How Low Income, Poor Can be Served

The Congress and most of Washington’s corps of lobbyists have been occupied in recent months with legislation that would fashion a new system to serve affluent customers interested in playing in the stock market and dabbling in esoteric financial products.

In this rarified air of high finance, little thought or time is being devoted to the plight of the 20 million citizens who do not have bank accounts, much less the means to play in the new financial world being constructed by the corporatized Congress.

Many of these forgotten citizens have been priced out of commercial banks by high fees that eat into already meager earnings. Others have been made to feel unwelcome and uncomfortable when they have attempted to deal with financial institutions that make it plain that they measure the worth of individuals only by the size of account balances. Still others live and work in inner city areas where branches are disappearing rapidly, leaving nothing in their wake but high-cost automatic teller machines (ATMs).

These citizens exist in a costly and, some times dangerous, underground world of finance, check cashing outlets and corner liquor and grocery stores willing to cash checks. Too often, they are easy prey for fast-talking credit merchants who charge astronomical interest rates.

This underground financial world is a prime exhibit of the adage that the poor pay more– particularly for basic services that the rest of the population takes for granted.

Especially vicious and costly are so-called “pay-day” loans where consumers receive credit in return for signed post-dated checks secured by their upcoming pay check. In some cases, these short-term pay day loans can carry an effective annual percentage rate of 900 to 1,000 percent interest or more. Unfortunately, during the high-interest period of the late 1970s and 1980s, most usury laws were wiped off the books, leaving borrowers defenseless against these high-cost credit scams.

Many of these citizens have no alternative. When the family budget is wrecked by illness, a car repair or the birth of a child, these citizens are forced to turn to whatever credit is available. They know that the “pay day” loans are outlandishly expensive, but the financial system provides few, if any, answers for low and moderate income families facing a financial disaster. And each time, they turn to something like “pay day” loans, or worse to some unscrupulous loan shark, they sink deeper into debt and despair.

The federal government’s new electronic funds transfer system is forcing official Washington to face up to the problem–at least part of the problem. By next January 1, all recipients of government payments must have a designated account to which the payment can be sent by electronic means. The Treasury Department is finding this Congressionally mandated assignment difficult. It now appears that the banks and other depository institutions will be called upon to issue debit cards for these citizens–cards which allow them to draw down their government payments via an ATM machine.

This is, indeed, an unimaginative solution to a big problem. It doesn’t bring the unbanked into the system in any meaningful way. It doesn’t set up a relationship that could lead to other banking services, like credit, that are badly needed by these consumers.

There are answers other than loan sharks, pay day loans and debit cards for low and moderate income families–the Treasury Department’s limited vision notwithstanding.

In fact, if the bureaucrats at the Treasury Department would take the time to sit down with the experts at the National Credit Union Administration (NCUA) they would find there is already a program underway that could help solve not only the EFT problem, but which would open the doors of opportunity for millions of citizens who have no banks accounts.

It’s called “Community Development Credit Unions,” a program designed to serve low and moderate income communities in both rural and urban areas. The current Chairman of the National Credit Union Administration–Norman D’Amours–is putting special emphasis on promoting and developing these credit unions, but he needs more help.

The community development credit unions are eligible for technical assistance and loans from NCUA and have the authority to accept a limited amount of deposits from non-members. At this moment, there are only 402 of these credit unions, but they have a great record of repaying their loans to NCUA.

The great advantage is that these credit unions are located right in the neighborhood. They are run by their consumer-members. They know the community, they know the neighborhood. They know the needs.

The Community Reinvestment Act (CRA) has been successful in bringing in substantial bank funds to underserved communities. As critically important as this is, it still lacks the day to day hands on aspect of credit union owned and controlled by the citizens right their in the same neighborhood.

Bank branches, where they exist in the inner city, have limited presence–and even more limited authority to work with and become part of the neighborhood as can a consumer-owned credit union.

Even the most progressive consumer-friendly bank simply doesn’t make the kind of small loans that credit unions make as a matter of routine. The family caught short at the end of the month and needing a few hundred dollars to meet an emergency really can’t turn to a bank and expect it to make loans of this size. It just isn’t part of their business.

But, these small consumer loans are the bread and butter…the routine of credit unions and particularly the community development credit unions.

Even more important, credit unions can and do provide counseling that help members manage credit and budget their limited resources. Many credit unions provide information on consumer products and help members to find the best deals on automobiles and other purchases.

The Clinton Administration should seize on what Chairman D’Amours is doing at the National Credit Union Administration and give him some help. There is bi-partisan support in Congress to add modest sums to the eight million dollar revolving fund from which NCUA makes loans to the community development credit unions.

Unfortunately, the President’s Office of Management and Budget has opposed these efforts, apparently because of concern that these successful credit unions compete with the Treasury Department’s program for Community Development Financial Institutions (CDFI). That’s shortsighted, and the President should step in and ensure that NCUA’s revolving fund is properly capitalized.

After all, the program has a proven repayment record–99.5 percent of on-time repayments. This track record suggests that these credit unions are viable operations worthy of support.

The traditional credit unions, themselves, particularly the prosperous and bigger credit unions should join in the effort to promote and nurture these development credit unions.

The trade associations–the Credit Union National Association and the National Association of Federal Credit Unions– should be in the forefront of this effort along with the state leagues of credit unions across the nation.

Community Development Credit Unions are a self-help mechanism that everyone–conservatives and liberals, Democrats and Republicans–should get behind as a means of alleviating the serious problems created by the lack of financial services at the grass roots of the nation low and moderate income and minority neighborhoods.