[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




                   AN EXAMINATION OF THE AVAILABILITY
                        OF CREDIT FOR CONSUMERS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 22, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-65










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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 22, 2011...........................................     1
Appendix:
    September 22, 2011...........................................    65

                               WITNESSES
                      Thursday, September 22, 2011

Gilbert, Ryan, Chief Executive Officer, BillFloat, Inc...........    42
Grant, Michael A., President, National Bankers Association.......    44
Guzman, Gerri, Executive Director, Consumer Rights Coalition 
  (CRC)..........................................................    38
Koide, Melissa, Vice President of Policy, Center for Financial 
  Services Innovation (CFSI).....................................    40
Manturuk, Kimberly R., Research Associate, University of North 
  Carolina Center for Community Capital..........................    46
Marquis, David M., Executive Director, National Credit Union 
  Administration (NCUA)..........................................    11
Mooney, Robert W., Deputy Director, Consumer Protection and 
  Community Affairs, Federal Deposit Insurance Corporation (FDIC)     9
Rademacher, Ida, Vice President, Policy and Research, the 
  Corporation for Enterprise Development (CFED)..................    48
Wides, Barry, Deputy Comptroller for Community Affairs, Office of 
  the Comptroller of the Currency (OCC)..........................     7

                                APPENDIX

Prepared statements:
    Gilbert, Ryan................................................    66
    Grant, Michael A.............................................    70
    Guzman, Gerri................................................    72
    Koide, Melissa...............................................    74
    Manturuk, Kimberly R.........................................    82
    Marquis, David M.............................................   116
    Mooney, Robert W.............................................   139
    Rademacher, Ida..............................................   151
    Wides, Barry.................................................   156

 
                   AN EXAMINATION OF THE AVAILABILITY
                        OF CREDIT FOR CONSUMERS

                              ----------                              


                      Thursday, September 22, 2011

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:31 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Renacci, Royce, 
McHenry, Pearce, Westmoreland, Luetkemeyer, Huizenga, Canseco, 
Grimm, Fincher; Maloney, Gutierrez, Watt, Hinojosa, McCarthy of 
New York, Baca, Miller of North Carolina, Scott, Meeks, and 
Carney.
    Chairwoman Capito. This hearing will come to order. Close 
the doors there.
    I would like to thank the Members for being cooperative and 
the witnesses for starting early this morning. The Oversight 
and Investigations Subcommittee has a very important hearing in 
this room at 2 p.m., and we need to move through this hearing 
as expeditiously as possible so that they can have enough time 
to complete their hearing.
    We are also likely to have a series of votes around 1 p.m., 
and it is my intention to try to wrap up the hearing when those 
votes are called. That said, I would like to remind Members to 
try to abide by the 5-minute rule when questioning witnesses so 
all Members will have sufficient time to ask questions.
    The financial crisis and economic downturn have left many 
Americans with fewer financial resources. Furthermore, some 
Americans have lost their jobs and suffered significant 
reductions in their standard of living. Many have exhausted 
their savings and are now seeking new financial products to 
help them get through these difficult times.
    While many of us will weather the storm and regain our 
financial footing, those who have struggled may have fallen out 
of the banking system or are teetering on the edge. Today's 
hearing will give members of the Financial Institutions and 
Consumer Credit Subcommittee a better understanding of the 
ongoing innovation of financial products to meet the demand for 
credit.
    Our first panel of regulator witnesses will provide us with 
an assessment of programs that financial institutions offer for 
borrowers seeking lower-dollar loans. Our second panel will 
provide members of the subcommittee with an overview of 
entrepreneurship and innovation in dealing with new financial 
products as well as the necessary safeguards to make sure that 
these products are safe for the consumer.
    We need to foster innovation in the creation of new 
financial products to meet our consumers' needs. There should 
be diverse product offerings for consumers so that they can 
best tailor the products to their needs.
    This product expansion is critical to consumers' ability to 
gain--to regain, in some cases--and maintain financial 
stability and to access the credit products they need. It is my 
hope that this hearing will provide Members with the 
information necessary to make informed decisions about ways to 
expand credit availability for the underserved.
    I would like to now recognize the ranking member, the 
gentlelady from New York, Mrs. Maloney, for the purpose of 
making an opening statement.

        We experienced some technical difficulties at the 
        beginning of Mrs. Maloney's statement.]

    Mrs. Maloney. --particularly not only from government in 
the first panel, but the second panel, on many in the private 
sector that are exploring short-term credit options and other 
ways to provide credit to the underbanked. According to a 
recent study, this segment is approximately 55 million people, 
or 24 percent of all households in America, and this population 
has grown by approximately 12 percent over the last 4 years, in 
large part due to the economic crisis.
    Even those who do have checking accounts at traditional 
banks often face credit challenges. In fact, research from the 
Bureau of Economic Research tells us in their recent report--I 
find this an astonishing statistic--that about half of all 
Americans would not be able to come up with $2,000 in 30 days 
for emergencies. I would say this is, then, an emergency that 
government faces.
    Whether they use payday lenders, check cashers, or simply 
seek to borrow money from their friends and families, these 
consumers tend to feel that their banks can't provide them with 
the money they need to fill the financial void that they face. 
And in many cases, banks are not willing to give this type of 
loan to a customer. So they seek services outside of their 
banks, where there is often a greater likelihood of predatory 
practices.
    We know that the population of people seeking these types 
of short-term credit products is growing in this uncertain 
economy, where the unemployment rate has been over 9 percent 
for some time. I have always supported consumer choice, whether 
it be in the area of credit cards, overdraft protection, check 
cashers, or any other form of short-term loans. I believe that 
as long as the prices are clear, the risks are clear, and that 
consumers are on a level playing field with their financial 
institutions, then they should be empowered to make decisions 
about their finances that are right for them and their 
families.
    I was very happy to learn about the National Credit Union 
Administration's short-term loan product for credit unions, and 
that the FDIC pilot project enabled a small number of banks to 
offer a low-dollar loan product. This is important that you are 
looking in these directions.
    But the problem is that consumers say the reason they seek 
a short-term loan as opposed to a loan from their bank is 
because the payday loan, or the check cash, or whatever it is, 
is fast and easy to obtain, and often these loans do not 
require a credit check.
    I look forward to hearing from the regulators on our first 
panel whether they think the loan products that their banks 
offer could be a viable alternative. I also would like to hear 
from them what they are doing for check cashers, because many 
are telling me that they can't get any cooperation from a bank. 
I know that in the great State of New York, there is only one 
bank that will cooperate with check cashers, and--even though 
they will check the credit of the people and ensure the credit 
of the people they are looking at.
    I really do feel that this is a huge, huge problem. There 
are many unbanked and underbanked citizens in our country, and 
we need to figure out how we can help them become banked, 
either through an alternative low-term project in the 
government, in the government banks--or the government-
regulated banks--or in the other alternative areas.
    And I would like to raise to the OCC, these alternative 
areas are not regulated. Maybe the OCC should regulate this 
area too, or what are your ideas of how this should be 
approached?
    In any event, I compliment the chairwoman for focusing on 
this. Regrettably, it is a growing problem in our country.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Westmoreland for 1 minute for 
an opening statement.

        [Technical difficulties.]

