committee approved $6 million.
  • The Senate Appropriations Committee approved $5 million.

Community Development Financial Institutions (CDFI) Fund:

  • The President requested $221 million for FY 2013, equal to FY 2012 enacted levels.
  • The Senate Appropriations Committees approved $233 million.
  • The House Appropriations Committee approved $221 million.

Bank On USA (within the CDFI Fund):

  • President requested that $20 million of the CDFI Fund’s budget be dedicated to implementing his proposal for Bank On USA.
  • The Senate Appropriations approved $20 million for FY 2013.
  • The House Appropriations Committee did not provide funding for Bank On USA for FY 2013. 

Resident Opportunities for Self-Sufficiency (ROSS):

  • The President requested $50 million for FY 2013, level with FY 2012 funding. Both the Senate Appropriations Committees and the House of Representatives approved $50 million. 

Family Self-Sufficiency Program (FSS):

  • The President requested $60 million for FY 2013, equal to FY 2012 enacted levels.
  • Both the Senate Appropriations Committee and the House of Representatives approved $60 million.

Housing Counseling Program:

  • The President requested $55 million for FY 2013, an increase of $10 million from the FY 2012 enacted level.
  • The House of Representatives approved $45 million.
  • The Senate Appropriations Committee approved $55 million.

Community Development Block Grants (CDBG):

  • The President requested $3 billion for FY 2013.
  • The House of Representatives approved $3.344 billion, a $396 million increase from FY 2012 enacted levels and the President's budget.
  • The Senate Appropriations Committee approved $3.1 billion. 

Rural Microenterprise Assistance Program (RMAP): 

  • RMAP will likely not be funded in FY 2013, despite the President’s request of $22.5 million, because both the House and Senate Appropriations Committees have recommended cutting the program’s funding to zero.

Rural Business Enterprise Grant (RBEG) program

  • The President requested $30 million for FY 2013, an increase of almost $6 million over the FY 2012 funding of $24.3 million.
  • The Senate Appropriations Committee approved $24.3 million, level with FY 2012.
  • The House Appropriations Committee approved $20 million.

Intermediary Relending Program

  • The President requested $19 million for FY 2013, an increase of $1 million from FY 2012 enacted levels.
  • The Senate Appropriations Committee approved $18.9 million.
  • The House Appropriations Committee approved $17.7 million.

Reach out to your legislators to urge their support for asset-building programs:

  • Email your Representative and Senators urging them to fund the asset-building programs that matter to you and your clients.
  • Call your legislators to ask them to support funding for asset-building programs. Explain how these programs help your clients. Dial the Capitol Switchboard at 202.224.3121
  • Visit your legislators’ staff at their offices in your area and tell them in-person how these programs affect their constituents and the people you serve. 

Mobile Banking: Can the Unbanked Bank On It?

Mobile bankingOver 30 million Americans are unbanked (meaning they lack a traditional checking or savings account and rely on costly alternative financial services), and 83% of American adults have a mobile phone. The Shriver Center will host a webinar with a panel of experts to discuss the relationship between this new technological approach to banking and what it may mean to banking the unbanked.

Mobile banking was first introduced in developing countries as a way to provide banking services to communities that lacked formal financial institutions. In recent years, mobile banking has taken a more prominent role in the technology world here in America as a tool for improving financial access to the unbanked.

This exciting new field may provide opportunities for increasing financial access among the millions of unbanked individuals. This webinar will provide an overview of the history of mobile banking as well as current developments in the products and services available. Panelists will also discuss the ability and effectiveness of using mobile banking to reach the unbanked and the regulations and consumer protections that need to be implemented in order to ensure this new technology safe and successful.

Panelists will include Marianne Crowe of the Federal Reserve Bank of Boston, Rob Levy of the Center for Financial Services Innovation, and Michelle Jun of Consumers Union.

Readers are invited to register for this free webinar. The webinar will take place on August 16th, 1:30pm CST.

Also, check back later this summer for the publication of the July-August issue of the Clearinghouse Review for a more in-depth look at mobile banking.   

This blog post was coauthored by Alison Terkel.

 

Introducing the Office of Financial Empowerment

Cash drawerThe Consumer Financial Protection Bureau (CFPB) officially launched the Office of Financial Empowerment (OFE) on June 25th, 2012, by hosting a conference call with CFPB Director Richard Cordray and Associate Director of Consumer Education and Engagement Gail Hillebrand. The OFE, which is a part of the Division of Consumer Education and Engagement, is tasked with coordinating with agencies to focus on providing safe affordable access to financial products and services to low-income populations. The OFE will focus on the over 50 million low-income individuals and tens of millions of economically vulnerably individuals and families.  

The OFE will be led by Assistant Director Clifford Rosenthal who served for the last 30 years as the President and CEO of the National Federation of Community Development Credit Unions, a nonprofit association for credit unions that serve low-income communities. 

The OFE will focus on five main themes:

  1. Innovation: Looking into which technologies are promising, applicable, and affordable.
  2. Data: Researching which programs and products work and which do not.
  3. Collaboration: Working with government agencies, public and private sectors, and community partners to achieve goals.
  4. Access: Examining barriers preventing access to financial products and services, alternative pathways to products and services, and how to make them safe and efficient.
  5. Scale: Examining data and pilot programs to determine which programs can realistically be brought to a national scale.

The OFE hopes to bring transparency to aspects of the financial marketplace such as transactions, payments, credit, and savings. Savings will be a main focal point, because low-income people can and do save. The OFE will help provide a range of suitable financial choices, free of traps, to provide low-income individuals with the opportunity to achieve financial stability.

The CFPB requests input from advocates, services providers, and community partners on current projects and comments on future endeavors.  If you have specific questions for the OFE you may email empowerment@cfpb.gov; if you would like to share your story to better inform the CFPB’s policies please visit the CFPB website

CFPB Requesting Comments on Non-Bank Oversight Rule

Payday lenderAlthough the Consumer Financial Protection Bureau (CFPB) has been in existence since July 2011, it wasn’t until January 2012, when Richard Cordray was confirmed as its director, that it got its full powers to oversee all financial markets and provide the utmost in consumer protections.

On January 5th, 2012, the CFPB launched the first ever program to supervise nonbank financial institutions. This supervision is an extension of the CFPB’s bank supervision program that began last July and will ensure that banks and nonbanks follow federal consumer financial laws. Essentially, the CFPB will approach nonbank examination the same as it does for banking institutions.

It is crucial to provide consumer protections from nonbank financial institutions. For instance, it is estimated that 20 million Americans use payday loans, roughly 200 million Americans rely on credit reporting agencies to report their credit histories accurately, 14 percent of consumers have one or more debts in collections, and nonbank lenders originated 10% of mortgages.

A “nonbank” is a non-depository business that offers financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include mortgage lenders, payday lenders, debt collectors, money service companies and others. 

Despite the large portion of the financial industry that nonbanks cover, prior to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law that created the CFPB, there was no federal program to supervise nonbanks. Other federal regulators examined banks, credit unions, and thrifts to make sure they were complying with the law, but generally the primary tool used to address issues with nonbanks was “after-the-fact” law enforcement.

The CFPB recently requested comments on a proposed rule to establish procedures for determining whether a nonbank is engaging in activities that pose risks to consumers and, therefore, should be supervised. Under the proposed rule, a nonbank that is being considered for supervision, because the CFPB has reasonable cause to determine that it poses risks to consumers, will be notified. The nonbank is given a reasonable opportunity to respond both in writing and orally, if requested by the nonbank. After considering the response, the CFPB would make a final determination either subjecting the nonbank to its supervision or not.

The proposal also permits a nonbank to voluntarily consent to the CFPB’s supervisory authority either by singing the consent agreement attached to the original notice or at any time during the proceedings. There is also a mechanism for nonbanks to file a petition to terminate supervision authority after two years, however, when a nonbank has voluntarily submitted to the CFPB’s jurisdiction for a specified period of time, it is not entitled to petition for early termination.

The CFPB has asked for comments from the public on how to enforce these rules and how to best protect consumers from all participants in the financial market. 

Please submit your comments to the CFPB by July 23, 2012. Learn more about how to submit comments

Settling the Wild Frontier of Prepaid Cards: CFPB Asking for Comments on Prepaid Card Regulations

The Consumer Financial Protection Bureau (CFPB) is taking on the unregulated prepaid card market. Prepaid cards are not just gift cards anymore; they have become a growing financial product as consumers turn to prepaid cards in favor of traditional checking accounts. In 2001, an estimated $57 billion was loaded onto prepaid cards, and this figure is protected to grow 47% to $167 billion by 2014. Despite their popularity, the prepaid card market is unregulated at the federal level and leaves consumers vulnerable. In many cases, prepaid cards have high fees and, depending on how they are structured, may not have FDIC insurance, which protects deposits up to $250,000. 

Recently the CFPB launched Ask CFPB: Prepaid Cards to shed some light on the mystery and perplexity around this product. Specifically, on May 23rd, in Durham, North Carolina, CFPB Director Richard Cordray announced that the Bureau is asking for comments on general purpose reloadable prepaid cards (GPR).  As the CFPB begins to evaluate its options for regulating the prepaid card industry, the Bureau is specifically interested in comments about the appropriate scope of regulatory coverage, product fee disclosures, product features, whether a savings component should be required, and other GPR specific consumer protections.

A recent report from Reinvestment Partners listed eight principles for the reform of the prepaid debit card. The top recommendations include not allowing line of credit or overdraft features, ensuring that such cards have all of the functionality of a low-cost checking account and all of the consumer protections of deposit accounts. 

Be sure to let the CFPB know your thoughts as it begins to examine how to provide safety and transparency to the growing prepaid card market. Click here to submit your comments to the CFPB.

Liquor Stores, Casinos, and Adult Clubs: No TANF

ATM machineAfter a string of news stories highlighting that some public benefits recipients were accessing their benefits through ATMs located in places such as casinos, strip clubs, and liquor stores, states began taking action. As stories of misuse became more widespread, lawmakers in nine states, including Arizona, California, Colorado, Indiana, Missouri, and Washington, placed restrictions on where Temporary Assistance for Needy Families (TANF) benefits can be accessed, and twenty-two other states, such as Michigan, have introduced similar legislation.  

Yet, in the midst of this media frenzy, facts were omitted and, while there have been some incidences of impropriety, the majority of public benefit recipients are not abusing the system. According to a survey by the Federal Funds Information for States (FFIS), the use of welfare electronic benefits at bars and casinos constitutes less than 0.1 percent of TANF transactions. Thus, while California was quick to put restrictions on TANF benefits when news stories highlighted cases of beneficiaries using their benefits at adult entertainment clubs, in fact less than one tenth of one percent of California’s TANF ATM withdrawals occurred at adult entertainment business. Similarly, Colorado, which also placed restrictions on access to TANF benefits, incurred only three tenths of one percent ATM access from casinos.

Despite the lack of evidence of widespread abuse, Congress took action this past December with the introduction of H.R. 3630.  This bill included provisions, which were supported by a group of House Republicans led by Rep. David Camp (R-MI), to block the use of TANF benefits at various locations and for certain products such as alcoholic beverages, tobacco, lottery tickets etc. These provisions, which ultimately became part of the Middle Class Tax Relief and Job Creation Act of 2012, were signed into law this past February by President Obama.

The final law requires states to prevent the use of TANF assistance in electronic benefit transactions (EBT) at specific locations. In particular, states must prevent TANF funds from being used for any EBT transaction in any liquor store, casino, gambling casino or gaming establishment, or any retail establishment that provides adult-oriented entertainment in which performers disrobe. An EBT transaction is defined as the “use of a credit or debit card services, automated teller machines, point-of-sale terminal, or access to an online system for the withdrawal of funds or the processing of a payment for merchandise or a service.” Failure of states to comply with the new provisions will result in a 5% cut in their annual TANF funding. "This means that states could incur substantial costs to address an issue that does not appear to be a widespread problem," according to FFIS.

The Office of Family Assistance (OFA), the agency responsible for issuing regulations implementing these prohibitions, is requesting public comments on how these regulations should be drafted.   

Although sections of the law aim to reduce fees for accessing TANF benefits, which is a good thing, the prohibitions on where TANF funds can be accessed perpetuate negative stigmatism of pubic benefit recipients. Not only does the evidence not support the view that public benefit recipients are using public aid on liquor, gambling, and adult entertainment, there are legitimate reasons why individuals may access their benefits in these locations. For example, in many low-income areas there are no bank branches, thus residents have limited choices in where they can access their TANF benefits. Often, the nearest ATM is in a liquor store. Banning withdrawals at these locations will impose barriers to TANF access on many individuals. 

It is therefore vitally important that individuals and organizations provide their comments to OFA, as it develops the regulations, on how to minimize these barriers.  At the same time, advocates should talk with legislators to explain the facts and encourage them to repeal these restrictions.  

To submit your comments please click here. The deadline for submission is June 11th, 2012.  

Debit Interchange Fees Fall 45% for Big Banks

Debit cardThe Dodd-Frank Wall Street Reform and Consumer Protection Act,  which passed in June 2010, aimed to provide oversight and new regulations to protect consumers from predatory financial practices. Among its many provisions, the so-called Durbin Amendment authorizes the Federal Reserve to regulate the fees that debit card issuers may charge retailers at the point of sale.

Plastic is king in American society, and debit cards play a significant role in today’s economy. The use of debit cards has grown more than any other form of electronic payment over the past decade, increasing to $37.6 billion in 2009.  Interchange fees from debit card purchases totaled over $16.2 billion.

On October 1, 2011, the final rule implementing the Durbin Amendment became effective. Since then, the interchange fees that issuers can charge are capped at 21 cents per swipe, however, issuers with assets under $10 million are exempt from this cap. Recent data show that fees for exempt institutions have stayed around 43 cents, about the same as they were back in 2009 before the law was enacted. This exemption expired April 1, and all institutions, regardless of size, will now be subject to the cap. In the meantime, fees at institutions that are covered by the regulations, dropped from 43 cents in 2009 to 24 cents in the fourth quarter of 2011, a 43% drop.

As stated under the law, issuers may only charge fees that are “reasonable and proportional to the cost incurred by the issuer,” which the Federal Reserve determined in its rulemaking is no more than 21 cents, plus 1 cent for fraud-prevention services. From the start, the financial industry has complained that the cap is too low. Yet, the Federal Reserve defended the cap last month saying it “acted within its discretion.” Nevertheless, the National Association of Federal Credit Unions (NAFCU) and eight other groups, which have opposed the Durbin Amendment from the beginning, recently filed an amicus brief arguing this point.  

While the banking industry may be correct that the fees are too low and should be raised, the bottom line is that consumers need protection. Thus, if the Federal Reserve ultimately raises the interchange fee cap, it should only do so to the extent that such an increase will be reasonable and proportional to actual costs, and even then the costs to consumers must be considered.   

This blog post was coauthored by Alison Terkel. 

CFPB: Answering Consumer's Questions and Reporting on Debt Collection

The Consumer Financial Protection Bureau (CFPB) is well on its way to exercising its full power under its newly confirmed director Richard Cordray. Although the CFPB has been active since July 2011, it was until it had a confirmed director that it could exercise jurisdiction over nonfinancial institutions, payday lenders and other fringe financial markets.  

One new initiative the CFPB launched last week is the “Ask CFPB” page where consumers can post questions and read answers to 350 basic financial questions in categories such as credit cards, mortgages and vulnerable populations. This database will help further the CFPB’s mission to promote financial literacy and engage consumers on how to better protect themselves from fraudulent and predatory financial services and products. The answers, which are easy to understand and are written in a simple, concise language, also includes definitions, explanations, and situations in order to educate consumers about financial products and services. The page is interactive and users can rate whether the answers were “helpful”, “too long,” or “confusing.” 

Another step the CFPB has taken to improve consumer protection is filing its first annual report to Congress on complaints and enforcement actions under the Fair Debt Collection Practices Act (FDCPA). Complaints about debt collectors totaled over 27% of all the complaints received by the FTC in 2011. The FDCPA was created to protect individuals from abusive practices in the debt collecting industry; however, the market has changed substantially since its enactment 35 years ago. Players such as debt buyers and collection law firms have entered the scene and technological advances allow collection firms to use more sophisticated methods to identify and reach debtors. According to the report, approximately 30 million individuals, or 14% of American adults had debt subject to the collection process.  

To address the rise in debt collection complaints the CFPB has proposed a rule that would cover debt collectors with more than $10 million in annual receipts from debt collection activities. The CFPB estimates that this rule would cover 175 firms that collect over 63% of the annual receipts from debtors. The CFPB is in the process of reviewing over 10,000 comments from the public, including advocacy groups, elected officials, trade groups and consumers on the proposed rule and will issue the final regulations shortly. In the meantime, consumers can also turn to the “Ask CFPB” page for answers about debt, including what times debt collectors can and cannot call your home, what information debt collectors are required to give you and are forbidden from giving to others. 

This blog post was coauthored by Alison Terkel.

 

Wal-Mart's "Pay with Cash" Program for Online Shoppers Doesn't Help the Unbanked

Wal-Mart Bill PayIn 2004, Wal-Mart began installing “Money Centers” for shoppers to cash checks, pay bills and make wire transfers.  None of these products, however, help unbanked customers gain access to bank accounts and avoid unnecessary fees. 

Recently, Wal-Mart launched another new program to compete with online giant, Amazon, that, to no surprise, does nothing to benefit the unbanked except lure them into buying more Wal-Mart products.   Amazon was trumping Wal-Mart in online sales due to lower prices and the ability to avoid paying sales taxes in some states. The new initiative, “Pay with Cash,” is targeted at customers without a credit card who wish to shop online.  Under the program, consumers can select items from Wal-Mart’s website then pick them up at their local Wal-Mart store and pay with cash. The program, which goes live next month, is targeted at the 20% of Wal-Mart shoppers who do not have bank accounts or credit cards and are currently unable to online shop.  

Wal-Mart is also trying to compete in the rapidly evolving consumer payment market where new technologies allow customers to “scan and scram, meaning they scan a bar code of an item at a Wal-Mart, or any other store, and are able to see where it is sold cheaper, most likely online.  Amazon even offers its own application, “Price Check” to entice brick-and-mortar shoppers to make purchases online. 

While Wal-Mart may be helping streamline the process of online shopping for the unbanked, the company is not doing them any favors when it comes to access to mainstream financial services and inclusion. To the contrary, Wal-Mart is making it easier for people to stay unbanked, rack up high fees in the fringe financial system, and miss out on building assets and credit, which is crucial in getting ahead in today’s economy. 

Initiatives such as BankOn USA exist to meet the need that Wal-Mart and others like it are ignoring.  In BankOn programs, financial institutions partner with community organizations to provide low-cost checking and savings accounts along with financial education in order to bring the un/underbanked into the financial mainstream and prepare them for success.  While Wal-Mart’s “Pay with Cash” program may help it remain competitive in the online retail market, it is not a way to improve the economic lives of the customers they serve. 

This blog post was coauthored by Alison Terkel.

 

SaveUSA Helps Families Save $1 Million

SaveUSAAsset building is crucial to a family or individual’s financial success. The difference between getting by and getting ahead is the ability to save and build assets. According to the recently released CFED Poverty Scorecard, 27.1% of Americans are asset poor (meaning that if they lost their incomes they would not be able to survive for three months because they do not have enough assets to fall back on).

SaveUSA is pilot program in four cities that offers eligible individuals a 50-percent match if they deposit a portion of their tax refund into a “SaveUSA Account” and maintain the initial deposit for approximately one year. SaveUSA, which is being offered in New York City, Tulsa, Newark, and San Antonio, has already helped residents open 1,662 accounts and save nearly $1 million dollars.  

SaveUSA is based on the $aveNYC program which began in 2008 and was sponsored by New York City’s Department of Consumer Affairs’ Office of Financial Empowerment (OFE), the Center for Economic Opportunity, and New York City Mayor Bloomberg. Behavioral economics research proves that saving programs are successful in low-income populations if strong financial incentives to save are offered. Under the $aveNYC program, the match was originally capped at $250 for the first two years, and was raised to $500 in 2010.  

Under the SaveUSA pilot, accounts are offered at Volunteer Income Tax Assistance (VITA) sites, where families and individuals can receive free tax preparation services. The idea is to encourage consumers to think about tax refunds not just as money back in their pockets, but as an opportunity to begin saving for the future.  Additionally, VITA sites and SaveUSA both encourage eligible taxpayers to apply for the Earned Income Tax Credits ( EITC). The EITC is a refundable tax credit for working low-income individuals and families who make below a certain wage. The idea is that low-income families can kick-start their asset building by depositing a portion of their tax refund, including their EITC refund, in their SaveUSA account thereby making them eligible for the maximum match.   

Title XII of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized a BankOn USA initiative that the U.S. Treasury Department is currently developing.  The federal BankOn USA pilot program is similar to both the $aveNYC program and BankOn programs. BankOn, which originated in San Francisco as a pilot in 2006, is a collaboration between financial institutions and community organizations to offer low-cost savings and checking accounts and financial education to low-income individuals. These partnerships allow banks and credit unions to offer products to the unbanked as well as raise awareness and conduct targeted outreach to bring consumers into the financial mainstream. BankOn programs also typically provide second chance accounts to those who have had accounts closed and whose name appears in ChexSystem. 

The Treasury Department is currently exploring the use of pilots, awards, and competitions to assess and promote effective approaches to designing and implementing the BankOn USA program if funded through federal appropriations. President Obama called for $20 million in his FY 2013 budget proposal to fund BankOn USA.

Programs such as SaveUSA and BankOn USA provide the starting point for financial stability and economic mobility. By encouraging individuals to begin saving for their futures, they are empowered to enter the financial system, prepare for emergencies and have the financial know-how to succeed.  

This blog post was coauthored by Alison Terkel.