    Mr. Westmoreland. --for this hearing, and despite the 
Administration's assurances that 2010 would be a recovery 
summer, consumers are still struggling to gain access to 
credit. This is particularly true in Georgia, where the 
proliferation of bank failures and burdensome regulations from 
this Administration further hindered bank's abilities to lend 
to creditworthy borrowers.
    Now, banks are expanding to offer nontraditional financial 
products to consumers because regulations have increased costs 
and limited banks' ability to charge customers for these 
services. I am especially concerned about Federal regulators 
regulating profit over regulating the product. This is 
particularly true of recent OCC guidance, issued June 8, 2011.
    And I look forward, Madam Chairwoman, to hearing the 
testimony today from these witnesses.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Gutierrez for 3 minutes for 
an opening statement.
    Mr. Gutierrez. Thank you very much.
    And I want to thank you and the ranking member. I support 
the work these regulatory agencies are doing to encourage banks 
to offer safe and sensible loan products to underserved 
borrowers.
    I am also interested in innovations and really helping 
families get out of the debt cycles and build good credit. I 
consider this a very important issue, and one for which I want 
to explore solutions, and how will we address the potential 
abuses that exist just before us?
    Big banks--the same banks that we bailed out--are not 
offering products that look very familiar to anyone looking at 
them and fighting abusive and predatory lending practices. 
Wells Fargo--I just got this from the Internet--Wells Fargo has 
something called ``direct deposit advance,'' and U.S. Bank has 
``checking account advance.''
    While these offers may sound interesting and pretty 
innocent, they may not be all they seem to be. They are 
charging fees and interest rates that work out to almost 120 
percent APR or more, and that looks pretty much like a payday 
loan to me.
    They are writing terms that they say can take their payout 
straight from their next direct deposit. Sounds like a payday 
loan to me.
    And guess what? If you can't pay it off at the end of the 
month, they are going to go to your account and debit your 
account, and if the money doesn't exist, you get an overdraft 
fee from U.S. Bank and Wells Fargo.
    I don't know about the rest of you, but I am paying 
attention, because I thought the payday industry was the ugly 
little brother duckling that the big banks always frowned upon. 
But it appears that after we bailed them out, and they took us 
to the brink of disaster that is exactly where they want to 
take many of their customers today.
    I hope we check into these products and use enforceable 
standards created by a new consumer protection agency, which I 
hope we stop tying the hands of.
    Thank you so much.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Luetkemeyer for 2\1/2\ 
minutes for an opening statement.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    As unemployment hovers above 9 percent, and the economy 
remains stagnant, the American people continue to suffer. 
Traditional financial institutions are facing a sizeable wave 
of new regulations and have, in some cases, turned to increased 
fees to help weather the financial storm.
    Regardless of who or what is to blame, the simple truth is 
that some low- and middle-income Americans are being forced out 
of depository institutions. They are more frequently turning to 
alternative sources of capital.
    Twenty-five percent of American households have difficulty 
obtaining credit from traditional sources, and 55 percent of 
our citizens have trouble pulling together $2,000 to deal with 
an emergency. We seem to continue to work against the non-
depository institutions despite the fact that they are 
regulated, have high customer satisfaction, and serve a 
population that others are not interested in or able to serve.
    If we want to get serious about helping those with limited 
access to credit, we need to consider novel concepts that 
include a wide variety of institutions. We are beginning to do 
this, but must continue to make progress. To take the FDIC's 
small-dollar loan pilot program, this is just one example of a 
new initiative that could ultimately lead to wider access to 
credit.
    Most institutions that have participated have viewed it--
some of them have viewed it as a success, and did so because it 
gave them an opportunity to build relationships with customers. 
Without that connection, financial institutions have no reason 
to do a small-dollar, short-term loan that might be needed to 
pay a medical bill or a car payment that allows the American 
public to get well, get educated, or get back to work.
    We can improve upon this program by consenting to the 
formation of partnerships between banks and non-banks, which I 
believe would encourage increased access to credit and stronger 
consumer protections. The economy isn't improving. Our 
constituents continue to suffer.
    It is time for our government to work together and identify 
innovative ways to foster cooperation and advance this 
conversation. Hopefully, today's hearing will provide a forum 
to do just that.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Baca for 2 minutes for the 
purpose of an opening statement.
    Mr. Baca. Thank you very much, Madam Chairwoman, and anchor 
for our third-base team, as well as our ranking member, as 
well.
    Today, we are here to discuss the credit crisis and how it 
impacts the unbanked and underbanked population in this 
country. With all the attention the near-collapse of Wall 
Street received, relatively little attention has been given to 
the population of minority and underbanked and unbanked 
communities.
    These individuals and families are struggling with high 
unemployment and limited options as to where to go for credit.
    A recent study by the National Bureau of Economic Research 
found that one quarter of Americans would be unable to come up 
with $2,000 in 30 days if they had financial emergencies. So, 
you have to put yourself in that kind of a situation.
    Another 19 percent would have to rely on short-term credit 
products in order to come up with the cash. This population is 
no longer just the poor. It is the middle-class families 
fighting to pay their bills, mortgages, and educational costs 
for their kids, and knowing that they need a $2,000 loan and 
can't get it anywhere else.
    Today's banks are not serving the underserved consumers and 
are not supporting the innovation that we need in the market. 
In this situation, where can these individuals go? Some Members 
may choose to focus on the subset of the short-term loans--
payday loans, what they feel are the danger of this product.
    But payday loan providers do not offer $2,000 loans. It 
would be a disservice to the people in need of credit to focus 
on these products alone.
    If close to half of Americans cannot come up with $2,000 on 
their own in 30 days, the problem is much bigger than just 
payday loans. We need to discuss short-term products and how 
they can help.
    We need to create an environment for safe but effective 
financial innovation that at the end will provide more access 
to people who need it. This year, I have introduced H.R. 1909, 
the Federal Financial Services and Credit Companies Charter Act 
of 2011.
    Chairwoman Capito. The gentleman's time--
    Mr. Baca. May I have 30 seconds?
    Thank you very much, Coach.
    The goal of the legislation is to provide access to short-
term products and safe, transparent--instead of reinventing the 
wheel, the bills work with what we have. Let us create Federal 
charter incorporated products. I realize that we have a lot to 
discuss and I look forward to hearing the testimony of the 
individuals today, and hopefully they will consider my bill, as 
well, in that, and that is the FFSCC Charter Act.
    Thank you.
    Chairwoman Capito. Thank you.
    Mr. Canseco, for 1 minute for an opening statement.
    Mr. Canseco. Thank you, Chairwoman Capito, for holding this 
meeting.
    Federal Reserve Chairman Ben Bernanke has as much as said 
that credit is the lifeblood of our economy. And based on a 
recent FDIC survey which shows millions of American families 
are unable and limited in their ability to access credit, and 
to quote my colleague, Mrs. Maloney, who stated and quoted the 
National Bureau of Economic Research that found that half of 
American families could not raise $2,000 in an emergency if 
they needed to.
    This is truly a daunting problem that threatens the future 
of American prosperity. To correct this, Congress should focus 
on fostering a vibrant and competitive financial services 
industry--one that provides ample choices for consumers and 
allows borrowers mobility from one type of lending product to 
the next.
    Unfortunately, the recent legislation and the hundreds of 
regulations that they mandate will restrict credit to even more 
and more Americans and disallow low- and moderate-income 
families access to traditional banking systems and other 
sources of credit. I look forward to hearing the testimony of 
the witnesses today.
    Thank you, and I yield back.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Scott for 2 minutes for an 
opening statement.
    Mr. Scott. Thank you very much, Madam Chairwoman.
    I think the statistics point out clearly this great need. 
Right now, only 17 percent of banks consider it a priority to 
really get into the communities and serve the unbanked areas.
    We are now in a very difficult economic time, with soaring 
unemployment. These unbanked individuals are not generally 
financially irresponsible. For example, there are those who 
have been unemployed for at least 4 months and are looking for 
work, and they have dried up their savings; there are those who 
are young adults who have limited access to liquidity due to 
various circumstances but realize the value in saving money 
where possible--they need access to credit.
    Additionally, there are those who receive an hourly wage 
from often more than one job, who are just trying to hold on 
and find steady employment, with the economy hovering at 10 
percent unemployment--and that is being very generous when you 
count those who have given up work. So we have an opportunity 
here. We have a responsibility to make sure we have a fair, 
level playing field.
    One size does not fit all. There is room for payday 
lenders; there is room for small industrial loan companies; 
there is room for pawn shops. All play a very vital role.
    And as we move forward with regulations we have to make 
sure that the one thing that is paramount is that our consumers 
deserve choices that fit their very serious economic 
circumstances at this time.
    With that, Madam Chairwoman, I yield back.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Fincher for 1 minute for the 
purpose of an opening statement.
    Mr. Fincher. Thank you, Madam Chairwoman.
    The poor state of this economy is hurting those the most 
who have the least. In an era of 9.1 percent unemployment, 
access to credit is tighter than it has ever been.
    However, in my home State of Tennessee, there is a way to 
get credit that requires no credit score and has provided 
thousands of Tennesseans with funds to pay for emergencies and 
life's other problems. These lenders in Tennessee have 
satisfied a unique demand in the marketplace that banks and 
other financial institutions cannot fill.
    Low-dollar lenders provide short-term, low-dollar loans, 
far below the amount that a person can borrow from the bank 
without a credit check. These loans offer another immediate 
option to many consumers who have low credit or no credit at 
all.
    I look forward to hearing the testimony today from the 
witnesses, and I yield back.
    Thank you.
    Chairwoman Capito. Thank you.
    I would like to thank the Members for their opening 
statements, and now I would like to introduce our first panel 
of witnesses for the purpose of giving a 5-minute opening 
statement.
    We have your written testimony.
    Our first witness is Mr. Barry Wides, Deputy Comptroller 
for Community Affairs, Office of the Comptroller of the 
Currency.
    Welcome, Mr. Wides.

  STATEMENT OF BARRY WIDES, DEPUTY COMPTROLLER FOR COMMUNITY 
    AFFAIRS, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Wides. Chairwoman Capito, Ranking Member Maloney, and 
members of the subcommittee, I appreciate the opportunity to 
appear on OCC's behalf to discuss consumer credit and the types 
of products that national banks and Federal savings 
associations are making available to meet small-dollar credit 
needs.
    National banks and Federal savings associations provide the 
lion's share of unsecured consumer lending in the United 
States, with over $600 billion in credit card and other 
revolving debt outstanding. Consumer credit comes in many 
forms: unsecured and secured credit cards; term consumer 
installment loans; and lines of credit linked to checking 
accounts.
    Many banks and thrifts offer credit cards that provide 
households with a crucial source of credit and a flexible 
repayment schedule. Lines of credit which are widely offered 
are frequently tied to checking accounts and can be set up 
automatically transfer funds to cover overdrafts. Most banks 
and thrifts also have unsecured consumer loan products, where 
the borrower makes installment payments over a set period of 
time.
    But there are many factors that may limit a borrower's 
access to traditional types of credit. Some prospective 
borrowers may have yet to establish a credit history or may 
only have a limited credit record.
    For other prospective borrowers, previous late payments, 
repossession action, bankruptcy, or foreclosure may have 
damaged their credit score. And some consumers are just unaware 
that the better credit products for which they would qualify 
are available.
    However, a growing number of banks and thrifts recognize 
that there are ways for these customer segments to be 
underwritten safely and soundly. And many banks and thrifts 
have taken initiatives to provide products tailored to the 
needs of these customers.
    My written testimony highlights examples of small-dollar 
loan products offered by banks and thrifts and shows that much 
is being done to improve access to credit. Many banks and 
thrifts use high-touch manual underwriting when making a loan 
decision, which allows them to consider mitigating 
circumstances such as temporary unemployment or emergency 
medical expenses. This approach is prudent as long as the 
customer has otherwise managed credit and has the capacity to 
repay the loan.
    Other banks offer products such as secured credit cards to 
help borrowers reestablish or improve their credit. And new 
scoring models are helping to automate underwriting for thin-
file customers. This not only lowers costs for low-margin small 
loans, but also allows rapid decisioning and expedited 
disbursement of funds.
    The bank regulatory agencies' Community Reinvestment Act 
guidelines specifically acknowledges the importance of small-
dollar loans as a means of serving the credit needs of the 
community. Programs that provide small, unsecured consumer 
loans based on the borrower's ability to repay and with 
reasonable terms are eligible for positive CRA consideration.
    Loan programs that feature reporting to consumer reporting 
agencies or include a financial education component also may be 
favorably considered. And banks and thrifts may receive 
positive CRA consideration for qualified investments in 
financial intermediaries that offer small-dollar programs.
    The OCC's community affairs staff engage in a variety of 
activities to encourage nationally chartered banks and thrifts 
to address consumer credit needs. We educate by communicating 
best practices through online resources and publications. We 
also work with the other bank regulatory agencies to conduct 
dozens of seminars each year where bankers hear firsthand from 
practitioners about how best to implement constructive 
programs, such as small-dollar loan initiatives.
    The OCC works actively in partnership with the National 
League of Cities Bank On initiative to expand banking 
opportunities for unbanked and underbanked individuals. Under 
this initiative, banks and thrifts are offering low-cost 
checking with no minimum balance requirements, prepaid debit 
cards, and small-dollar loans with the support of counseling 
organizations who provide budgeting and financial counseling 
assistance.
    I would like to conclude by reemphasizing that the OCC 
firmly supports efforts by national banks and Federal savings 
associations to be leaders in their communities. The OCC's 
guidance and supervision encourages our regulated institutions 
to offer products and programs that meet a spectrum of credit 
needs in a safe, sound, and sustainable manner.
    Thank you for the opportunity to appear before you today, 
and I look forward to your questions.
    [The prepared statement of Deputy Comptroller Wides can be 
found on page 156 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Robert Mooney, the Deputy Director 
for Consumer Protection and Community Affairs at the Federal 
Deposit Insurance Corporation.
    Welcome, Mr. Mooney.

   STATEMENT OF ROBERT W. MOONEY, DEPUTY DIRECTOR, CONSUMER 
  PROTECTION AND COMMUNITY AFFAIRS, FEDERAL DEPOSIT INSURANCE 
                       CORPORATION (FDIC)