 

Moving Forward on Children's Savings Accounts

Piggy BankFor 10 years, the Corporation for Enterprise Development (CFED) has funded pilot programs across the country to provide Children’s Savings Accounts (CSAs). It looks as though this investment is beginning to pay off, in that several states have recently launched their own versions of CSA pilot programs.

Children’s savings accounts are inclusive, long-term asset-building accounts established for children as early as birth and allowed to grow over their lifetime. Accounts are seeded with an initial deposit and can be built by contributions from family, friends, and the children themselves. The accounts can be augmented by savings matches and other “benchmark” incentives through public or private sources. Since saving can be difficult for lower-income households, the accounts of lower-income children can be further supplemented by the government through a larger initial deposit, higher match rates, or both. CSAs are often linked to age-appropriate financial education such that savings behaviors are further encouraged through educational instruction to develop a child’s financial acumen as the account grows. CSA funds are restricted to financing higher education, starting a small business, buying a home, or funding retirement.  

This past fall, the Mississippi College Savings Account (CSA) Program officially launched with the goal of providing savings accounts to 500 children across the state. Funded by the W.K. Kellogg Foundation, the program provides a $50 initial deposit, restricted to use for post-secondary education for children at selected sites across the state. Four hundred and six children in Mississippi have already enrolled in the program--in the City of Jackson, 170 three-, four-, and some five-year old children and in Leland and Greenville 236 three-, four-, five-, and some six-year-old children are enrolled. The children also receive financial education in the classroom, and their parents will be offered training from the FDIC’s Money Smart curriculum to encourage them to invest in their child’s future. This CSA pilot is critical in Mississippi, a state were less than 15% of ninth graders end up continuing and completing college. 

A similar program is underway in Grand Rapids, Michigan. Under this program Michigan is partnering with LINC Community Revitalization and providing CSAs to kindergarten students in four pilot schools.

In Illinois in 2005, the Shriver Center was one of CFED’s original partners in piloting CSAs. In addition to CFED, the Shriver Center partnered with Chicago Public Schools and CHASE to provided accounts to 82 elementary school children at the William J. and Charles H. Mayo Elementary School. Each accountholder received an initial deposit of $500 and had the opportunity to earn a $1:$1 match up to a total of $1,500. After this successful demonstration project, the Shriver Center and the Illinois Asset Building Group successfully advocated for the passage of H.B. 1662 (Children Savings Account Act). 

This law created a CSA Task Force to draft recommendations for designing a successful CSA program in Illinois. The Task Force found that many Illinois residents are living paycheck to paycheck. One in four Illinois households are asset poor, meaning that they could not get by for three months if they lost all outside sources of income. Among other things, the Task Force found that if a child has an account in his or her name, regardless of the amount held in the account, the child is seven times more likely to attend college. The presence of assets also has a positive influence on a person’s well-being, self-esteem and hope toward the future.

The Illinois CSA Task Force’s recommendations for successfully implementing a statewide CSA program included, among other things:

  • using Illinois’s 529 college savings plan platform to operate and administer the accounts;
  • automatically opening a CSA for every child born to Illinois residents at the time of birth;
  • seeding every account with an initial public deposit and providing supplemental deposits based on family income;
  • including a targeted, matched-saving component to encourage saving among low-income families;
  • excluding CSA accounts from asset tests in all Illinois public benefits programs; and
  • making a statewide investment in financial education programs for youth and integrating the CSA program into school curricula as a way for children to understand saving.

As other states begin to experiment with CSA pilot programs, Illinois should begin implementing this Task Force’s recommendations. Providing CSAs and financial education at a young age could provide Illinois children with both the necessary asset building knowledge and a nest egg to use to begin their lives. Given the current economic times, this is something that Illinois cannot afford to delay.

Automatic IRAs: Federal Budget, Congressional, and State Proposals

NesteggNesteggSocial 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. 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. This highlights the need to put more policies like Automatic IRAs in place to provide economic security for low- to moderate-income people.

Automatic IRAs are a simple, easy way to encourage individual retirement savings. Under most Automatic IRA proposals, employers that do not offer a retirement plan would be required to allow their workers to open and contribute to an individual retirement account (IRA) through regular payroll deductions. Through automatic enrollment with an opt-out option and a limited number of investment options, Automatic IRAs can attain high participation rates. Additionally, by including a low default contribution rate, these plans alleviate potential burdens on low-income individuals while ensuring that individuals engage in at least minimal savings. Because Automatic IRAs are paid through payroll deductions, they are the least costly retirement plan option available for employers. 

The concept of Automatic IRAs is gaining in popularity and has bipartisan support.  Legislation to create a national Automatic IRA program was reintroduced last month. Congressman Richard Neal (D-MA), following the lead of Jeff Bingaman (D-NM) in the Senate (S. 1557), and the Obama Administration’s proposal in the FY 2013 Budget Request, introduced the Automatic IRA Act (H.R. 4049).

Under these bills, businesses with more than 10 employees that do not already offer retirement accounts would enable employees to contribute to IRAs though payroll direct-deposit facilitated by their employers. Additionally, Rep. Neal introduced a House Concurrent Resolution (H. Con. Res. 101), which states that businesses that do not have direct-deposit capabilities should receive a tax credit to cover the administration costs to set up IRAs. The passage of this legislation would provide retirement savings accounts to 78 million Americans who do not currently have access.

Similar legislation has been introduced in the past several Congresses (Automatic IRA Act of 2006, H.R. 6210, 109th Cong. (2006), Automatic IRA Act of 2007, H.R. 2167, 110th Cong. (2007), and Automatic IRA Act of 2010, H.R. 6099, 111th Cong. (2010)), as well as in President Obama’s previous budget proposals. 

Illinois recently introduced legislation, H.B. 4497 and S.B. 1844, to create an Illinois Automatic IRA program that, if successful, would provide retirement savings opportunities for the approximately half of all Illinois workers who do not currently have an employer-sponsored retirement plan.

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

Tax Refunds Issued on Prepaid Cards Take a Toll on Consumers

Debit cardTax refunds may look a little different this season in some states. Instead of issuing paper checks, a number of states will require that taxpayers receive their refunds either through direct deposit or, for those who are unbanked, prepaid debit cards. While the use of direct deposit and debit cards may save states money by cutting down on printing and mailing costs, taxpayers may wind up paying more in the long run.

Most states currently offer direct deposit, and some, including Illinois and South Carolina, encourage electronic payment of refunds but still offer to mail checks to those who want them or to those who do not have bank accounts. Increasingly, however, states have stopped mailing tax refund checks in favor of electronic transfers and prepaid cards. Oklahoma, Louisiana, Georgia, and Connecticut are among these states.

Oklahoma recently introduced the Tax Refund Card, which will be administered by MasterCard. Although the state claims that the card is a safe, convenient, and secure alternative to the traditional refund checks, many Oklahoma taxpayers are unhappy with the decision due to the card’s ATM fees and a $1.50 inactivity fee. Free withdrawals are available at any MoneyPass ATM network, but this network has limited locations, forcing consumers to use other networks that charge fees. Additionally, due to limits on ATM withdrawal amounts, taxpayers may have to make multiple withdrawals, thereby incurring multiple fees.

Both Louisiana and Connecticut have contracts with Chase to offer a similar tax refund debit card. In 2011, over one million Connecticut residents received tax refunds, while 45% of Connecticut taxpayers received paper checks. This year, this 45% will be receiving prepaid debit cards and paying hefty fees to access their money. 

An estimated 7.7%, or over 9 million Americans, are unbanked and therefore, do not have the option of direct deposit. Their only option will be such prepaid tax refund cards and the fees associated with them. One solution to this problem would be for states to create BankOn initiatives, which offer the unbanked the opportunity to open low-cost accounts  at mainstream financial institutions. These include so-called “second chance” accounts that provide those who have had an account closed in the past a second chance to open a new account. By starting BankOn programs, states have the opportunity to not only save the costs associated with paper refund checks, but also to provide their unbanked residents with a chance to enter the mainstream financial market. Ultimately, such access will enable residents to save more at tax time and build assets for the long term. Instead of taking a narrow view solely focused on cost containment, states need to expand their focus to include creating asset building opportunities for their residents that, in the long term, will prove even more lucrative for states. 

This blog post was coauthored by Alison Terkel.

 

CFED Asset and Opportunity Scorecard

Assets & Opportunity ScorecardThe results are in: poverty is on the rise in America. Over 46 million Americans, 15% of the country’s population, are income poor. This number has grown from 1 in 5 in 2009 to 1 in 4 today. And this is actually an underestimate of the U.S. poverty level since the Census Bureau’s current method for calculating poverty is outdated. In fact, the Census Bureau recently announced a new supplemental poverty measure to help update the way it calculates poverty.

While income poverty is important, it refers only to a person’s cash flow. Asset poverty, on the other hand, focuses on net worth. Individuals who cannot get by for three months if all of their outside sources of income cease are considered asset poor. Asset poverty is, therefore, is more important than income poverty, since income poverty examines only whether people have enough to get by, whereas asset poverty examines whether they have enough to get ahead. 

This week, the Corporation for Enterprise Development (CFED) released the 2012 Assets & Opportunity Scorecard, which highlights the growing asset poverty trend. According to this report, 43%, or 127.5 million people, are asset poor. The Scorecard focuses on five areas and provides an overall ranking and grade per subject area for each state, as well as policy solutions for states to implement to improve their scores. As CFED’s State Asset Network partner for Illinois, the Shriver Center contributed data for this report.

Based on this data, Illinois ranks 32nd in the nation with almost 13% of its population experiencing income poverty and over 26% experiencing assert poverty.

Financial Assets and Income
Illinois scored a C and ranked 29th in the nation in terms of assets and income. The most dramatic figure ranks Illinois 42nd in the country for bankruptcy; 6.3 per 1,000 residents have filed for bankruptcy, compared to the national average of 5.

Businesses and Jobs
Illinois also scored a C and ranked 31st in the nation in the area of business and jobs. While the national unemployment rate is 9.6%, in Illinois it is 10.2%, ranking the state 36th in the country. Similarly, the national underemployment rate is 16.7% versus 17.5% in Illinois, ranking it 40th. These numbers depict the continuing struggle of those looking for work and lingering unemployment.

Housing and Homeownership
Illinois scored a D for housing and homeownership, ranking it 44th in the nation. The state’s foreclosure rate is 7.29%, 48th in the nation, meaning that 1 in every 498 households are in foreclosure. Forty percent of residents are also financially overburdened by their homeownership costs and another 52% are overburdened by rental costs.

Health Care
Illinois scored a C in health care and ranked 26th in the nation. Although health care reform will provide health care coverage for more Americans, currently the poorest 20% of Illinois residents are 13.6 times more likely to be uninsured, and people of color are 2.3 times more likely to be uninsured than the rest of the nation.

Racial Wealth Gap
Nationally there has been a dramatic increase in the racial wealth gap. While 20% of white families are asset poor, over 44% of households of color in America are asset poor. In Illinois, people of color are 2.6 times more likely to be asset poor.  