    Mr. Mooney. Thank you for inviting me to testify on options 
available to consumers in need of small-dollar, short-term 
credit. Expanding the availability of mainstream financial 
services in general, and affordable small-dollar loans in 
particular, is a priority at the FDIC.
    A generation or so ago, it was not uncommon for banks to 
make small, unsecured loans to individuals. However, over time 
a series of product and technological innovations in the 
competitive landscape of banking contributed to a decline in 
the number of banks offering small loans and an increase in 
alternative credit providers offering more costly credit 
products.
    The FDIC began reviewing whether banks could feasibly offer 
alternatives to high-cost, short-term credit in the context of 
military personnel, whose financial problems can collectively 
affect the readiness of our Armed Forces. In December 2006, we 
held a conference titled, ``Affordable, Responsible Loans for 
the Military: Programs and Prototypes,'' where attendees, 
including military banks, representatives from the Department 
of Defense, community groups, and others developed a template 
for an affordable, small-dollar loan program.
    In June of 2007, to encourage more banks to offer these 
loan products, the FDIC issued its Affordable Small-Dollar Loan 
Guidelines. The guidelines encourage affordable prices, 
reasonable loan terms, streamlined underwriting, and suggest 
linking a savings component and financial education to short-
term loan products.
    In February 2008, the FDIC launched a 2-year small-dollar 
loan pilot program to determine the feasibility of banks 
offering small-dollar loans as an alternative to high-cost 
emergency credit such as payday loans or fee-based overdraft 
programs. The pilot concluded in 2009. Twenty-eight volunteer 
banks participated with total assets ranging from $27 million 
to $10 billion, and with almost 450 branches in 27 States.
    Banks made 34,400 loans with a principal balance of just 
over $40 million. While delinquencies on the loans tended to be 
higher than for unsecured consumer loans in general, charge-
offs were in line with those other loans.
    The pilot has resulted in a model, or template, of product 
elements for a safe, affordable, and sustainable small-dollar 
loan. Product elements include loan amounts of $2,500 or less, 
loan terms of 90 days or more, APRs of 36 percent or less, and 
low or no fees. Elements also include streamlined but solid 
underwriting, and optional savings and financial education 
components.
    The template is simple and replicable.
    Most pilot bankers indicated that these loans were a useful 
business strategy for developing or retaining profitable, long-
term relationships with customers. The most prominent product 
element bankers linked to the success of this program was a 
loan term longer than just a few pay cycles to give consumers 
time to repay the loan. And perhaps most importantly, the pilot 
shows that banks can offer affordable small-dollar loans in a 
manner that suits their business plans and is fair to 
consumers.
    Going forward, the FDIC is working with the banking 
industry and others to support strategies that expand the 
supply of small-dollar loans. These strategies include 
highlighting the successful features of the pilot and other 
small-dollar loan models, such as we are all doing here today; 
and encouraging broad-based partnerships among banks, 
nonprofits, and others to design and deliver small-dollar 
loans, including the use of new technologies and business 
models.
    The FDIC is also engaged in a number of related 
initiatives, such as our Model Safe Accounts pilot, where we 
hope to demonstrate affordable savings and transaction 
accounts; Money Smart, our comprehensive financial education 
curriculum; our Alliances for Economic Inclusion that we have 
in 14 markets around the country; and our unbanked and 
underbanked surveys and other consumer research.
    In conclusion, like all of us, underserved consumers need 
to cash their paychecks, pay bills, and save for the future 
with products that are safe, affordable, and easy to 
understand. They also need to access reasonably priced credit 
to buy a home or car, pay for their children's education, and 
of particular relevance to this hearing, to meet unexpected 
short-term financial needs.
    The FDIC looks forward to the day when affordable small-
dollar loans become a staple product at all banks, helping 
American families address their short-term credit needs in a 
safe, reliable, and financially sound manner.
    Thank you.
    [The prepared statement of Deputy Director Mooney can be 
found on page 139 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Mooney.
    Our final witness on this panel is Mr. David Marquis, who 
is the executive director of the National Credit Union 
Administration.
    Welcome.

  STATEMENT OF DAVID M. MARQUIS, EXECUTIVE DIRECTOR, NATIONAL 
               CREDIT UNION ADMINISTRATION (NCUA)

    Mr. Marquis. Good morning, Chairwoman Capito, Ranking 
Member Maloney, and members of the subcommittee. NCUA 
appreciates the invitation to testify about the availability of 
credit for the underbanked--that is, people who have a savings 
account but who also use alternative financial services.
    In recent years, credit unions have outperformed banks in 
lending overall. Between December 2007 and June of 2011, credit 
union loans have expanded by about 6 percent while credit 
contracted for the rest of the economy.
    Of note, low-income credit unions, which focus on providing 
services to individuals in communities more likely to have 
underbanked populations, have performed even better. Lending at 
these particular institutions grew by about 14 percent.
    In passing the Federal Credit Union Act nearly 80 years 
ago, Congress decided that credit unions have a mission of 
meeting the credit and savings needs of consumers, especially 
people of modest means. NCUA therefore has considerable 
experience facilitating the ability of credit unions to meet 
the financial needs of the underbanked.
    NCUA works to help the underbanked obtain credit in three 
principal ways: by facilitating the availability of loan 
products; by expanding credit union access to members in 
underserved communities; and by offering assistance to credit 
unions focused on providing service to the underbanked.
    To facilitate the availability of credit for the 
underbanked, the NCUA finalized its small loan program last 
September. The rule provides a viable, consumer-friendly, 
lower-cost alternative for credit. With strong consumer 
protections, the rule balances increased risk and access to 
affordable, fully-amortized credit that is faster and easier to 
qualify for as compared to more traditional lending products.
    Since its introduction, the product has gained growing 
market acceptance and enhanced the availability of short-term 
credit. At the end of June, 343 Federal credit unions reported 
more than 33,000 small loans averaging just over $412 each and 
just under 21 percent interest rates, which is significantly 
lower than the triple-digit interest rates often charged by 
payday lenders.
    To further expand credit union access to unbanked 
households, NCUA also revised its rules in June. These changes 
ease regulatory burdens on credit unions seeking lower-income 
credit union designation.
    Additionally, NCUA continues to promote access to credit by 
approving applications allowing credit unions to add 
underserved areas for their field of memberships.
    To provide additional assistance to credit unions, NCUA 
operates the Community Revolving Loan Fund. Congress created 
this fund to provide low-interest loans and grants to support 
low-income credit unions' efforts like improving financial 
literacy, providing financial education, creating new products, 
and preventing foreclosures and expanding overall access to 
credit.
    In May, NCUA issued a proposed rule to eliminate outdated 
procedures and increase transparency. When finalized, NCUA 
anticipates that the reduction of regulatory burden will 
increase loan demand and enhance the availability of basic 
financial service in low-income communities.
    The committee has also requested ideas to increase the 
availability of sustainable, affordable credit options for 
underbanked households. In this regard, NCUA has several 
suggestions.
    First, current law only permits multiple common-bond credit 
unions to serve underserved areas. Allowing other types of 
credit unions to add underserved areas would promote improved 
access to basic financial services, loan products, and wealth-
building opportunities.
    Second, Congress could permit credit unions to serve any 
adjacent geographic area meeting economically distressed 
criteria like poverty and unemployment without regard to CDFI 
fund's more restrictive conditions than NCUA's local community 
requirements.
    Finally, focusing more broadly on job creation and economic 
growth, the passage of the bipartisan Small Credit Union 
Lending Enactment Act, sponsored by Congressman Royce and 
Congresswoman McCarthy, would also increase access to credit. 
The bill would enable credit unions to prudently make safe, 
well-underwritten member business loans more frequently, 
supporting economic growth and job creation.
    If enacted, NCUA will act quickly to implement the strong 
safety and soundness regime called for in the bill by writing 
new rules and remaining vigilant in our supervision effort 
programs.
    In sum, NCUA recognizes the real need to expand access to 
credit for the underbanked. As a result, the agency has long 
sought to enhance the availability of credit, increase access 
to potential members, and assist credit unions. NCUA also 
stands to work with the committee on any future legislative 
efforts to increase access to credit.
    Thank you, again, for the opportunity to discuss these 
important issues. I look forward to your questions.
    [The prepared statement of Mr. Marquis can be found on page 
116 of the appendix.]
    Chairwoman Capito. Thank you very much.
    And I am going to go ahead and begin the questioning.
    My question is in relation to the interchange issue that we 
had earlier in the year on the debit and credit--or, it was the 
debit cards, and some of the push-back from the financial 
institutions was because of the loss of revenue in that area, 
that they were going to be eliminating some credit card 
rewards. But also, some, I think, have started to assess 
monthly charges for a banking account, a checking account with 
the financial institutions, and some people--the folks that we 
are talking about today are--my fear was that they would just 
drop out of the banking system because of the--you know $10 a 
month is a significant amount of money here.
    Are you finding with the institutions that you regulate 
that they are losing customers in this economic range and that 
maybe developing a short-term, low-dollar loan program is a way 
to get them back into the banking systems? Is that something 
that is working?
    Mr. Wides. One of the banks that we actually highlighted in 
my testimony was KeyBank, in Cleveland, Ohio. They have 
actually, as a large bank, developed a very aggressive strategy 
for going after the unbanked. They have check cashing within 
their branch locations; they offer remittance services; and as 
I mentioned in my testimony, they recently rolled out a small-
dollar product for customers who didn't qualify for the bank's 
other unsecured credit products. And this credit product that 
they developed is geared toward individuals who have thin 
credit files or are reestablishing credit.
    And I would say that KeyBank is an example of a national 
bank that has actually developed a strategy to affirmatively go 
after this clientele, and they do offer the kinds of products 
that you mentioned, the low-cost products that provide a 
slimmed-down set of offerings for consumers.
    I can't speak to the other question in terms of whether the 
interchange rules have or have not had an effect yet. But we do 
see promising signs of banks seeing the unbanked as a market 
that is worth going after.
    Mr. Mooney. I would briefly add that in the FDIC's survey 
of banks 2 years ago relative to their activities in 
underserved markets, banks that responded said that about 73 
percent of those were aware of the increased demand in low- and 
moderate-income areas and underserved areas, and they 
considered that to be an important market. However, only 18 
percent of those banks prioritized it as a market that they 
would go into, which is why the FDIC started Alliances for 
Economic Inclusion. In 14 different markets, we brought 
together banks, nonprofits, and public officials to talk about 
ways to reach into these underserved neighborhoods and develop 
products that are useful to them, including small-dollar loans.
    Our pilot program showed that the banks who found that loan 
program to be the most profitable were those that targeted low- 
and moderate-income areas, targeted the military--targeting the 
individuals who otherwise don't have free and ready access to 
the financial system.
    Chairwoman Capito. In regards to your pilot program, the 
original participants in that program, are they still offering 
those--
    Mr. Mooney. It is a good question.
    Chairwoman Capito. --products?
    Mr. Mooney. We began with 31 banks that started the 
program. We ended the program 2 years later with 28 banks. Most 
of those banks, we believe, are still in the program; we 
haven't surveyed them recently.
    But we are very encouraged by the fact that an additional 
50 banks who are members of our Alliances for Economic 
Inclusion have either started to offer a small-dollar loan 
program or are developing a program to initiate in the very 
near future. I was just at a meeting of military banks, and the 
military banks that were part of the program continue to offer 
the program and consider it very important.
    Chairwoman Capito. Let me ask a quick question, because I 
only have a little bit of time left. I have heard kind of 
veiled references to qualify, qualify, qualify. How does a 
person qualify? Is it your credit score? And can you qualify, 
is a question I would have?
    So, just briefly, if somebody would like to address that?
    Mr. Wides. Sure. I would say mostly they are looking at the 
credit profile; they may use the credit score, but if the 
borrower does not have a credit score because of a thin file, 
they are beginning to use alternative data sources that look at 
utility payment, rent payment, and other public file 
characteristics.
    They also do a debt-to-income ratio capacity, and for 
credit card lending, under the Card Act, in fact, a capacity 
analysis is required.
    Mr. Mooney. It is important that the underwriting be very 
streamlined and very fast.
    Chairwoman Capito. Yes, I am thinking that somebody who 
needs a $2,000 loan for whatever, it is usually something that 
is pretty crucial to them; it is not to go on vacation. And 
timeliness is extremely important.
    Mr. Mooney. Our pilot banks turned those around within 24 
hours, some very quickly. Remember, they are serving their own 
customers, so--
    Chairwoman Capito. Right.
    Mr. Mooney. --they do know them.
    Chairwoman Capito. Right.
    All right. Thank you.
    Mrs. Maloney?
    Mrs. Maloney. Thank you.
    And in response to your question on the Card Act--the 
Credit Card Bill of Rights, which I authored and worked on for 
4 years and which passed this body with strong bipartisan 
support, the Pew Foundation found that bill alone saved 
consumers over $10 billion last year by stopping unfair abusive 
practices, such as raising rates retroactively on balances for 
no reason at all.
    I think the answer to that is if a bank is raising and 
charging fees, go to a different bank. Go to a community bank. 
Go to a credit union. They all provide the same service.
    And shop around. In many cases the interest rate is much, 
much lower at some banks than at other banks. So consumers 
should, if they are getting unfair fees, cancel their account 
and move to another bank that is providing what they feel is 
fair service.
    I feel that this is a truly important issue about 
addressing the unbanked, and one of the reasons that many 
people think that financial institutions are not providing it 
is that there are often not branches in low-income 
neighborhoods. But a report that was issued in 2008 from the 
New York City Department of Consumer Affairs on Financial 
Empowerment found that a fundamental mismatch between the 
products being offered and the population's real need was the 
primary reason why lower loans and products were not getting 
out to the unbanked.
    And then the areas that we do have services--and I will 
note one that is active in the community I represent, which is 
money service businesses--they cannot get banks to work with 
them. So we really have to get this system to work better, and 
I wrote the OCC several times and inquired, was the OCC 
cracking down on banks that were working with MSBs? The banks 
in my district said that they would not offer services to MSBs 
because the OCC was telling them not to, that they were going 
to rate them differently.
    I just want to say that I did put in a bill on self-
certification of the MSBs, that if they comply with the Bank 
Secrecy Act and the anti-money laundering statutes, the bill 
makes strict penalties for MSBs that in any way are not up to 
their statements, and banks are not held liable for MSB 
activities. And the banking associations did not oppose this 
bill; they found it fine. But they are afraid of regulators 
hitting them hard if they cooperate with some of these 
alternative areas that are out there.
    So I think that banks have choices, and they are going to 
be able--they have the choice to go to what product they feel 
meets their business model, and we should recognize that and 
honor that. We are in a free enterprise system.
    But also, these new alternatives that are coming up, I 
believe we should help them regulate them--they are 
unregulated; they would like to be regulated, and maybe the OCC 
should start regulating them and working on ways they can work 
with the financial systems that already exist to get the credit 
out to the communities. What I am hearing many of my 
constituents say is, ``We are seeing banks that are too-big-to-
fail and too-big-to-give-any-credit.''
    So they are really important banks. They are international. 
They are serving the world, but they are not serving 
communities and they are certainly not serving the unbanked and 
underserved.
    I will just throw that out as a question: Would the OCC be 
open to creating a unit that would oversee or regulate these 
new entities and look at ways to encourage the existing banking 
system--credit unions, financial institutions--to work with 
them to get the credit out? We don't have to reinvent the 
wheel. There are many people who are out there trying to help 
in that particular field.
    So my question is really to the OCC.
    Mr. Wides. You raise very important points, and I would 
like to address a couple of them. Number one, the Consumer 
Financial Protection Bureau will have the authority and does 
have the authority to regulate the check cashers, payday 
lenders, and it probably would require legislation to move that 
function back under the OCC. As it relates to the money 
services businesses, there are issues that have been raised in 
that context relative to anti-money laundering, and I am not an 
expert on all of that, but we are aware of the issues that have 
been raised about some of the money service businesses not 
being able to get access to the services of banks because of 
the concern of the bank regarding the anti-money laundering.
    Mrs. Maloney. My time has expired. I look forward to 
meeting with you on this issue. FINRA came out in support of 
the bill and the whole area that looks at that area in our 
economy, so I think it is a challenge that we need to look at. 
And on the CFPB, we are having trouble getting a Director in 
there so that they can really get started.
    So anyway, my time has expired.
    Mr. Wides. I would be happy to work with you.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Renacci for 5 minutes for 
questioning.
    Mr. Renacci. Thank you, Madam Chairwoman.
    And thank you all for testifying today. My concern is, 
again, the underbanked and the unbanked represent 14 percent, 
or 230 million adults in our country, and I am trying to get an 
understanding as to how we can better serve those individuals.
    Mr. Mooney, in some of your comments, you said that the 2-
year pilot program was simple and replicable. My question is, 
was it successful in the sense that, were the banks profitable?
    And one of your other comments was that you started out 
with 31 and went to 28. I would really like to hear how many 
banks are doing it now.
    Mr. Mooney. Congressman, thank you. You hit on two very key 
points relative to the pilot program.
    The banks that participated in the program considered it to 
be successful for them because they realized that over time, 
they were able to develop longer-term relationships with 
customers they already had or were new customers who would 
become profitable over the long term and the long run. The 
banks that participated in the program, we started with 31; we 
ended the program with 28 banks. You have to remember that this 
period of time, 2008 and 2009, was one of the most financially 
troubled. There was such turmoil in the financial marketplaces 
that it would not have been unusual for a couple of banks to 
join and then drop out, depending on their circumstances.
    But at the end of the pilot program 28 of those banks 
continued to offer the small-dollar loan program. They 
considered it an important part of their product mix.
    What we can do--
    Mr. Renacci. How many--
    Mr. Mooney. --we will look for--I am sorry--
    Mr. Renacci. I was going to say, how many today?
    Mr. Mooney. We will find that out. We haven't done a survey 
of those institutions recently; we will be happy to do that for 
you.

    [The following information was received from Mr. Mooney for 
the record:
        Number of banks in the pilot program: 28.
        Number of banks continuing to offer SDLs: 24.
        Number of banks no longer doing so: 3.
        Number of banks merged into another bank: 1.]

    Mr. Renacci. It is very difficult to determine the success. 
And a lot of times--I was in business for 28 years, and I have 
only been in Congress for 9 months.
    Sometimes, I think people in the real world out there don't 
connect with what you are saying here today, because I have 
talked to the banks and I have talked to some of the 
underbanked. They can't get the money. They can't borrow the 
money today.
    And I have talked to some of the banks. I have had meetings 
for the last 6 weeks with small banks and community banks, and 
they are not going toward these programs. They don't feel they 
are profitable; they feel they are overregulated already; and 
they have problems in doing it because of all the other 
regulations.
    So it would be very helpful--and hopefully after today's 
hearing, if you could get back to me and tell me, out of the 31 
that started, how many are still going forward? I would 
appreciate that information.
    Mr. Marquis, on the 343 credit unions you mentioned in your 
testimony who would report small loans on their call reports 
since the announcement of the small-loan rule, can you tell me 
how many are still participating and still following through 
with these type of programs?
    Mr. Marquis. That is the current data as of June, so that 
is the number of credit unions that are actually participating 
as of June of this year. And so far on their balance sheets, 
they have $14 million. Plus, these are small-dollar loans, so 
the total dollars won't add up to a lot.
    And no one is saying, at least the evidence so far, that 
anyone is having any big issues with that issue. It is a high-
volume issue, requires some human resources, but we gave them 
some flexibility to manage within that.
    And of course, they have to be a member for at least for a 
month to participate in this program, and the goal here is then 
to get them into the other financial products so they can stay 
a member of a credit union and also build a credit history so 
they can better get access to financial resources later on.
    Mr. Renacci. And again, I guess just all three of you can 
maybe just comment on this: There are other alternatives to the 
banking or credit union opportunities, and I guess my question 
is, I was talking to some regulators last night who had said, 
``They are going to charge too many fees and they are going to 
charge too many interest rates,'' and my comment was, as long 
as the consumer understands and is fully disclosed and totally 
gets it and up-front--if somehow they could get all the 
information and say, ``I understand it,'' don't you believe 
that consumers should have all options available to them--
banks, credit unions, and any other option available to them, 
as long as they are fully disclosed and they understand the 
consequences?
    Mr. Wides?
    Mr. Wides. We certainly favor full disclosure. We believe 
that consumers have choices, as you pointed out. Certainly, the 
OCC has not issued any guidelines which would preclude a bank 
from offering a particular product or service that would meet 
the needs of the unbanked.
    Mr. Mooney. I would say that the FDIC's concern is not over 
the non-banks and what they are offering as much as it is over 
what banks are offering. We believe that banks have the 
capacity and the existing infrastructure to affordably offer 
small-dollar loans and some other products as well: 7,500 
institutions exist across the country; 7,000 of those are 
supervised by the FDIC; 5,500 of those are banks that have less 
than $1 billion in assets; and about 4,400 or so have assets of 
less than $250 million.
    These community banks have shown and have a proven track 
record of meeting whatever the real credit needs of their local 
communities are, and they have done a good job. We would like 
to encourage those institutions to begin offering, once again, 
affordable, small-dollar loans as an option for their community 
members.
    Mr. Renacci. Thank you all.
    Chairwoman Capito. Thank you.
    Mrs. McCarthy, for 5 minutes for questions?
    Mrs. McCarthy of New York. Thank you.
    And thank you to the witnesses.
    I happen to be very interested in financial literacy, with 
my colleague here, Mr. Hinojosa, and we have been working on it 
not only in the Education & the Workforce Committee, but also 
here on this particular committee. So while you have the 
opportunity--and I guess, I will go to Mr. Mooney and Mr. 
Marquis--to go into the underserved areas, for those that you 
offer credit, are you also teaching them financial literacy, 
how to get out of debt, how to build up their savings, how to 
have more sustainable credit and everything else like that?
    Mr. Mooney. Thank you, Mrs. McCarthy. At the FDIC, we offer 
the Money Smart financial education program, and we promote 
that. It is available free of charge; it is not copyrighted. 
Banks, nonprofits, and others are offering it. Right now, our 
numbers indicate 2.75 million Americans have taken some portion 
of that course.
    Financial education is fine as far as it goes, but it 
doesn't go far enough unless it results in a safe, sound, and 
profitable banking relationship, but also one that is 
affordable. We conducted a longitudinal survey of our Money 
Smart students 2 years ago to find out if there was an actual 
change in behaviors as a result of taking the course. In this 
Gallup survey, we interviewed people before they took the 
course, after they took the course, and a year later to see if 
behaviors changed. The good news is that those individuals 
started to budget for the first time and adhere to a budget; 
they saved more; they shopped around for financial services; 
and they paid their bills on time. This is terribly important 
proof to banks that this is a market which is very profitable 
and a good one for them. We encourage banks to not only offer 
financial education, but then open accounts for these folks.
    Mrs. McCarthy of New York. Mr. Marquis?
    Mr. Marquis. Thank you.
    We put on several workshops for the small credit unions to 
help them do financial literacy. We also have the CDRLF fund 
that Congress has given money to that allows us to give 
technical grants to help credit unions put on literacy 
programs.
    And we have added almost 1,700 underserved areas to credit 
unions over the years. Right now, only multiple-bond credit 
unions can add underserved areas. We could go further if we 
could have other credit unions add those areas.
    We also have economic development specialists. They are not 
really examiners who examine. There are 15 of them and they go 
only to small credit unions to help them produce programs that 
better the educational needs of their membership at a credit 
union.
    Mrs. McCarthy of New York. Mr. Marquis, also, being that 
you are in the underserved area, and I understand you have 
outreach programs, but what products do you offer that are the 
most successful? Plus, how do you handle those customers who go 
into default? How do you work with them?
    Mr. Marquis. Every credit union does it a little bit 
differently. Delinquency sometimes tends to be a little higher 
in our small credit unions.
    Over the decades we have learned, as examiners, how to deal 
with that. Just because they skip some payments, they usually 
make their payments over time, especially on the low-dollar 
amounts. There are different ways to look at that. A credit 
score is not the only way to evaluate a loan.
    A lot of low-income people have other ways to make income. 
We look at what their character is; we look at how they pay 
their other bills. And over time, they establish a relationship 
with the credit union and the credit union learns who those 
members are, and over time they understand how they get in 
trouble from time to time over short periods of time, and they 
learn to work with their members.
    But every credit union is a little different. They just 
have to learn how to manage their delinquency in a prudent way 
to maintain safety and soundness.
    Mrs. McCarthy of New York. Thank you.
    With that, I yield back my time.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer, for 5 minutes for questions?
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Mr. Mooney, in your testimony you make a comment that you 
are studying the creation of pools and nonprofit or government 
funds to serve as guarantees for small-dollar loans. Can you 
explain that program just a little bit for me, please?
    Mr. Mooney. Yes. We are familiar with different government 
programs. For example, the State of Maryland has one, I 
believe, and the State of Virginia, whereby funds are either 
made available to guarantee these types of loans, and in those 
particular cases, we have seen them involving State employee 
programs partnering with either a credit union or a bank. In 
Illinois, for example, there was a bank in Lake Forest that 
actually partnered with a local city, and they were part of our 
small-dollar loan program, to offer small-dollar loans through 
the City's payroll department.
    Mr. Luetkemeyer. Are these States where they normally don't 
have any small-dollar lending authority, or are these in 
competition with existing--
    Mr. Mooney. That is a good question. I don't know what the 
answer to that is.
    Mr. Luetkemeyer. Quite frankly, I am kind of concerned from 
the standpoint that if you get the government involved in 
guaranteeing loans again, we have found that this has been kind 
of a disaster in the housing situation, where you had two 
separate programs that have come through this committee--the 
one was a 95 percent loss; the other we spent $40 million for, 
I think, 11 loans, or something like that, which is a disaster.
    And now, we are looking at something like that again. If 
private enterprise is willing to take that risk, and we have 
entities out there that are willing to do this, why are we even 
looking at this unless it is a State where we don't have that 
authorization?
    Mr. Mooney. You raise a good point. I think that is worth 
considering.
    Mr. Luetkemeyer. Okay. Along those lines, with regards to 
the small-dollar pilot program that you had, I know one of the 
folks testified here recently when we were discussing it with 
them, and I had the FDIC in my office and we discussed it 
thoroughly, that some of the folks who participated in the 
program and were supportive of it did it because it helped them 
with their CRA rating--Community Reinvestment Act. And I can 
understand that is--because that is basically what CRA does. It 
tries to get you into other areas they believe are underserved.
    So, Mr. Wides, do you think this is a pretty good way to go 
to help with the CRA rating? Would you be supportive of that if 
you had a bank that wanted to do this?
    Mr. Wides. Yes. We have had a number of banks let us know 
that CRA was a main driver for them getting involved. But what 
we found was after they got involved with the program, they 
actually found that it was a way of attracting new customers 
and a way of providing a service that they could do.
    They didn't say that it was profitable, but they said that 
it was manageable, in terms of the costs that they incurred. 
And they did find efficiencies, and this was something we had 
talked about earlier, that they had found ways to more 
efficiently process them, and I think that there is a lot of 
knowledge-sharing around that.
    Mr. Luetkemeyer. I had some discussions with some of the 
banks in my district recently, and what is the normal time that 
it takes to get a CRA rating once the examination has been 
completed?
    Mr. Wides. I would have to get back to you. I think it 
would depend on the size of the institution and--
    Mr. Luetkemeyer. Can you give me a rough estimate--a month, 
2 months, 6 months, 10 months?
    Mr. Wides. I would have to get back to you. I would like 
to--
    Mr. Luetkemeyer. Do you think 3 years is a little out of 
line?
    Mr. Wides. I would say for a community bank, yes. For a 
very large bank, that would probably be the sort of the outset 
of how long it could take.
    Mr. Luetkemeyer. Normally, you have those exams about every 
2 years, do you not?
    Mr. Wides. Large banks would have an exam every 3 years, 
roughly; a community bank every 5 years, assuming they have 
good CRA performance.
    Mr. Luetkemeyer. I am a former regulator. I don't quite 