Asset Building Policy Solutions
The recession may be over, but families are still reeling from the aftermath and struggling to get ahead. The U.S. income poverty level is the highest it has been in the 52 years that poverty data has been collected. It is imperative that states and the federal government begin addressing these overwhelming figures. By implementing asset building strategies, the nation will create opportunities for families to both move out of poverty and become economically upwardly mobile. The Shriver Center and its Assets Opportunity Unit will continue its efforts to ensure that these issues receive the attention that they deserve. 

For more information about the Shriver Center and its work on alleviating poverty visit Shriver’s Website and subscribe to our asset building newsletter, or follow us on Twitter and Facebook.

For a complete look at all 50 states and their scores, see the full CFED Asset and Opportunity Scorecard.

 

Don't Go to Jackson Hewitt's Tax Party

Tax FprmsIt’s that time of year again; W-2s are showing up in mailboxes across the country signaling people to start preparing to file their 2012 taxes. Like in years past, tax preparers are already bombarding the public with reminders about the impending tax season. Unlike previous years, however, there are a number of big changes in this year’s tax landscape.

First and foremost, 2012 is likely the last year for refund anticipation loans (RALs). As discussed in previous blogs, RALs are short-term, high-interest-rate bank loans sold through tax preparation sites, such as H&R Block or Jackson Hewitt. Although marketed as “instant refunds,” RALs are actually extremely high-cost bank loans that last 7-14 days until the actual Internal Revenue Service (IRS) refund repays the loan. All fees are deducted from the final RAL amount issued to the taxpayer. If, however, the RAL customer does not receive the expected tax return amount as calculated by the tax preparer, he or she is liable to the lender for the difference. By one estimate, consumers paid approximately $833 million in RAL fees in 2006 and $740 million in 2007.

The allure of RALs is that they provide taxpayers an immediate advance on their anticipated tax refunds. Yet, most taxpayers could have their refund in two weeks or less if they file electronically on their own. Fortunately, after this 2011 tax season, RALs will no longer be offered. In December of last year the Federal Deposit Insurance Corporation (FDIC) entered into a settlement agreement with Kentucky-based Republic Bankcorp Inc., the last bank in the country providing funding for RALs for tax preparation companies, which will prohibit the bank from continuing to fund them after this year.

While the demise of RALs was slow and painful, Jackson Hewitt, the sole tax preparer that will be offering RALs this tax season, is making sure that RALs have one last party on their way out. Jackson Hewitt’s flashy TV commercials ads are trying to turn tax time into party time. In particular, Jackson Hewitt, as the only player in the market, is trying to capitalize on this last tax season as much as possible. In addition to its traditional tax preparation and RAL services, Jackson Hewitt is also partnering with Wal-Mart. Wal-Mart recently entered the banking game by providing check cashing services and also began offering a prepaid card, the MoneyCard. Through its partnership with Jackson Hewitt, it will also provide so-called “free” tax preparation.

Over 3,000 Wal-Mart’s will offer free 1040 EZ assisted filing, and customers will be given their tax refunds in the form of Wal-Mart cash cards.  Most people, however, cannot use the 1040 EZ form. The 1040 EZ form does not cover anyone who wants to itemize deductions (usually homeowners) or anyone claiming student loan interest, health care credits, the earned income tax credit (EITC), child tax credits (CTC), or retirement credits. Because a 1040 EZ filing cannot be used in connection with refunds, households that use the 1040 EZ form to have their taxes prepared for free will be forgoing things like the EITC, which is the largest anti-poverty program in the United States. If a household elects to claim the credit, then Wal-Mart’s tax preparation service will not actually be free. 

Additionally, even for those that do have their taxes prepared for free, the cards on which their refunds are paid come with hidden fees. Fees for Wal-Mart’s Cash Card include $2 to withdraw cash from an ATM, $1 to check the balance, and $3 if $1,000 isn’t added to the card in a given month.

Tax time is a critical time helping for low- and middle-income families to save. Tax filers who are eligible for EITC, CTC, and other credits can receive free tax preparation by going to a Volunteer Income Tax Assistance (VITA) site and getting their tax refunds for free. Additionally, VITA sites will help these households file electronically thereby allowing them to receive their refunds within days without having to rely on predatory products such as RALs. With such savings, low- and middle-income families can open bank accounts, possibly through a Bank On program, which provides low-income families with low-cost accounts at mainstream banks and financial institutions, thereby launching them onto the path of long-term financial stability.

So yes, tax time can be party time, but just don’t invite Jackson Hewitt to the party.

This blog post was coauthored by Alison Terkel.

 

Entrepreneurship: Girl Scouts Teach More Than How to Sell Cookies

The Girl Scouts of America turn 100 this year, and to celebrate they are rolling out not only a new lemon-flavored cookie, but new badges. Thirteen of these new badges reward learning about financial topics such as saving and investing, philanthropy, budgeting, and earning good credit. The Girl Scouts’ three million members will be getting a leg up on becoming financially savvy, something not always taught in school.

The Girl Scouts will not only learn valuable life lessons about money, but will put these lessons to use in tangible ways. Before earning the “Financing My Dreams” badge, the girls must first meet with a real estate broker to see if their dream job will pay enough for their dream house. The real estate brokers become mentors, teaching the Girl Scouts the importance of credit in the home loan process, interest rates, and why you should put 20% down on a home. After the Scouts master these skills, they take their dream home and compare it to actual homes listed on the market in their communities and, with the brokers’ assistance, decide how to achieve their dreams. Once this is accomplished the Girl Scout receives her badge as a reminder of the road she must take to get her dream job and home

As Claire Mysko, author of “You’re Amazing! A No-Pressure Guide to Being Your Best Self,” said, teaching financial literacy to young girls is the key to building the confidence they will need to have financial freedom and healthy relationships. But don’t worry boys, the Boy Scouts also offer financial literacy badges including “Personal Management,” which teaches comparison shopping and stock market research.

All children should receive a financial education, regardless of whether they are Boy Scouts or Girl Scouts. Schools should be mandated to provide financial education courses so that future generations grow up knowledgeable about money, able to make informed decisions, and able to be financially independent. In 2010, the Treasury Department issued Financial Education Core Competencies to establish a consistent baseline for financial education. It is up to each state to decide how to implement these core competencies, including whether existing classes meet them and if students will be tested and/or minimum requirements imposed for graduation. Currently only 13 states require high school students to take a personal finance course before graduation and only 9 require testing. A study conducted by the National Endowment for Financial Education (NEFE) in 2009 looked at students from 15 colleges in states with differing financial education policies. The students from states that required a financial education course had the highest reported financial knowledge and were more likely to display positive financial actions, including being more likely to save, more likely to pay off credit cards in full each month, and less likely to max out credit cards and be compulsive buyers. 

All states should require financial education courses in school beginning in grammar school. In the meantime, Scouts are taking matters into their own hands. Boy Scouts and Girl Scouts will be learning critical financial lessons that are not available in many American schools and that will help them grow into fiscally confident adults. And of course, by selling delicious cookies, Girl Scouts will be earning that “Entrepreneurship” badge as well.

Watch a video about the Girl Scouts new financial literacy badges on CNN’s website.

This blog post was coauthored by Alison Terkel.

 

 

Goodbye and Good Riddance: Refund Anticipation Loans

As we ring the 2012 New Year we can say goodbye and good riddance to Refund Anticipation Loans (RALs). RALs are short-term, high-interest-rate bank loans sold through tax preparation sites. The allure of RALs was that they provided 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.

A report 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.

But now RALs are dead. In December of last year the Federal Deposit Insurance Corporation entered into a settlement agreement with Kentucky based Republic Bankcorp Inc. that will prohibit the bank from continuing to fund RALs. The demise of RALs was slow and painful. Over the last several years, federal banking regulators and the Internal Revenue Service (IRS), recognizing the danger and negative impact of RALs, slowly but surely began to prohibiting the practice of selling RALs.

As early as 2008, the 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 2010 the IRS announced it was creating a Task Force to study RALs.  

In February 2010 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 issued cease and desist orders to banks funding RALs. In August 2010 the IRS announced that starting with the 2010 tax filing season it would no longer provide tax preparers with the mechanism they had been using to underwrite RALs. This so-called “debt indicator” tool gave tax preparers an indication of whether a client would have any portion of his/her 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. Since refunds can generally be received within 10 days of filing electronically, the IRS decided that there was no longer a need for the debt indicator or RALS. As IRS Commissioner Doug Shulman explained at the time: “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.” Then in October 2010, the Office of Thrift Supervision (OTS) issued a supervisory directive to Iowa-based MetaBank Financial stating that the bank was guilty of engaging in unfair and deceptive practices through its funding of Jackson Hewitt’s RAL products and requiring it to obtain written approval before entering into any new third-party relationship agreements. 

Shortly thereafter, in January 2011, the OCC prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever, thereby ensuring that H&R Block, could not offer RALs. The year prior, 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, just as H&R Block was forced to leave the RAL market 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 for the 2011 tax season. Yet, in the midst of the 2011 tax season, the Federal Deposit Insurance Corporation ordered Republic Bank to stop providing RALs.

As soon as the Federal Deposit Insurance Corporation (FDIC) issued the cease and desist order to Republic Bank, the only two other banks funding RALS, fearing similar actions against themselves, announced that they would leave the RAL market. Since Republic charged on average $90 for a $1,500 RAL and earned over $44 million, or 69% of its net income, from providing loans to Jackson Hewitt and Liberty Tax in 2010, it quickly appealed the FDIC’s decision and the case resulted in the recently announced settlement agreement. Pursuant to the settlement agreement, Republic Bank while pay a fine of $900,000, but more importantly it must leave the RAL market by the 2013 tax season. In the meantime, federal regulators will closely monitor Republic’s tax-refund business. 

The death of RALs is a great achievement for consumer advocates and provides needed protection for low-income families. Yet, tax preparers are likely to begin marketing an alternative product, Refund Anticipation Checks (RAC), a less risky but still costly product to the consumer, instead. An RAC is a temporary bank account set up by a tax preparer on behalf of a taxpayer into which the IRS direct deposits a refund check. Consumers access that money through a check or prepaid card. When the money is gone, the account closes automatically. Consumers typically pay about $30 to set up the one-time use account. If they opt to get a paper check, they could end up paying a check-cashing fee, too. In 2009, about 12.9 million filers got refunds via an RAC, but this number is likely to increase now that RALs are gone.

Through generally cheaper than a RAL, enrolling in an RAC program doesn't make a lot of financial sense, either. Consumers would be wiser and save money by preparing their taxes themselves or going to an IRS Volunteer Income Tax Assistance (VITA) site and having their taxes prepared for free. The IRS Volunteer Income Tax Assistance Program (VITA) and the Tax Counseling for the Elderly (TCE) Programs offer free tax help for low- and moderate-income taxpayers. Trained VITA site volunteers also help those who are eligible receive the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), or credit for the elderly and disabled. Taxpayers should then open a low-cost or free checking and saving accounts with a BankOn affiliated bank so they can opt in for a direct deposit of their tax refund. VITA sites begin to open at the end of January, so begin preparing for tax season early to receive a tax refund for free.