think that is where we are going, but I will let you get away 
with that.
    I really think that when we are looking at 3 years, and you 
are getting to the point where you are getting into the next 
exam, I think we have missed the boat. So, I think we need to 
take a look at our processes and procedures to make sure we get 
back to where we are going to be so we can get these banks to 
where they can actually go out, because what you are doing is 
hindering them from being able to expand, put in new branches, 
buy additional banks, and in doing that, now we are exactly 
where we are at today with this, from the standpoint we are 
hurting the ability of people to get credit and be able to 
access financial services.
    So I am very concerned about that, and I would love to 
continue the discussion with you on that off to the side.
    I am kind of curious, also, I know in the pilot project, 
one of the things that you discussed was the terms of the loan. 
I know that in discussing it again, with the FDIC folks, the 
successful folks who had the program had larger amounts than 
what normal payday loans are, and it extended the terms out 
longer as a result of that.
    Do you think that is something that can be worked on with 
regards to a new pilot program, and perhaps have the FDIC 
engaged with the small lending--small-dollar folks? Why would 
you not include them in your pilot program? Right now, it is 
only the banks. Why do you not include the small-dollar folks 
in the program?
    Mr. Mooney. We certainly encourage partnerships for banks 
with others, but at the same time, the FDIC chose to focus on 
the banks that it supervises relative to involvement in the 
pilot program, as well as banks that it insures. What we want 
to do primarily, Congressman, is to encourage a large number of 
institutions with a large branch network to begin to think 
about offering this type of affordable credit to their 
communities.
    Mr. Luetkemeyer. I had discussions with your comrades. They 
made a statement that they are not prohibited from doing that. 
I assume that is--
    Mr. Mooney. Correct. They are not prohibited from doing 
that. But again, for the pilot program our focus was on those 
institutions that we insure and supervise.
    Mr. Luetkemeyer. Thank you very much.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Gutierrez?
    Mr. Gutierrez. Thank you very much.
    To Mr. Mooney and/or Mr. Wides, I understand that there are 
guidelines, but some mainstream banks are still offering loans 
that have the same pitfalls as payday loans. What is the FDIC 
or the OCC doing to prevent financial institutions from 
offering predatory services? Please, either one of you can 
begin.
    Mr. Mooney?
    Mr. Mooney. Congressman, thank you for raising this issue. 
It is important to us during our examination process to ensure 
that consumers are treated fairly and that the products and 
features are fully disclosed.
    We are also concerned about bank partnerships with third 
parties that may be engaging in activities that do not comply 
with consumer protection laws and regulations. Certainly, a 
focal point of our exams is on current deceptive acts and 
practices.
    To that end, the FDIC issued particular guidance to 
financial institutions it supervises on the risks inherent--
    Mr. Gutierrez. Because of the clock, unfortunately, there 
was a minute between the answer part of your answer and part of 
my question. So, what do you think?
    Mr. Mooney. I think most of our banks don't show much risk 
in terms of offering products that are that troublesome.
    Mr. Gutierrez. They don't show any risk--
    Mr. Mooney. Nonetheless--
    Mr. Gutierrez. What do you think about the consumer?
    Mr. Mooney. Oh, the consumer--
    Mr. Gutierrez. Do you think this is a good deal for the 
consumer to walk into Wells Fargo or U.S. Bank and take out a--
what is the--do you think these are essentially payday loans?
    Mr. Mooney. I would have--
    Mr. Gutierrez. Have you examined these loans?
    Mr. Mooney. I think your points certainly indicate that 
there may be problems with them, and I would certainly pay 
attention to your views.
    Mr. Gutierrez. Okay. Could you please look at these loans--
    Mr. Mooney. Of course.
    Mr. Gutierrez. --and evaluate these loans, and maybe get 
back to us? Because I am going to read it, and it says, ``The 
direct deposit advance service offers a temporary source of 
credit when you need help managing unexpected or emergency 
expenses. As a Wells Fargo consumer checking customer you 
qualify for up to $500 with advances directly linked to your 
direct deposit on your checking account. The credit service 
advance access to your next electronically deposited paycheck 
or recurring deposit of $100 or more.''
    I think that if you looked at an advertisement for a payday 
loan, it would read almost exactly the same way. And the terms 
are almost--they are going to offer you 20--it is 120 percent 
APR if you don't pay it, right? You can pay it all back, so you 
get a one-time fee.
    But if you don't pay it, they allow you to extend the loan, 
and extend the loan, and extend the loan up to 6 months. And 
then there is a cooling-off period, but they don't stop 
charging you interest on the loan; they just don't allow you to 
take any more money.
    These are all the same pitfalls. You have examined the 
payday industry. You know something about the payday industry, 
don't you, Mr. Mooney?
    Mr. Mooney. I think that your points relative to the 
features that you discuss are worth looking at. We have always 
shared the concerns about consumers who are in desperate need 
of cash getting to the right products.
    Mr. Gutierrez. And I guess my only point is, in the past 
they would always say, ``These are not FDIC-regulated 
institutions. These are payday loans. These are institutions 
outside the regulatory sphere.''
    But these are within the regulatory sphere of the FDIC, and 
how it is that--anyway, Mr. Wides?
    Mr. Mooney. Your points are well made and well taken.
    Mr. Gutierrez. OCC?
    Mr. Wides. Yes. We are aware of those concerns. Those 
concerns led us, actually, to issuing proposed guidelines back 
in June regarding the appropriate safety and soundness and 
consumer protection that should be provided with these types of 
products.
    We have received about 14,000 comments. The comment period 
closed last month. And we are looking at the various comments 
and certainly will take into account the various types of 
concerns that you raise today as we look toward finalizing this 
guidance.
    Mr. Gutierrez. I understand the functioning that you have. 
But that is why I was always fighting for a consumer protection 
agency, someone whose purpose is to look specifically at these 
kinds of loans.
    And I have to tell you that I sit here and I keep hearing 
about how it is that the Fed and the government is just--first 
there was the $700-plus billion bailout that maintained it; now 
they are coming back with these kinds of loans. And then it is 
FDIC-insured, and we all know that things have been going well, 
but they could go badly.
    We back them up, but they are not backing us up. And I hope 
the two of you take a close look at this so that we don't fall 
into this kind of exploitation of our American taxpayer.
    Thank you.
    Chairwoman Capito. Thank you.
    Mr. Pearce, for 5 minutes?
    Mr. Pearce. Thank you, Madam Chairwoman.
    The richness of what we are doing here today is amazing. We 
are hearing the testimony of how the government is advising 
people who are broke to borrow more money.
    If there is anything that the government knows how to do, 
that is it. We are borrowing 42 percent of every dollar that we 
spend, and in fact, we can't borrow that much so we actually 
printed 70 percent of the money that we borrowed last year.
    So I hope next, you give printing lessons to those people 
who can't afford to get more loans. Let's keep the continuity 
going here.
    It would also be interesting to see if you talked to the 
largest payday lender in history--that would be the IRS. They 
have extraordinarily high interest and penalties, and they just 
keep going no matter what, as long as you don't pay, and so 
many times the interest and penalty are far greater, and it 
basically looks like a payday loan to me, what the IRS is 
doing. So I hope that at some point, your agencies will drift 
off into those oversights.
    Mr. Mooney, I am interested in your small-dollar loan pilot 
program. New Mexico's average income is about $29,000, and we 
have Indian reservations where the unemployment is running in 
the 30 percent range. I notice that none of the banks in that 
list come from New Mexico.
    What are the criteria for choosing those banks?
    Mr. Mooney. First of all, it is entirely voluntary. They 
had to be well managed and well run. We looked for a variety of 
institutions across the country of different asset sizes and 
different business strategies, but they had to actually apply 
and volunteer for the program.
    Mr. Pearce. Okay. Now, you mentioned that the default rate 
is 3 to 4 times on these loans.
    Mr. Mooney. That is right.
    Mr. Pearce. Do these customers pay more interest? Do they 
have other requirements?
    Mr. Mooney. I am not aware that there was, in most cases, 
an interest adjustment relative to delinquencies, but most of 
those delinquencies were brought up to current status during--
    Mr. Pearce. Would you all look with suspicion if banks 
actually charged more interest to people who default at a 
higher rate?
    Mr. Mooney. No. In fact, in this program we wanted to 
conduct a feasibility study. We wanted to find what the impact 
was on banks and we wanted to give them enough flexibility so 
that they could innovate. That would include the rates and fees 
they charge.
    I should point out, about half of the banks that 
participated did not charge additional fees, but half did. 
Although for all of them, the total cost of the loan was still 
less than 36 percent APR.
    Mr. Pearce. Just an observation, I think if we--let's say 
that we started a stock fund that was going to fund the kind of 
loans that you are talking about today--all three of you--and 
we gave priority to Members of Congress who are telling banks 
how to loan their money and how to run their business, I 
suspect you wouldn't get one Member of Congress who would buy 
the preferred stock to lend people money who may or may not pay 
back where the chances of not getting your money back.
    So what we are engaged in here today is noble, but also it 
is highly suspicious. It is one of the reasons businesses are 
having very great difficulty making it. When we are faced with 
9 percent unemployment, we are spending a lot of effort in an 
area which I don't think any one of us would put our money into 
that.
    Would you invest in a stock like that, Mr. Mooney, if you 
were given the opportunity to put your own money into a stock 
that would go in and lend to people who have a history of not 
repaying?
    Mr. Mooney. I--
    Mr. Pearce. You don't have to answer that. I am asking--
    [laughter]
    I just thought it would be interesting to pitch it out 
there.
    Anyway, just--I do get the richness, and I understand what 
we are talking about, but at some point, if you don't have any 
money you probably shouldn't be borrowing too much more, and if 
we would learn that method in the Federal Government, we might 
get our credit rating back instead of having it downgraded even 
worse.
    But I yield back my time, Madam Chairwoman.
    Chairwoman Capito. The gentleman yields back.
    Mr. Watt?
    Mr. Watt. Thank you, Madam Chairwoman.
    I actually came not expecting to ask any questions, but 
because I actually thought this hearing was more about 
something slightly different, and I wanted to find out what was 
going on with reevaluation of collateral, but this is a 
different category of borrowers we are talking about. But I am, 
kind of like Mr. Pearce, surprised that--maybe from a slightly 
different perspective, but we are here bragging about a pilot 
program that has an annual percentage rate of 36 percent, and 
last time I checked most of these banks were borrowing money 
from the Fed at zero percent.
    I assume, based on what all of you have testified, 
including the credit union, Mr. Marquis, that all of these 
people go through some credit qualification. It sounds like 
they pay back their loans. They might not pay them on time.
    Why are we bragging about--and then I heard Mr. Wides say 
that now we want to give them CRA credit for loaning money to 
somebody at 36 percent interest that they got at zero percent 
interest. I am having a little trouble figuring this out, so 
maybe you all can help me, because I don't think we ought to 
be--I am like Mr. Pearce. I don't think we ought to be loaning 
money to people who can't pay it back.
    But if an assessment has been made of their credit and they 
are going to pay it back I don't think we ought to be charging 
them 36 percent annual percentage rate on money that the lender 
got for zero percent. And this is not--and I don't think the 
FDIC ought to be bragging about a pilot program that has a 36 
percent annual percentage rate on. So help me understand what I 
am missing here.
    Mr. Mooney. Congressman, thank you for that point. I want 
to clarify that in the pilot program, no institution charged 
more than a 36 percent APR; many institutions charged far less. 
Some were charging 10, 12, or 15 percent interest. It doesn't 
speak to your point--and an important point--about the funds 
they use to lend to those individuals or the interest rate that 
they pay to borrow those funds.
    But I think what we tried to do during this pilot program 
was to encourage institutions to offer fair, responsible, and 
affordable interest rates, so that they could afford to repay 
over a reasonable period of time. And that is what we think 
those institutions did do.
    Mr. Watt. $1,000, $360 in interest if I keep it for 1 year? 
I am missing something.
    Mr. Mooney. Some actually were charging lower interest 
rates. The 28 institutions' experience was different. We didn't 
want to see them--
    Mr. Watt. Mr. Pearce might change his mind about investing 
in that--that is a pretty good return, if somebody is actually 
paying the loan back. And then I get on his side of the 
equation. If they are not going to pay the loan back, then I am 
not sure why we are encouraging them to borrow.
    So, I am just frustrated, I guess, as a lot of the 
borrowers out there are, and it is not unique to the people in 
this category of borrowing. It goes on up the line. It goes on 
up the line.
    Mr. Mooney. During the pilot, some banks in the pilot--and 
we encouraged them to do this--offered a savings component on 
the repayment of the loan, so a portion of the payment would go 
into a savings account so they wouldn't have to borrow again, 
so they would have a financial cushion, a small amount of 
savings to meet emergency credit needs.
    So I think, Congressman Pearce and Congressman Watt, your 
points relative to the fact that some people may not be able to 
afford to borrow responsibly but should begin saving to develop 
that cushion if they can is a point well taken.
    Mr. Watt. Thank you.
    Madam Chairwoman, I yield back.
    Chairwoman Capito. Mr. Westmoreland, for 5 minutes?
    Mr. Westmoreland. Excuse me, I would like to ask the OCC 
and the FDIC, are you allowing Georgia banks to offer any of 
these products?
    Mr. Mooney. We would encourage banks to consider offering 
these products anywhere, yes.
    Mr. Wides. The OCC supervised five national banks that 
participated in the pilot. None of those five banks were 
located in Georgia, although if a bank in Georgia wanted to 
offer a product along the lines of the FDIC's program, we would 
not have a supervisory objection assuming it had appropriate 
safety and soundness controls.
    Mr. Westmoreland. Have any of the Goergia banks asked to do 
this?
    Mr. Mooney. In the pilot program we had, I believe, two 
Georgia banks that were part of the program.
    Mr. Westmoreland. And so none of them were approved?
    Mr. Mooney. I believe that they were part of the program, 
and I could check that for you. I don't know if they were or 
were not national banks, but they were FDIC-insured banks, if 
that is what you are asking.
    Mr. Westmoreland. Do you tell these banks how much to 
charge for these type of loans--this credit? Anybody?
    Mr. Mooney. Either of us? No, we did not. We asked that 
they be affordably priced. We showed them the guidelines where 
we had a maximum of 36 percent APR. But we wanted to promote 
flexibility and innovation in the pilot program, Congressman, 
so that the banks had a free hand to analyze their costs and 
decide what their charges and fees would be.
    Mr. Wides. For the five national banks that participated in 
the FDIC's pilot, they developed the guidelines themselves. In 
fact, four of the five national banks that participated in the 
FDIC's pilot had offered this product prior to the FDIC 
announcing its pilot. I spoke to one community banker in Texas 
who told me that they had been offering this product for 20 
years, that this is part of the bread-and-butter business of 
lending in this small community in Texas.
    So, the OCC did review the terms under which the banks were 
offering it, did not engage in any way in terms of the terms or 
features and monitored with the bank to make sure that the 
performance was done in a safe and sound manner.
    Mr. Westmoreland. Is the Consumer Financial Protection 
Bureau going to regulate these banks that are doing that, or 
are you all going to continue to regulate them, as far as 
consumer protection?
    Mr. Wides. The Consumer Financial Protection Bureau has 
direct supervisory responsibility for banks over $10 billion in 
assets as it relates to certain consumer protection laws. So 
for the five banks that participated in the pilot that were 
national banks, none of those banks had assets over $10 
billion, so the OCC would continue to supervise all aspects of 
those banks' operations, including this pilot.
    Mr. Westmoreland. And, Mr. Marquis, let me ask you a 
question: Under the options that you got for increasing access, 
you talk about going into underserved areas and offering, I 
guess, your products, or--and it says that you would also be 
able to participate in a community development financial 
institutions fund. Is that correct?
    Mr. Marquis. Many credit unions participate in the 
Community Development Loan Fund Program. I think we have let 
low-income credit unions borrow about $54 million over the past 
several years, and it also gives them access to technical 
development funds or grants.
    Mr. Westmoreland. Isn't that just a taxpayer guarantee on 
those loans?
    Mr. Marquis. On the loans, they--we have never had a loss 
on one of those loans. They have always been paid back. There 
has never been a delinquency on one of those loans.
    Sometimes, we require matching funds if we think the credit 
union is distressed a little bit, but that has never produced a 
loss to that fund. The technical development grant is roughly 
$1.2 million appropriated by Congress every year. That is--
    Mr. Westmoreland. I understand, but my question was, are 
these loans guaranteed by the taxpayer?
    Mr. Marquis. I guess they are guaranteed by the taxpayer to 
the extent, though, that if we had to liquidate one of those 
credit unions, they are protected by--they have access to all 
the balance sheet assets first, so in all likelihood, the share 
insurance fund would absorb that loss, not the taxpayer.
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Baca, for questions?
    Mr. Baca. Thank you, Madam Chairwoman.
    Mr. Mooney, in your testimony you detailed a small-dollar 
loan program and how it was constructed and operated during the 
last 2-year period in 2008 to 2009. You urged that the pilot 
project provide a template for safe and affordable small-dollar 
products.
    You argue that banks offer these products in a way that 
meets the business needs, and I want to follow up in a question 
there. If these programs have been successful, then why do only 
26 percent of the institutions in the country offer these 
products? That is question number one. And surely this can't be 
enough institutions to meet the needs of the 50 percent of the 
Americans who have trouble raising a $2,000 loan in 30 days, 
especially considering the pilots only took place in 27 States.
    Mr. Mooney. Those points are well made, Congressman, and 
that is precisely why we engaged these institutions in the 
pilot program. We wanted to demonstrate that banks should 
consider offering these products to their customers. We wanted 
to find out whether or not they would be profitable, whether or 
not institutions would consider offering them on their own.
    What we found out was that banks did consider the long-term 
relationships that they develop with these customers to be 
profitable, and that was the primary reason why they engaged in 
the program.
    We also wanted to produce a model that would be 
replicable--that we could encourage other institutions to 
consider. The fact is that banks have the infrastructure 
currently in existence and the capacity to make these 
relatively small-dollar loans available to their customers.
    Most of the customers of payday lenders and alternative 
lenders have checking accounts with insured financial 
institutions. We think it is important that those institutions 
consider serving them in helping to meet their needs as well.
    Mr. Baca. Some of these loans could go up--you stated 
earlier, or I heard the figure--up to 36 percent interest, is 
that correct?
    Mr. Mooney. Some did go up there, but there was a variety 
of interest rates. Banks were able to set their own. But all of 
them were offering interest rates and--
    Mr. Baca. So actually, the 36 percent interest rate is even 
higher than that when someone is late in payment, which means 
they are paying a lot more, aren't they?
    Mr. Mooney. They could be if there was an additional late 
charge, yes.
    Mr. Baca. So versus an uncharted bank or someone else that 
offers a $2,000 loan for ``X'' amount of dollars means that 
they are actually paying a lot less than someone who is 
charging 36 percent interest rate plus late payment. Is that 
correct?
    Mr. Mooney. I am not sure of that.
    Mr. Baca. You are pretty sure it is correct. It would be 
higher when you take in the total percentages that someone 
would pay in the interest rate, now they have a late payment, 
now the payments are a lot higher so when you calculate that--
and you borrowed only $2,000. I don't know how you can do that.
    But let me ask another question: You said that--earlier I 
heard you make a statement that it would take--for someone who 
wanted to borrow some money, it would take maybe $2,000 or 
less--I will use that figure. It could take up to 24 hours 
turnaround time. Is that correct?
    Mr. Mooney. Yes. Most of the banks in the pilot try to make 
the decision within 24 hours.
    Mr. Baca. So what happens if you have an emergency and you 
need to fix your vehicle, and you need 4 tires, you had some 
maintenance, and you needed a $2,000 loan, and what--you have 
to wait 24 hours for a response?
    Mr. Mooney. That is right.
    Mr. Baca. So that means you are out of luck, you lose your 
job possibly, because someone may say, hey, you didn't have a 
vehicle in an emergency. So that is a problem that we have 
because you have 24 hours turnaround when you can go somewhere 
else and obtain a loan and get it and take care of the 
emergency that is there.
    So I have a question. I have problems with that 24-hour 
period because that is quite a long time because then you have 
to turn around and do the credit check on the individuals, and 
of course you are only going to give it if they establish 
credit, have good credit, and have a history in that area, so 
that presents some problems.
    Let me ask another question: In recent years--this is to 
the entire panel--the Federal Government and the Federal 
regulators have begun to allow banks and credit unions to offer 
small-dollar loans to underserved populations. However, it 
seems that these efforts have fallen drastically short when 
compared with the actual problem. Then I ask, why would the 
government need to continue using these programs when it seems 
that we have the tools in the private sector to build upon and 
expand?
    To any of the panelists?
    Mr. Mooney. Thank you for that. This is one of the reasons 
why the FDIC has promoted the small-dollar loan pilot program.
    We asked banks to volunteer to offer these programs. They 
are not underwritten in a way that would pose a risk to the 
taxpayer. There are no Federal guarantees involved; we wanted 
just private sector involvement and we wanted to see if they 
would work without that kind of assistance. I think we showed 
that they can do this, or at least the institutions who 
participated helped us draw that conclusion.
    Chairwoman Capito. Thank you.
    Mr. Grimm, for 5 minutes?
    Mr. Grimm. Thank you, Madam Chairwoman.
    Mr. Mooney, you are on a roll so I am going to kick it over 
to you. It is my understanding that many of the non-