Although RALs are dead, and no one will be at their funeral, consumers must remain vigilant and continue to avoid costly products at tax time.

 

Why Obama has the Right to Appoint Cordray

 

The Consumer Financial Protection Bureau (CFPB) opened its doors in July of 2011 and after a pro-longed partisan political battle, it finally has a director.  After Republican Senators made it clear they would continue to block Richard Cordray’s nomination, or anyone else’s, until their demands to restructure the CFPB to make it less powerful were met, President Obama, in a speech on Wednesday in Cleveland with former Ohio Attorney General Richard Cordray by his side, publicly confirmed Cordray’s appointment during Congress’ recess.

Although it is very likely that Cordray’s recess confirmation will be challenged, it is clear that President Obama had both the legal authority and moral obligation to make this appointment. Recess appointments are not new, but some legislators are claiming that Cordray’s appointment exceeded the President’s executive powers since Congress was technically in a pro forma session. Both houses of Congress can hold pro forma sessions at which no formal business is expected to be conducted. Such sessions are usually held to fulfill the Constitution’s requirement "that neither chamber can adjourn for more than three days without the consent of the other." Over time pro forma sessions have also been used to prevent the presidents from making recess appointments. Yet, such recess appointments have occurred in the past. In 1903, when the first session of the 58th Congress ended, President Theodore Roosevelt made over 160 recess appointments during a recess that lasted only a fraction of a day. Similarly, President Truman twice made recess appointments during recesses that lasted just a handful of days. Additionally, the 11th Circuit Court of Appeals, the highest court to consider the question of when recess appointments can be made, considered whether a George W. Bush appointee to the 11th Circuit was invalid because it occurred during a very short legislative break and held that the Constitution, on its face, does not establish a minimum time that an authorized break in the Senate must last to give legal force to the President’s appointment power under the Recess Appointments Clause.

            Cordray is also not the first controversial figure to be appointed through a recess appointment. Some familiar names – Thurgood Marshall, Earl Warren, and William Brennan – were all, at one time or another, recess appointments.  In 1961, President John F. Kennedy appointed Thurgood Marshall to the 2nd Circuit Court of Appeals – he was finally confirmed by the Senate the following year by a vote of 54-16. President Dwight Eisenhower appointed three judges to the Supreme Court during recesses; including, Warren, Brennan and Potter Stewart. Nor has President Obama overused his powers. Obama has only made a total of 28 recess appointments, compared to:

 

Challenging Cordray’s appointment means that once again Congress is not listening to its constituents, nor looking out for their financial well-being. According to a recent AARP and Center for Responsible Lending poll, 74 % of all respondents (including 73% Independents and 68% Republicans) responded affirmatively that they support having a single agency with the mission of protecting consumers from financial companies

Unfortunately even before Cordray’s nomination, some legislators weren’t listening. Forty-four Republican senators sent the President a letter stating that they refused to vote for anyone to become the Director unless they got what they want --- restructuring of the CFPB to make it less powerful. Specifically, they demanded that instead of a single director there should be a board overseeing the CFPB, that the CFPB should be subject to the Congressional appropriations process, and that prudential financial regulators, who oversee the safety and soundness of financial institutions, be given the right to veto any regulations issued by the CFPB.  These are the same restrictions that conservatives had originally wanted in the Dodd-Frank Wall Street Reform and Consumer Protection Act but were unable to get passed. By making its funding contingent on appropriations and putting veto powers on its regulations, the CFPB would essentially have little operating funding and little authority.

After forty-four senators blocked Cordray’s nomination in September and again in December, and not because of his qualifications (in fact, several Senators indicated that Cordray’s qualifications were good), the White House decided to exercise its legal powers and not let Americans’ financial futures hang in the balance. As President Obama stated in his Cleveland speech, “every day that [Cordray] waited to be confirmed was another day when millions of Americans [were] left unprotected. 

Although the CFPB has been working hard since it launched in July, without a director, the CFPB could not "exercise its full power" since it could not enforce laws against “non-bank financial institutions such as pay day lenders” and other members of the predatory fringe financial markets. Now that Cordray has been confirmed, through a perfectly legal recess appointment, the CFPB can fully protect American’s financial futures.

 

 

The Consumer Financial Protection Bureau: Hard at Work So You Know Before You Owe

The Consumer Financial Protection Bureau (CFPB) has been hard at work despite some lawmakers’ efforts to block the confirmation of Richard Cordray, President Obama’s nomination as director of the CFPB. The CFPB has rolled out a series of Know Before You Owe topics in order to best hear consumer complaints, answer concerns, and make appropriate policy changes. First the CFPB recently published a report on consumer credit card complaint data

The report summarizes information collected from the first three months of the CFPB’s Consumer Response office’s complaint system. When the CFPB officially launched in July of this year, its Consumer Response office’s first focus was on credit card inquiries and complaints. Consumers were encouraged to submit inquiries and complaints to the CFPB in a variety of consumer-friendly manners, including by mail, fax, telephone and the CFPB’s website. The CFPB’s call centers, for example, provide services for the hearing- and speech-impaired and can assist consumers in 191 different languages. Through these mechanisms the CFPB received over 5,000 comments on credit card issues. The data collected will inform the CFPB’s future enforcement, rulemaking, research, and consumer education efforts. 

Although the majority of the comments resulted in the CFPB providing general feedback and informational resources; the CFPB also sent 84% of these concerns directly to credit card issuers to resolve and/or and respond to consumers. Thus far, credit card issuers have reported full or partial resolution of 74% of them. There were a wide range of complaint topics, however, the top five concerns related to:

  1. billing disputes (13.4%);
  2. APR or interest rates (11%);
  3. identity theft/fraud/embezzlement (10.8%);
  4. other (8.9%); and
  5. closing/cancelling an account (4.8%).

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act the CFPB was given authority to enforce the CARD Act. The CARD Act, which was signed into law by President Obama in May 2009, was designed to be a “credit card bill of rights” intended to end interest rate hikes, hidden fees, and other abusive practices in the credit card industry 

The CFPB also recently held a conference marking the one-year anniversary of the enactment of the CARD Act that included presentations and reports on the credit card industry’s progress in complying with the Act. This progress, however, is mixed. Overdraft fees have virtually disappeared in the credit card industry. Similarly, prior to the CARD Act, approximately 15 percent of credit card accounts were re-priced over the course of a year; today that number is under 2 percent. Yet, while only one of the nine major credit card issuers has a usual practice of periodically reviewing the APR on existing accounts and raising interest rates for new purchases, five others have increased, or plan to increase, interest rates on new purchases for customers who are delinquent on past balances. 

On another front, the CFPB is currently seeking consumer comments on mortgage application forms. Presently the forms to apply for a mortgage are very complicated. The CFPB has created a prototype of a simpler credit card agreement that clearly spells out the terms for the consumer. Use of the form is not mandatory; however, the CFPB hopes that financial institutions will adopt it. The public is being encouraged to visit the mortgage section of the CFPB’s website and compare two versions of a mortgage disclosure form the CFPB has developed that describes loan terms and closing costs. Consumers can choose which one is easier to read and that they prefer. Consumers can also compare the proposed form to their mortgage company’s current forms.

Clearly, the CFPB is working hard to protect consumers from predatory lending and deceptive practices, as well as actively hearing and responding to public comments. We only wish that the Senate would be as responsive and listen to the public’s desire to have Cordray’s nomination confirmed so that the CFPB can continue and expand this good work.

Learn more about the findings of the surveys included in the CARD Act: One Year Later conference.

Learn more about the Cordray nomination proceeding.

 

Wal-Mart and Other Retailers: The Next Financial Institutions?

Wal-Mart Bill PayingThe name “Wal-Mart” has become somewhat of a lightning rod for those who value buying local and supporting small business and labor rights. Recently Wal-Mart has entered into an even more contentious business—the banking industry—and the lightening has increased.

As reported in a previous blog, Wal-Mart, along with other large retailers, has jumped on the bandwagon to provide financial services. Wal-Mart’s new MoneyCenters offer a variety of products, such as its prepaid  MoneyCard. Customers like Wal-Mart’s late hours, as well as the MoneyCard’s  flat $3 monthly operating fee and no overdraft fees. As one Wal-Mart executive put it, Wal-Mart has been building à la carte financial services, becoming a force among the unbanked and “unhappily banked.” The MoneyCard acts just like a credit card, except that it is prepaid, and can be used to purchase goods and services. Wal-Mart’s MoneyCenters also provide services such as check cashing, international money transfers, direct deposit, and bill paying all at a competitive rate.

In July 2005, Wal-Mart submitted an application for a bank charter with the Federal Deposit Insurance Corporation (FDIC). Subsequently, the FDIC received over 1,500 letters about the application, with the majority of respondents vehemently opposing Wal-Mart's foray into banking. Ultimately Wal-Mart withdrew its request for a bank charter in early 2007 after a great deal of opposition from banks and legislators, including Rep. Barney Frank (D-MA) who introduced a bill aimed at preventing nonfinancial commercial institutions, more specifically big box stores, from operating banks.

Wal-Mart’s financial products aren’t without faults. Customers may not realize that they may need a Social Security number to apply for the card, thereby excluding immigrant populations who rely on other forms of identification such as Matricula Consular Cards or ITINs. Matricula Consular cards are photo identification cards issued by Mexican consulates to Mexican nationals living outside the county. Individual Taxpayer Identification Numbers, or ITINs, are issued to foreign nationals by the Internal Revenue Service as a tax processing number and can also be used as a valid form of identification at some banks. For more information on ITINs, check out the upcoming issue of the Clearinghouse Review.

The MoneyCard also has hidden fees, aside from the $3 monthly rate, such as charges for balance inquiries and ATM withdrawals and other fees that are not clearly stated. These are the same types of fees and transparency issues that caused people to flee from banks in the first place. Moreover, prepaid products, such as the MoneyCard, act as electronic cash. Therefore they do not build credit, nor do they help people save or build assets. Additionally, prepaid cards, unlike credit cards, are not covered by Regulation E of the Electronic Funds Transfer Act (EFTA) and therefore often do not have the same protections as debit or credit cards, such as:

  • a cap on losses when cards are lost or stolen or when unauthorized charges are made;
  • assurances that missing money will promptly be re-credited; or
  • clear and conspicuous disclosures of all fees before signing up.

Wal-Mart is not the only one trying to cash in on the 30 million Americans who remain unbanked or underbanked. Target recently entered the field with an American Express prepaid card, and Kmart and BestBuy have their own Visa and Mastercard prepaid cards. Target’s prepaid AmEx card has fees similar to Wal-Mart’s MoneyCard, such as a $3 fee to load money onto the card, and a $3 fee per ATM withdrawal after the first free ATM withdrawal per month. Target’s card does not, however, have a monthly fee. Thus far, Wal-Mart has the lowest monthly fee and the lowest activation fee of such retailer cards. After all, Wal-Mart’s slogan is “saving money, living better.”