depositories have developed quite a bit of expertise, I would 
say even efficiencies, in making and servicing loans to a 
higher-risk consumer who typically cannot qualify for a small 
loan and other credit products that are out there at depository 
institutions.
    Are there any conditions under which you believe that a 
qualified non-depository lender should be allowed to partner or 
otherwise work with the depository banks to provide innovative 
small loans and other credit products?
    Mr. Mooney. Banks have always partnered with third parties 
for a variety of reasons, including to obtain computer services 
that they provide; and to provide nonfinancial and other 
financial services, including loans. There are risks involved. 
We would warn institutions to be careful of those risks and to 
manage that third party relationship carefully.
    Risks would include operational risks, credit risks, 
reputational risks, and the like. But if the bank is involved 
in activity that is legal with a third party, and they are 
closely monitoring and managing the actions and activities of 
that third party, and if they have the capacity to do that and 
do it well, then we would consider them in compliance with our 
guidance on third party risk. So I would say that is a 
possibility, yes.
    Mr. Grimm. Okay. Thank you.
    Mr. Marquis, under the Credit Union Administration--under 
their regulations, you mentioned that interest charged to 
consumers is limited but you don't say what exactly that is. 
Can you tell me what the limit on interest rates is?
    Mr. Marquis. Yes. Overall, the interest on credit unions is 
set by statute, except for in certain circumstances that we can 
do these pilot programs at 18 percent. In this particular 
program, we have allowed the credit unions to charge up to 28 
percent provided that we don't have rolling loans where the 
consumer doesn't have the capacity to repay. So we are trying 
to make this an alternative to payday lending and an 
opportunity to establish credit at a financial institution to 
better be able to get credit in the future.
    So far in this program, that has been outstanding. For a 
year, the average interest rate that credit unions did end up 
charging came out to 21 percent.
    Mr. Grimm. Thank you. Under the small-amount loan rule, I 
think it is called, you list several requirements for the 
program, from loan amounts to application fees. Why were these 
chosen, specifically? Why would you limit a consumer who pays 
exactly on time or early, even--some pay early--from using the 
product more than 3 times in a rolling 6-month period?
    Mr. Marquis. The only time that goes into effect is when a 
credit union wants to charge that extra interest rate in the 
small credit union program up to the 28 percent, and a consumer 
who has been a member for a long time in good standing with the 
credit union, there is nothing to stop the credit union from 
lending to them continuously on a revolving loan program. This 
is just to get people who have not participated in the credit 
union to establish a history with the credit union and to 
improve their credit histories.
    And these loans are not predatory. We want to make sure 
that the member does, in fact, have the capacity to repay, so 
we said you can make 3 loans over a rolling 6-month period, but 
you can't add a fee to it if you extend the loan term, and you 
can only charge a $20 fee or less in order to implement the 
loan.
    Mr. Grimm. Okay. Thank you.
    I just wanted to say that there are certainly a lot of 
underserved communities. Access to credit, I think, is 
something that is a problem throughout the entire United States 
and throughout just about every community.
    And with the current state of our economy and the fact that 
many, what we have considered stable, middle-class homes that 
always paid their bills on time, are obviously having trouble 
right now. Take Staten Island, in Brooklyn, where we just got 
hit by a hurricane. Those who traditionally always made their 
bills, they are out of work and they have an emergency--
literally an emergency.
    I am just going to tell you, people are going to find ways 
to get through that emergency. We need to make sure that they 
have that access.
    With that, I yield back. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Scott, for 5 minutes?
    Mr. Scott. Thank you.
    This has been a fascinating hearing. I have been grappling 
with how to approach the situation from my knowledge. We have 
an issue here that involves two basic groups, and we are trying 
to get an answer that I think kind of ignores that fact.
    First of all, we have the unbanked and we have the 
underbanked. And I don't see how the pilot program that we are 
talking about--that you were talking about--can even approach 
the bigger part of this problem, which is the unbanked.
    According to a recent study by one of our accounting firms, 
KPMG, there are 33 million unbanked, and the unbanked are those 
individuals who have absolutely no relationship with a bank. 
They have no account; they have nothing. So how can we even 
begin to approach the program?
    And then the other issue is, banks basically are high-
profit, low-risk, and with stricter regulatory forms that we 
are placing on them due to the recent crisis we have had, they 
are tightening their underwriting requirements, making it even 
more difficult. So it seems to me that a part of this hearing 
should be to take a look at and see--for example, let me just 
get, for the record, do each of you agree that there is very 
serious and very great opportunity and room in all of this for 
the alternatives, like payday lenders, pawn shops, cash 
checking services, that really apply to the need of easy, quick 
access to these 33 million, and the fact that can these 
financial institutions really even begin, given their 
structure, to really, really address this issue?
    Now, the underbanked certainly has some possibility here. 
They have a relation with the bank. They just have low credit 
ratings.
    So I want to sort of find out find out first--am I right 
about this? Is this a--
    Mr. Mooney. Yes. We conducted our unbanked and underbanked 
survey, and we found out when we surveyed banks that 73 percent 
surveyed were aware of needs in low- and moderate-income and 
underserved areas, but only 18 percent prioritized the need to 
develop those products and services. That is why we decided to 
focus on and encourage and find different ways that banks can 
help to meet those needs.
    In 14 MSAs around the country, we have gone to the trouble 
to establish Alliances for Economic Inclusion. Many hands make 
light work, and many partners can help address this particular 
problem that you outlined so well. We have over 1,000 partners 
nationwide in these 14 alliances. Over 300 banks are part of 
that, and each of those meet on a regular basis locally to 
identify areas of need, to identify underserved customers, and 
try to figure out new ways to provide affordable financial 
services to those individuals.
    We think that it is our job to continue to encourage banks 
to do that. Banks have the capacity, Congressman; they have the 
infrastructure already in place to begin offering these 
products. The expenses, the overhead--all of that is already in 
place. What we would like to see them do is to help meet the 
needs of those particular residents in their community as well.
    Mr. Scott. Let me just ask your response to some of the 
potential barriers that are faced with. Does consumer confusion 
about what types of acceptable forms of identification are 
required to open a bank account--just that one fact, does that 
discourage some of the consumers from using the financial 
institutions?
    Mr. Mooney. We have learned in our partnerships with 
nonprofits--who work face to face daily counseling consumers--
that can be a cause of concern. Nonetheless, in those 
partnerships that I talked about and these alliances, banks are 
finding new ways to satisfy those identification requirements 
and to make consumers feel more comfortable when they are 
actually opening these accounts and engaged in those 
transactions.
    Mr. Scott. And what about the holding period for clearing 
checks? Because the problem which you have here is there are 
many people in these emergency situations who need it quickly; 
they need it now, and that is why they go to some of the 
alternatives. Can these banks fix their situations in terms of 
the holding period?
    Chairwoman Capito. The gentleman's time has expired. Thank 
you.
    Mr. Scott. Thank you. I am sorry.
    Chairwoman Capito. Mr. Fincher, for questions?
    Mr. Fincher. Thank you, Madam Chairwoman.
    Last week, I was looking into the financial situation we 
find ourselves in as a country, and I was looking at the 
average credit card debt per household in the country was about 
$7,000, something like that, and it just was unbelievable how 
much debt we have as a country, but also personally how much 
debt we have. And as we are listening to the testimony today--
and I really appreciate the input--there is a level of personal 
responsibility that we all have in the country, and we must go 
back to that, that the government isn't the answer-all. We need 
to do our part.
    A couple of questions.
    Mr. Wides, for you first. You recently proposed guidance on 
payday loan alternatives that covers disclosures, costs, and 
usage, but did not impose specific requirements or limitations. 
Why did the OCC decide to use guidance that lacks specifics?
    Mr. Wides. Thank you, Congressman.
    It is principle-based guidance. It is trying to lay out 
what our safety and soundness expectations are for national 
banks and Federal savings associations, in recognizing that 
there are needs for consumer protections, as well.
    The guidance is out in proposed form. The comment period 
closed back in early August. We are reviewing a significant 
number of comments relative to that guidance.
    We have received comments from some commenters who have 
raised the concern that you have raised, that perhaps there 
should be specificity on that point. But at the same time, we 
received comments on the opposite point of view, as well. So we 
are looking at all the comments and working through that, and 
trying to come up with an appropriate outcome.
    But I can't really go into much more in terms of our 
guidance, because it is still in proposed form.
    Mr. Fincher. How long will it take, do you think?
    Mr. Wides. I really can't give you an idea at this point, 
unfortunately. The comment period closed last month. As I 
mentioned earlier, we received about 14,000 comments. It was an 
area of great interest by consumer groups, as well as financial 
institutions and major trades, so unfortunately, I can't really 
give you a timeline.
    Mr. Fincher. Mr. Mooney, there is a need for short-term, 
low-dollar loans, particularly in my State of Tennessee. 
However, based on what I have heard today and what I see at 
home, banks are not meeting this need. So in your opinion, why 
should banks be getting involved if they don't seem to be 
interested while there is private--the free market private 
sector already meeting this need?
    And then, the last part, to Mr. Marquis, how are banks ever 
going--or credit unions--going to be able to serve people who 
don't have credit?
    Mr. Mooney. Congressman, thank you. While the business 
strategy of different banks may vary, and not all banks may be 
seeking to meet a retail market need, most banks do. Banks are 
chartered by States and the Federal Government to do business, 
to serve their communities, to meet their financial needs.
    While we would like to see all banks offering this type of 
product to meet this important need in many communities--we are 
encouraging as many as possible to actually do that. They are 
there. They have the offices; they have the employees; they are 
paying the overhead. And it may make sense for them, in terms 
of their overall business strategy. At least for those where it 
does make sense, we would like to see them do more.
    Mr. Marquis. On a safety and soundness basis, you obviously 
don't want to have a consumer get into a debt spiral. You don't 
want to cause more harm, as they say.
    So you want to establish credit history for that consumer 
by making them crawl before they walk, in terms of establishing 
credit history. Credit unions are not in business to make a 
profit. They make a profit only to establish adequate capital 
levels for their institutions.
    The more credit unions can establish relationships in 
underserved communities, and have better access to underserved 