While these prepaid cards may provide an easy way for people to begin accessing financial services, they do not help customers save for the future or build credit, because they are not linked to either bank or savings accounts. Instead, programs such as BankOn, which promote real savings and responsible financial education, are ultimately better options. Bank On programs are voluntary, public/private partnerships between local or state governments, financial institutions, and community-based organizations that provide low-income un- and underbanked people with free or low-cost starter or “second chance” bank accounts and access to financial education. This innovative program, which began in San Francisco, California, has spread to cities and states across the country that want to help reduce barriers to banking, such as allowing ITIN numbers to be used to open accounts, and increasing access to the financial mainstream for consumers.

Although prepaid cards like the Wal-Mart MoneyCard may, in some cases, be a good first step (assuming that fees are both reasonable and clearly disclosed), they do not encourage the same saving mentality that opening a BankOn account does. Until such a mental shift occurs, the 30 million un/underbanked Americans will still be economically disenfranchised.   

This blog post was coauthored by Alison Terkel.

 

 

 

America's Poor are Paying Big Banks for Benefits

Debit cardStates have recently begun renegotiating with banks to lower fees on electronic benefit transfer (EBT) cards after pushback from beneficiaries and growing negative press coverage over the past few months.  

EBT systems are a means of delivering government benefits to recipients electronically via a plastic debit-type card. A Shriver Brief blog post published earlier this year provided an overview of the transition from mailing checks to using EBT cards (i.e., direct deposit and closed-loop debit-type cards) to the current trend of issuing branded prepaid benefit cards (EPC). The Shriver Center also hosted a webinar on this trend and its negative impacts on low-income consumers in February of this year.

Forty-one states have switched from issuing paper checks for everything from unemployment benefits to Temporary Assistance to Needy Families (TANF) to other state public benefits to either EBT systems or, more recently, prepaid cards. All Supplemental Nutrition Assistance Program benefits across the country are paid electronically. By distributing benefits electronically, states are able to save millions on postage and printing, which is particularly attractive given states’ budget deficits.  

Banks, such as Bank of America, Wells Fargo, US Bank and JP Morgan Chase, generally provide states with EBT and EPC cards free of charge and then earn revenue on swipe fees, penalties, and other fees, such as ATM and balance inquiry fees. Such arrangements have come under fire because these same banks that taxpayers bailed out in 2008 during the economic downturn are now earning money from poor, disadvantaged people who are down on their luck and then sharing what they've grabbed with the state. Although banks do not report how much revenue they receive from these types of arrangements, JP Morgan Chase, for instance, collects around $100,000 a month from EBT card usage fees under its contract with Washington State—this is on top of the $800,000 the state pays it.

In May, the National Consumer Law Center (NCLC) published a report examining the electronic payment of government benefits in the unemployment context. This report has garnered a lot of attention and, it appears, prompted some states to take action by entering into renegotiations with the banks to lower or eliminate fees. 

After being identified as one of the states having the cards with the worst fees in NCLC’s report, Oregon renegotiated with US Bank to provide unlimited US Bank ATM and teller withdrawals and two free withdraws per month at non-US Bank ATMs (although the bank that owns the ATM might still assess a fee).  Although these fee changes are an improvement, they don’t benefit all Oregonians. Those who live in rural areas, where unemployment is especially high, have to travel over 80 miles at times just to get to the nearest US Bank ATM. This problem would have been better resolved if US Bank had agreed to unlimited withdrawals at out-of-network ATMS.

Colorado has also taken steps to save money for those receiving unemployment benefit payments by renegotiating its contract with JP Morgan Chase. The state was successful in saving card users over $500,000 a year. Some of these changes include eliminating point-of-sale fees, allowing cardholders to withdraw up to $809 in a 24-hour period, and allowing one free denied transaction. California, which was applauded by NCLC for having low fees on its unemployment benefit cards, has tried to reduce fees further. In September 2010, the California Department of Social services sent letters to companies that own and operate large ATM networks such as Wells Fargo, Bank of America, JP Morgan Chase and Cardtronics asking them to waive surcharges for EBT card users at their ATMs. Unfortunately, none of the banks complied. Interestingly, South Carolina, whose unemployment EBT cards are fraught with high fees, demanded fee reductions from Bank of America when it learned that its fee arrangement with the bank was substantially higher than the bank’s similar contracts with California and New Jersey. 

Almost all of the states’ contracts for EBT cards are up for renegotiation in 2012, either because the contract expires or because the state has an option for a one-year renewal. When renewing their contracts, states should, at a minimum, ensure that banks do not continue to earn fees off of the backs of low-income consumers and the unemployed.  

Alison Terkel coauthored this blog post.

 

Hostage Takers Not Budging: No on Cordray Nomination Again

Photo by Andres RuedaThe 44 Republican Senators who are continuing to hold former Ohio attorney general Richard Cordray's confirmation as Director of the Consumer Financial Protection Bureau (CFPB) hostage are not negotiating. Although the CFPB has been up and running since July 21, 2011, bipartisan fighting has been going on for much longer, and seems likely to continue. In September the Senate blocked Cordray’s confirmation, and last week most Republican senators, including Illinois Senator Mark Kirk, blocked it again in a 53-45 vote.

Without a director, the CFPB cannot "exercise its full power" and fully protect American consumers from predatory lenders and other fraudulent financial products. These Republicans know it and are taking advantage of this fact. Unless and until a director is confirmed the CFPB is not able to:

  • prohibit unfair, deceptive, or abusive acts;
  • write rules related to model credit disclosure forms;
  • define which larger non-bank financial institutions should be supervised by the agency; and
  • examine or enforce laws against non-bank financial institutions such as all mortgage-related businesses, along with payday lenders, student lenders and other large non-bank financial companies.

But some legislators are insisting that the bureau first be stripped of its independence and be subject to an annual budget process sensitive to financial industry influence that is sure to slash its ability to effectively protect consumers from unsafe products and practices. Many of these senators are the same ones who send a letter refusing to confirm any nominee, regardless of his or her qualifications, unless the structure of the CFPB is changed to disperse its power and weaken its director’s role. Specifically, the letter demanded that instead of a single director there should be a board overseeing the CFPB, the CFPB should be subject to the Congressional appropriations process, and that there should be a safety-and-soundness check by the prudential financial regulators, who oversee the safety and soundness of financial institutions, on any regulations issued by the CFPB. These are the same restrictions that conservatives had originally wanted in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), but were unable to get passed.

In mid-October, a group of 37 bipartisan attorneys general came together to support Cordray’s nomination, and they confirmed their support right before yesterday’s vote. Although they do not all agree on the Dodd-Frank Act, they do believe that Cordray is highly qualified to serve as the director of the CFPB. Moreover, they indicated that coordination between the attorneys general and the federal government is critical, a point driven home by the economic injustice protests around the country. Twenty-seven Democratic members of the House Financial Services Committee also released a letter sent to Senate Minority Leader Mitch McConnell (R-KY) calling for him to agree to a vote of the full Senate on the nomination of Cordray as Director of the CFPB. Other groups, such as the American Sustainable Business Council (ASBC), a growing coalition of responsible and sustainable businesses that sent a letter to the full Senate on behalf of more than a hundred businesses and business networks, have also called for the rapid confirmation of Cordray.  

Before the vote was scheduled, Sen. Scott Brown (R-MA) also broke from his party to endorse Cordray. This is not the first time Sen. Brown has made a break from party lines; he also broke with his party on the Dodd-Frank Act vote, and his vote (one of just three Republican votes) helped push it through. He did withhold his vote, however, until he had secured highly targeted legislative favors for hometown banking giant State Street. 

Thus, it is not necessarily impossible that that some senators may change their minds. As the House letter to McConnell said, it is “unfathomable that any federal legislator would stand in the way of ensuring comprehensive protections for military families, the elderly and all Americans.” But, so far, this is exactly what is happening, and Cordray’s nomination is still being held hostage.

 

Debtor Prisons: The 2011 Version

Illinois Attorney General Lisa Madigan recently vowed to fight debt collectors use of arrest warrants to pursue money they are owned on credit cards, auto loans and other bills—a practice that is flourishing statewide. 

More than one-third of U.S. states allow borrowers who can't or won't pay to be jailed. Nationwide statistics aren't known because many courts don't keep track of warrants by alleged offense, but a tally of court filings in nine counties across the U.S. by the Wall Street Journal earlier this year showed that judges signed off on more than 5,000 such warrants since the start of 2010.

A debt-related arrest warrant is typically issued when a borrower who was sued for payments on an outstanding debt doesn't show up in court or fails to make payments ordered by a judge. Although debt collectors say the threat of jail is used only as a last resort, judges and consumer advocates have criticized the use of such warrants, comparing them to a modern-day version of debtors' prison. Some defendants, in fact, avoid showing up in court because they can't afford to pay and fear they will be sentenced to jail.

The use of debt-related arrest warrants isn’t even the most egregious tactic employed by debt collectors. One debt collection company in Erie, Pennsylvania, actually used fake court proceedings to deceive, mislead or frighten consumers into making payments or surrendering valuables without following the lawful procedures for debt collection. In this case, 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. The “courtroom” that consumers were summoned to was located on the debt collector’s premises and 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.

Last year, Illinois enacted the Debt Settlement Consumer Protection Act (Public Act 96-1420) in order to curb unfair debt collection practices. The 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.

As millions of consumers struggle through one of the most difficult financial times in American history, repeated reselling of debt that has already been collected upon has also become a problem. One report on the debt buying industry revealed that debt collection abuses are on the rise. More debt is being bought and sold and there has also been an exponential growth of lawsuits against debtors, many of which are filed without any proof to back up the debt collection company’s claims.

While Attorney General Madigan can't force judges to stop signing off on debt-related arrest warrants, the Illinois Department of Financial and Professional Regulation, a state agency that licenses lenders and debt collectors, said it plans to introduce a bill early next year that would ban debt collectors from seeking arrest warrants.

 

ABLE Act Helps Individuals with Disabilities Save

Disabled ManThe “Achieving a Better Life Experience Act” or the ABLE Act, which was first introduced in the Congress in 2009 as H.R. 1205, was reintroduced recently.

H.R. 3423 was introduced on November 15th by Andrew Crenshaw (R-FL) and Cathy McMorris Rodgers (R-WA) and in the Senate as S.1872 by Robert Casey (D-PA) and Richard Burr (R-NC). The bill, which has bipartisan support, would amend Section 529 of the tax code to provide tax-free savings accounts for individuals with disabilities.

The 2011 version of the ABLE Act, though similar to the original version, differs slightly. Unlike the original bill, which had a maximum allowable cap of $500,000 in savings, under the 2011 version the accounts would be governed by the same regulations as 529 college savings accounts, in which amount limits are determined on a state-by-state basis. Another change is that, if an individual has an ABLE account, he or she will continue to receive Medicaid benefits, however, if the individual's ABLE account balance exceeds $100,000, his or her Supplemental Security Income (SSI) benefits, if any, will be suspended until the balance goes below $100,000 at which point SSI benefits will be reactivated without a need to reapply.

Funds in ABLE accounts can be used for “qualified disability expenses.” These include transportation, employment support, health prevention and wellness, assistive technology and personal support, miscellaneous expenses as well as housing and education. Individuals eligible to open an ABLE account are those who are receiving SSI, disability benefits, or who have been determined to have a psychological or mental impairment which results in severe functional limitations, including blindness, for a continuous, 12-month period.

The Arc, a disability advocacy group, joined the sponsors of the bill along with other advocates at a press conference on Capitol Hill on November 15th as the bill was introduced.  As Peter V. Berns, Arc’s CEO explained:

The ABLE Act is about giving people with intellectual and developmental disabilities the opportunity to achieve their dreams. Families are looking for ways to finance things like an apartment, or a ride to work, or additional educational opportunities after high school that don’t jeopardize other necessary services provided by federal programs. This bill creates a tool for families that could lead to a more independent and fulfilling life.

To learn more about the ABLE Act and to compare both versions of the bill, please refer to this chart.

 

Good for Big Banks, Bad for the Unemployed

According to the U.S. Bureau of Labor Statistics unemployment is at 9.1% in the U.S., which means over 14 million people are unemployed; of that population, 8 million have been unemployed for over 15 months. President Obama added $40 million in unemployment benefits under the Economic Stimulus Plan, and unemployment benefits were extended by 14 months after the passage of the Worker, Homeownership, and Business Assistance Act of 2009.

In the past, unemployment benefits were delivered by check, and those without bank accounts paid costly check-cashing fees. These benefits, and other federal and state benefits, are increasingly paid via prepaid cards. Prepaid cards are cards that states contract with card issuers to provide. The card issuer administers the cards with funds from the state. Bank of America, U.S. Bank, Wells Fargo, and JP Morgan Chase have each entered into contracts to provide access to unemployment insurance benefits in a total of 41 states collectively. These arrangements save states large amounts of money. Kansas, for instance, has saved over $300,000 a year, and other states, such as New Mexico, are saving over $1.5 million a year in postage and printing costs. South Carolina, which launched its arrangement with Bank of America in July of 2010, expects to save $5 billion dollars in check printing and mailing costs annually. Yet, these cost savings are accruing to states and not unemployment recipients. While this is a win for states, those receiving the benefits, the unemployed, are paying the price.

Recently, the Huffington Post reported that the division of US Bankcorps that encompasses prepaid cards earned $357 million dollars between July and September of this year, accounting for over one fourth of the bank’s total revenue. Part of this revenue derives from fees charged to use unemployment prepaid cards. The National Consumer Law Center’s (NCLC) study of the 40 states that offer unemployment benefit prepaid cards, which was discussed in a previous Shriver Brief blog, reported that fees on prepaid cards vary by state. Such fees can include debit purchase fees, fees to talk to a teller, fees for ATM withdrawals, overdraft fees, insufficient funds fees, and fees for checking account balances.

As previously reported, new federal regulations, issued as part of the Dodd-Frank Wall Street Reform Act, cap what banks can collect from merchants when consumers swipe ordinary debit and credit cards. These limits, some of which do not apply to unemployment cards, will cut Bank of America’s revenues by $2 billion dollars this year. Most banks are aiming to recoup between 30 to 50 percent of this lost revenue through other methods. Thus, while Bank of America recently aborted its plans to charge customers $5 a month to use their debit cards in the face of national outrage, it has quietly continued to mine another source of fees: jobless workers.

Some state prepaid unemployment card systems are better than others. NCLC’s report highlights California and New Jersey as good models for best practices. These states’ systems provide ample, free ways for beneficiaries to get cash without fees. These include:

  • free in-network ATM withdrawals;
  • free bank teller withdrawals;
  • two free out-of-network ATM withdrawals either every two weeks (California) or every month (New Jersey) before incurring a $1 fee;
  • free cash back from a purchase;
  • no overdraft or denied transaction fees;
  • no ATM fees for balance inquiries either in or out of network;
  • free automated and live customer service calls;
  • no fees for point-of-sale transactions; and
  • no inactivity fees.

Interestingly, both California’s and New Jersey’s prepaid unemployment card arrangements are with Bank of America, and, while these arrangements are applauded for their low fees, Bank of America’s arrangement with South Carolina is fraught with high fees. When South Carolina found out about this discrepancy it demanded fee reductions in line with those states. States should, at a minimum, review their contracts to ensure that their fees are in line with other states’. 

Prepaid unemployment benefit cards need to be regulated and fees limited in order for these types of systems to actually benefit unemployment beneficiaries rather than increase card insurers’ revenues. The Department of Labor and the newly established Consumer Financial Protection Bureau should regulate prepaid benefit card programs by banning unfair fees and providing consumer protections. The Benefit Card Fairness Act of 2010 and the Prepaid Card Consumer Protection Act of 2010 would provide some of these protections. With such regulations in place creating a card that is good for card issuers, states and unemployed workers would be much more feasible.

 

Dropping Fees, But Still Looking for Revenue

Bank of America protestersLast month, Bank of America announced that it would begin charging a $5 monthly fee  for consumers to use their debit card accounts. Only those with $20,000 or more in their accounts or whose mortgage was held by Bank of America would be exempt from the fee. In this regard the fee would have a disproportionate negative effect on low-income consumers who do not have large sums in their accounts and typically are homeowners.

Under public pressure, including pressure from the Occupy Wall Street movement, which is protesting the fact that the very banks that got bailed out that are now turning around and hiking fees, Bank of America backtracked and announced it would not charge the fee. Bank of America was the most recent bank to back away from plans to charge customers a monthly fee for using their debit cards—JPMorgan Chase & Co. and Wells Fargo & Co. also decided to cancel test programs, while SunTrust Banks, Inc. and Regions Financial Corp. stated on October 31st that they would end monthly charges and reimburse customers.

Although Bank of America dropped the fee, the blacklash from the public continues. The Occupy Wall Street movement, along with other advocacy groups, called for a Bank Transfer Day on Saturday, November 5th, 2011, encouraging customers of large banks to move funds into credit unions and small local banks. According to the Credit Union National Association, credit unions signed up 650,000 new customers since the concept of Bank Transfer Day was announced on September 29—double their normal rate.

Amidst bank threats to charge extra fees, U.S. Bank introduced the Convenience Cash Card, a low-cost prepaid card. The Convenient Cash Card is a reloadable prepaid card that allows cardholders to make purchases wherever Visa® debit is accepted. According to U.S. Bank, unlike other prepaid products, U.S. Bank cardholders can add funds to the Convenient Cash Card at any U.S. Bank branch and withdraw money from any U.S. Bank ATM free of charge.

As banks continue to look for new products and services to make up for lost revenue due to the passage of the Dodd-Frank Act, which caps interchange fees or “swipe fees” on debit cards, Americans are, or should be, hyper acute to fees put on their cards and bank accounts. U.S. Bank’s Convenience Cash Card is no different. Although the bank’s website claims free deposits and ATM withdrawals, it does not explicitly outline other possible fees, aside from the $3 fee to buy the card. Even the fine print doesn’t lay out the fees; it merely says a consumer will receive a fee schedule upon obtaining the prepaid card. Learning after the fact what fees they will really be charged does not allow consumers to gauge if the card is an affordable choice.

Whether banks are truly introducing prepaid cards to provide an affordable solution for the unbanked or whether it’s simply another attempt to increase lost revenue is debatable. Either way, public protests are being heard. Many changes are still needed, but people aren’t giving up. The $5 fee might be gone, but consumers have not forgotten the actions of the big banks, the bailouts, and the fallout that occurred because of all of it.  Protesters continue to take to the streets, marching on the doorsteps of banks, demanding transparency and fair banking practices. In sum, members of the public are making it clear that their tax dollars helped to bail out banks and that they will not let the same banks continue to generate fees from consumers to increase their profit margins. This is another example of how advocacy and action can make a difference to your pocketbook

This blog post was coauthored by Alison Terkel.

More Fees Brought to You by Bank of America

Debit CardDebit card transactions have become a way of life. According to a recent Nilson Report, debit card use rose from 1% of transactions in 1995 to over two-thirds of transactions today.   Yet, for the over 38.7 million Bank of America debit card users such transactions will now cost more. Bank of America recently announced that it will charge a new $5 per month, or $60 annual, fee for its customers to use their debit cards for purchases

According to Bank of America, as well as other financial institutions that are considering similar fees, recent legislation has impacted their profits, and such fees are needed in order for them to remain profitable. Specifically, they blame the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank Act) provisions regarding interchange or so-called “swipe” fees. As we have discussed in previous blogs, the so-called Durbin Amendment to the Dodd-Frank Act granted the Federal Reserve (Fed) the authority to regulate the amount of 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. Although, about $16 billion in interchange or “swipe” fees were collected in 2009; averaging around 44 cents per transaction, a report issued by the Fed found that the median total processing cost for debit and prepaid card transactions was actually 11.9 cents per transaction. Thus, the Fed issued proposed regulations that would have capped interchange fees at 12 cents, starting in July. After receiving public comment, the Fed ultimately decided in its final rule to cap the maximum permissible interchange fee that a card issuer may receive for an electronic debit transaction at the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This rule became effective October 1, 2011.

The new rules exclude banks with less than $10 billion in assets meaning it only applies to big banks, not community banks and credit unions. Yet, since this cap will cost large card issuers billions, they have been looking for additional sources of revenue. In addition to fees for debit card transactions such as the one proposed by Bank of America, debit card issuers are also considering “unbundling” (i.e., dividing debit card services into components and charging for each of them separately), as well as limiting the amount of debit card transactions. Free checking could very well be something of the past as well. Bank of America has already begun to charge $8.95 per month to open a new checking account with access to a teller and paper account statements. According to the latest data from economic research firm, Moebs Services, only about half of Wall Street banks are now offering free checking.

The fees and decline in free checking accounts has not gone unnoticed by the Obama Administration.  In a recent interview with abcnews.com and Yahoo President Obama called the $5 fee “not good business practice” and later added “this is exactly the sort of stuff that folks are frustrated by.” In the same interview the president urged lawmakers to confirm Richard Cordray, the nominee to lead the Consumer Financial Protection Bureau to ensure that the CFPB can prevent such arduous fees in the future. Vice President Joe Biden was also vocal about the subject saying the fee is another "tone deaf" move that the public is angry about. The administration is not alone in their opposition; many community leaders and advocates agree and have begun a petition against the fee at Change.org.

While everyone is up in arms over Bank of America’s new debit card transaction fees, clearly it’s low- and middle-class Americans who will suffer the most. In fact, account holders with a combined bank balance of over $20,000 or have a mortgage with Bank of America are not required to pay the monthly $5 fee. Low-income consumers who do not have large balances and more often than not, do not own homes, are therefore the ones being targeted by Bank of America. As Tom Feltner of the Woodstock Institute explains, banks will probably start competing at different levels in order to appeal to those with high balances, while those with low balances are the ones targeted to for extra fees. 

Under the rules, Bank of America can still charge 21 cents for debit card transactions and, since it only costs about 12 cents for the transaction, it will still make money, just not as much. And therein lies the crux of the matter—who gets to decide how much profit is enough? For too long, big banks have been the ones deciding this question to the detriment of the American public. The new regulations have taken the decision out of their hands, but of course banks are not going to give up that easy. So as they struggle to find other revenue streams, it’s up to us to ensure that consumers, especially not low- and moderate-income consumers, aren’t the ones forced to pay out.

This post was coauthored by Alison Terkel.

 

Legitimizing the Fringe Financial Market

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

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

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

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

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

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

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

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

This blog post was co-authored by Ali Terkel.

 

Credit Reports and Scores: What's Free?

Credit cardWe have all heard the catchy FreeCreditReport.com jingles on TV, but have we really stopped to think about how credit information is used and how it is dividing the country? Due mainly to the recent fiscal crisis, 25 percent of Americans had low credit scores in April 2010, compared to a historical average of 15 percent.

The Fair Credit Reporting Act (FCRA) entitles everyone to receive one free credit report a year. Yet, for-profit sites, such as Freecreditreport.com, with its catchy jingle and commercials, claim to be free but are not. Only the website annualcreditreport.com actually provides free credit reports as required under the law. 

A credit report, however, is not the same as a credit score. A credit report lays out your financial history, loans you have taken out, credit cards in your name, and details about your payment history and whether you have filed for bankruptcy, been sued, or had a foreclosure. A credit score, on the other hand, is the number assigned to you that represents your riskiness for repayment. Credit scores typically range from 300 to 850; the higher the number, the lower the credit risk a consumer is considered. And while a consumer is entitled to one free credit report a year under FCRA, the FCRA does not entitle you to a copy of your credit score, what lenders base their lending decisions on, for free. New rules implementing credit score disclosure requirements under the Dodd-Frank Act, which became effective on July 28th, will enable consumers who are denied credit or offered a higher-than-usual interest rate to find out the reasons by getting a free look at their credit scores. The regulations require financial institutions to send consumers a free copy of their credit score with factors that have decreased their score when they aren’t given the best loan terms and lowest rates after applying for a credit card or a home loan. Yet, this isn’t the same as simply receiving a free score once a year as is the case with your credit report. The Credit Score Fairness Act, which has been introduced in previous sessions of Congress, would have changed this and entitled to consumers to free copies of both their credit report and credit scores, but Congress has yet to pass this legislation. 

This is regrettable for several reasons. First, the current credit reporting system is fraught with inaccuracies. A 2008 Federal Trade Commission (FTC)-sponsored pilot study found that about 31 percent of people who reviewed their credit report found errors that they wanted to dispute. Unfortunately most people find out about inaccuracies after they have already been negatively affected. Moreover, the process of disputing the errors can be timely and costly to consumers. Easier access to both credit reports and scores, would allow people to catch errors earlier thereby avoiding credit score markdowns and harmful repercussions that arise from low scores.

Second, the use of credit information and credit checks has expanded beyond its original purpose. According to Fair Isaac Corporation, the company that pioneered credit scores, a credit score is an “objective measurement of your credit risk” for such things as car and home loans. In other words, credit scores were originally intended to be used solely as a representation of a consumer’s likelihood of repaying a loan. Yet, credit reports and scores are being increasingly used by landlords, insurance companies, utility companies and, most notably, by employers. A January 2010 survey conducted by the Society for Human Resource Management found that 60 percent of companies use credit reports to inform hiring decisions, up from 24 percent in 2004. This new phenomena has become a catch-22—people need a job to get credit, but they can’t get a job if they have bad credit or no credit at all. How are people supposed to climb out of poverty if they are not able to gain employment and work towards improving their credit in order to obtain assets? Five states, including Illinois, have recognized this problem and have banned the use of credit checks by employers for hiring and firing decisions, and 22 more states are considering similar legislation.

Another problem with credit scores is that they appear to be contributing to the already widening national racial wealth divide. There has been evidence that some companies have used credit checks as a way to discriminate against minorities by using these checks to preclude minority workers from getting higher level jobs. For example, the Department of Labor won a case against Bank of America in which the bank was found to have discriminated against African-Americans by using credit checks to hire entry-level employees. Similarly, a recent study done by the Woodstock Institute looked at zip codes and consumers’ average credit scores. The study showed that predominately African-American communities were almost four times as likely to have individuals with credit scores in the lowest range as predominantly white communities. Individuals with lower credit scores have a harder time acquiring loans for homes, cars, accessing credit cards and other low cost loan products, leaving them less likely to attain assets.  

Finally, what about the estimated 50 to 70 million Americans  who have no credit score at all? Given the prominence, both good and bad, that credit scores and reports are playing our lives, this segment of the population lacks the key (i.e., credit score) to the mainstream financial industry. If alternative credit data, such as paying rent, utility bills and medical bills on time were included in the data reported to credit bureaus, un-scored consumers could be brought into the credit industry. Unfortunately, those who are un- or underscored are most likely to forego paying things like utility bills to pay for food instead. If this information were included although they would have a credit report and credit score, it would most likely be a bad score. The question of how to best serve this population still remains, but some credit reporting agencies, such as Experian, have begun reporting the use of rental data in its calculation of consumers’ credit scores. Whether this will benefit or hurt consumers has yet to be seen, especially since Experian will also report delinquent rental payments.   

In sum, policy makers and advocates need to consider the preeminence of credit reports and scores in recent years, the effect on consumers of these changes, and to ensure that consumers are adequately protected.

This blog post was coauthored by Ali Terkel.

Congressional Hearing or Hostage Negotiations: Cordray's Nomination for Director of the Consumer Financial Protection Bureau

WalletPartisan politics are alive and well in Washington. The fate of the Consumer Financial Protection Bureau (CFPB) is being held hostage by 44 Republican senators who won't budge until they get their way.  

The CFPB was established by the Dodd-Frank Wall Street Reform Act to provide oversight of and enforce laws about the consumer financial market. Although President Obama nominated former Ohio Attornery General Richard Cordray to be the CFPB’s Director of the CFPB earlier this summer, the agency officially opened its doors July 21, 2011, without a confirmed director. Yet, without a director the CFPB cannot fully protect consumers since, by statute, it cannot enforce laws against “non-bank financial intuitions such as pay day lenders” and other members of the predatory fringe financial markets until a director has been confirmed.

Last Tuesday, during Cordray’s nomination hearing, the ranking Republican on the Senate Banking panel, Senator Richard Shelby, called the hearing "premature," saying that the panel shouldn't be considering any nominee until Democrats take their demands for accountability more seriously. Republicans are blocking Cordray's nomination not because of his credentials, but rather as part of a power play with the White House. Even before Cordray’s nomination, 44 Republican senators sent the President a letter stating that they refused to vote for anyone to become the Director unless they get what they want --- restructuring of the CFPB to make it less powerful.

Illinois Senator Mark Kirk is among the 44 senators opposing Cordray's nomination. Kirk was also one of only six senators who supported legislation to repeal the Dodd-Frank Act in its entirety, as well as  bills to create a board structure for the CFPB instead of a single-director structure. Obviously Kirk is neither listening to his constituents nor looking out for their financial well-being. According to a recent AARP and Center for Responsible Lending poll, 74 % of all respondents (including 73% Independents and 68% Republicans) responded affirmatively that they support having a single agency with the mission of protecting consumers from financial companies.

Richard Cordray is caught in the middle of these outlandish political tactics. As a result, the American people are not getting the protection from financial markets that they should be getting and that the Dodd-Frank Act requires. As Representative Barney Frank, a Massachusetts Democrat who was one of the chief authors of the law that created the bureau, explained, Republican opposition is the legislative equivalent of an “arsonist having set a fire and objecting to a building’s inhabitants using the fire exit.”

During the confirmation hearing Senator Bob Corker, a Tennessee Republican, said that his big opposition to the CFPB is that there's no way to challenge a decision by the consumer bureau, unless a particular rule "threatens the stability of the financial system." Under current law the bureau can be overturned by a two-thirds vote of a panel of financial regulators if any of its regulations threaten the stability of the financial system, which Corker called a "high hurdle." When asked by Senator Corker if Cordray thought that veto power over the bureau's decisions was a high hurdle, Cordray replied "It is a high hurdle, but not an inappropriate one." Consumer advocates agree.

The Shriver Center, along with Woodstock Institute and Illinois PIRG, issued a joint statement prior to the hearing explaining that a strong, independent agency is needed because banking regulators were more concerned about the health of financial firms than about consumer abuses, such as subprime mortgages, in the years leading up to the housing market crash. As the groups stated: “If Senate Republicans fail to vote for Cordray … it will prove that they still favor a flawed financial system over ordinary Americans … and [is] another indication that they are willing to resort to extortion … to get their way even to the detriment of a fair financial system and the still fragile economic recovery.”

It’s beyond time that politicians stop focusing on their agendas and start keeping their constituents’ needs in sight instead.

 

Banks Make Huge Profits On Food Stamps

SNAP benefits cardOver 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.

One reason that EBT systems have become so popular is that states have found that they can save millions of dollars by "outsourcing" the provision of these benefits to big financial firms. In fact, JP Morgan is the largest processor of food stamp benefits in the United States.

JP Morgan has contracted to provide food stamp debit cards in 26 states and the District of Columbia. JP Morgan is paid for each case that it handles, so that means that the more Americans that go on food stamps, the more profits JP Morgan makes. Considering the fact that the number of Americans on food stamps has exploded from 26 million in 2007 to 43 million today, one can only imagine how much JP Morgan's profits in this area have soared.

J.P. Morgan also provides unemployment insurance benefit debit cards in seven states which is ironic since it, along with other big Wall Street banks, was a major contributor to the financial collapse that lead to tens of thousands of Americans becoming unemployed. 

It seems grossly unjust that the very Wall Street financial institutions that caused the recession and received bailouts from the U.S. government and tax dollars during the financial crisis are now making money off the recession and their victims again – low income families and taxpayers. Moreover, one of the programs that was on the chopping block during the debt debate was the food stamp program. In other words, Congress was prepared to cut food assistance to families, but did not even bother examining whether big banks’ profits from administering food stamp program benefits should be cut.

As part of the recent Wall Street reform, the Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB, which became operational on July 21st, is now the sole federal agency focused on consumer protections. Among its responsibilities is supervision and enforcement with respect to the laws over providers of consumer financial products and services. As such, one of its early efforts should be to review the practice of continuing to allow financial institutions to profit off the very consumers they helped to defraud and deplete their assets in the first place.

To learn more about the CFPB visit its website.

To learn more about issues surrounding the electronic payment of public benefits you can view the Shriver Center’s webinar, The Next Frontier: in Public Assistance: Electronic Payment Cards.

 

Updates on Asset Limit Reform

Piggy bankAccumulating 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.

 

Racial Wealth Gap Is Wide and Growing

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.