communities, the more capacity they will have to step up and 
help them establish a positive credit history.
    Mr. Fincher. Thank you, guys. I appreciate it.
    I yield back.
    Chairwoman Capito. Thank you.
    Mr. Carney, for 5 minutes?
    Mr. Carney. Thank you, Madam Chairwoman, and thank you for 
having this--what Mr. Scott characterized as a very fascinating 
hearing today. I have to agree with that characterization. 
Confusing as well, as we heard Members on both sides of the 
aisle talk about the need to provide services and credit for 
the unbanked, the underbanked, and yet, they are concerned 
about predatory lending rates.
    The question was asked, is this the appropriate venue for 
traditional banks? I think the answer is ``yes.'' The answer I 
heard was ``yes.'' I would like to hear the answer from the OCC 
to that question, because obviously the credit unions are doing 
it, so they must feel it is an appropriate--but I didn't hear 
anything from the OCC about whether this is an appropriate 
space for regular banks, if you will, for your banks.
    Mr. Wides. Yes, if it is subject to safety and soundness 
guidelines.
    Mr. Carney. So that seems to be the question, on the 
balance between safety and soundness and what are affordable or 
reasonable rates. And how do you--how do we do that? How do we 
settle on what is predatory and what is not?
    I was a little surprised to hear the credit union rates, 
frankly, were as high as they were. If you added profit onto 
that, that would put it into the 30 percent range. Your 
average, I guess, was 20 percent, so maybe not into the 30 
percent range.
    I heard my colleague up here express concern about 38 
percent. How do the banks, or how do--what is your role as 
regulators in that process in determining what is predatory or 
not in this space?
    Anybody?
    Mr. Wides. There is no rule or regulation or statute that 
establishes a maximum interest rate for a federally chartered 
thrift or national bank.
    Mr. Carney. So they could charge whatever would be 
acceptable in the market?
    Mr. Wides. They are also underwriting a credit risk here--
    Mr. Carney. Sure.
    Mr. Wides. --and we expect them to be prudent in terms of 
underwriting the credit risk to a borrower who has sufficient 
repayment capacity. That seems to be, I think, the real issue 
in terms of the interest rate that is charged is, what is that 
borrower's repayment capacity? What is the default rate? What 
is the loss rate that you suffer on a given borrower--
    Mr. Carney. So some assessment of the loss ratio is going 
to be part of the pricing, right? That is fairly obvious. And 
then I guess the administrative costs of making low-dollar, 
short-term cash available to consumers. Is that--
    Mr. Wides. Yes. That is correct.
    Mr. Carney. --fair?
    Mr. Wides. Yes.
    Mr. Carney. But we don't seem to have, on a political 
level, a good handle on what is acceptable, I guess. Rates that 
have been mentioned here in this hearing today have struck some 
people on both sides as kind of unacceptable. How do we--as 
Members who come here to represent our constituents and our 
districts--look at that question of what is affordable, what is 
predatory, and what is acceptable? I guess it depends on our 
particular philosophy of banking and the marketplace.
    Do you have any views of that from a regulatory perspective 
or from a credit union perspective?
    Mr. Marquis. You have to balance safety and soundness with 
the issue of establishing the credit for someone who may have 
ruined their credit over time for whatever the reasons are, and 
you have to bring them back onboard in terms of mainstream 
financial services. But it is a higher volume business, and it 
has a higher cost.
    We have to balance that with making sure the financial 
institutions don't cause harm to themselves by building out 
those portfolios too big. Delinquency tends to be higher; 
charge-off tends to be higher. So it doesn't take many loans to 
offset and reduce that 20 or 30 percent interest rate to be 
something in the negative category, if you are not careful.
    Mr. Carney. That is how you get at your 21 percent average 
without a profit being part of that, right?
    Mr. Marquis. So far. And we have allowed them to charge up 
to 28 percent, and up until now, they haven't had to do that. 
They are crawling before they walk and trying to manage that 
business and determine where the break-even points are in that 
business.
    Mr. Carney. Really quickly, there was some mention earlier 
about debit interchange and the Card Act. Do you have any 
impression or any idea of the unintended consequences of, say, 
the Card Act, in terms of access to credit for the underserved 
consumer?
    Mr. Marquis. I am not sure the two subjects are exactly 
related, but at the end of the day, financial institutions, 
especially credit unions, are not in business to make a profit, 
but they have to build adequate capital. There are only several 
ways to make money: you can charge more interest on loans; you 
can break even on fee structures or charge a little more for 
fees; you can reduce your costs of funds; and you can reduce 
your expenses.
    At the end of the day, those are all finite things that you 
have to balance out in terms of what does it take that 
organization in their business model to come out at the end of 
the day that they are not losing money.
    Mr. Carney. Thank you.
    I see my time has expired.
    Chairwoman Capito. Thank you.
    Mr. Hinojosa, for questions?
    Mr. Hinojosa. Chairwoman Capito, thank you for holding this 
important and very timely hearing. I commend all that you and 
Ranking Member Maloney do to improve the financial literacy 
rates of all those residing in the United States.
    Before I ask my questions, I think all of us here today 
should be aware of some of the following facts. I will just 
give three or four.
    First, 25 percent of households in the United States, or 
close to 30 million households with approximately 60 million 
adults, are unbanked. So I have concerns of that group, just as 
Congressman Scott gave earlier.
    Second, 3 in 10 adults in the United States, or more than 
68 million individuals, report they have no savings. And only 
24 percent of those adults in the United States are now saving 
more than they did a year ago because of the current economic 
climate.
    Third, I learned that 28 percent, or nearly 64 million 
adults, admit to not paying all of their bills on time. So it 
seems to me that personal financial literacy education is 
essential to ensure that individuals are prepared to manage 
money, credit, and debt.
    My first question I want to direct to Comptroller Barry 
Wides and to Deputy Director Robert Mooney. What are each of 
you and the entities you regulate doing to bank the unbanked, 
move the underbanked entirely into the mainstream financial 
services system, and what are you doing to reign in those 
predatory lenders that we are talking about, such as the check 
cashers and others that charge excessive interest rates?
    Mr. Wides. Thank you, Congressman. The OCC is very involved 
with the national financial literacy efforts of the Financial 
Literacy and Education Commission. I am the agency's 
representative to that Commission.
    One of the more interesting, and I think promising, 
initiatives in financial literacy and inclusion of the unbanked 
is the Bank On initiative, sponsored by the National League of 
Cities, in which the Treasury Department and the banking 
regulatory agencies are partners with this effort. The way that 
initiative is working is that cities around the country are 
coming up with a template of a basic banking product that would 
be offered in conjunction with financial literacy through local 
nonprofits.
    And what the banking regulators are doing is collaborating 
with these cities that are sponsoring these initiatives to 
bring the bankers to the table to see if they can offer a 
product in these markets that would be geared toward an 
unbanked individual. In many instances, it involves second 
chance checking accounts for people who might have previously 
been banked but left the system due to high fees or inability 
to manage an account. So these initiatives do involve a 
financial literacy component, and--
    Mr. Hinojosa. Let me interrupt you. If those initiatives 
were implemented and they were able to have them open up a bank 
account, would they be covered under the FDIC just like anybody 
else on that $250,000?
    Mr. Wides. Oh yes, yes. These are full bank accounts with 
FDIC--
    Mr. Hinojosa. The reason I ask you--and I am glad to hear 
you say yes, because one of the things that many of our 
immigrants have is that they are afraid of not being able to 
get their money out, number one; number two, that banks may 
fold up and that they will lose their money, like they did in--
back during the 1940s--1930s to 1940s. So I don't blame them 
for learning from their parents and their grandparents about 
those experiences.
    And we just have too many people who could benefit by being 
banked. I would like to hear your answer.
    Mr. Mooney. Congressman Hinojosa, thank you. The FDIC is 
very much aware of what you just stated, and first of all, we 
also want to recognize your leadership in the financial 
literacy field.
    Mr. Hinojosa. Thank you.
    Mr. Mooney. Our Money Smart program has been updated--the 
financial education program--to include issues related to 
Federal Deposit Insurance. We embarked on a public service 
campaign--a national public service campaign in several 
different languages--to build public confidence, in particular 
in our minority and immigrant communities as to the importance 
of FDIC-insured accounts, not only that they are safe and 
insured up to $250,000, but that we provide uninterrupted 
access to their financial accounts and the financial services 
in the event of a possible bank failure, and we have done that. 
Also, with that insurance and with those bank accounts come 
consumer protections.
    Economic inclusion, as you state, is important, and the 
FDIC, several years ago, embarked on a campaign to establish 
Alliances of Economic Inclusion, and we have done this in 14 
different MSAs around the country, everywhere from Boston, to 
Baltimore, to the Black Belt area of Alabama, to Los Angeles, 
to Southern Texas, to Chicago, and the list goes on. In those 
communities, Congressman, we brought together banks--all the 
banks--nonprofits, and public officials to figure out new ways 
to reach the underserved in several ways: one, by offering 
affordable savings and checking accounts as well as affordable 
small-dollar loans; and two, possibly in many of these markets, 
affordable foreign remittance services. And in addition to 
small business lending, we also encourage the use of financial 
education programs--programs that will result in the opening of 
accounts for those who are underserved, in particular in some 
of the immigrant markets that you have talked about.
    More than 1,000 organizations and banks are part of that 
initiative, and we are finding very, very positive results in 
each of those.
    Chairwoman Capito. Thank you.
    The gentleman's time has expired.
    Mr. Hinojosa. I like your response.
    And, Madam Chairwoman, I want to comment that I have 
visited Federal Reserve Banks and others that have materials in 
eight languages, but are the banks actually getting any 
pushback from either community leaders or elected officials 
because we are doing it in languages other than English?
    Chairwoman Capito. If you could answer briefly, because we 
need to--
    Mr. Mooney. I am not aware of that. In fact, our translated 
services are very popular with banks.
    Mr. Hinojosa. Thank you.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Mr. Miller, for 5 minutes? Do you have 
any questions for this panel?
    Mr. Miller of North Carolina. I do, for the OCC.
    I am sorry. As the Chair noted, I have just kind of 
sprinted in, but I am curious about your military lending 
program. One of the great triumphs of consumer protection is 
what we have done in the last decade for servicemembers. There 
is a series of articles, or maybe just one big article in the 
New York Times about the abuse of servicemembers. Many of them 
were fresh out of high school, living independently for the 
first time, and they were being gouged by lenders just off the 
base, obviously targeting them at a very vulnerable stage of 
their lives.
    There was legislation introduced to do something about it, 
and the industry--the lenders who were doing it--succeeded in 
getting that postponed and having the military conduct a study. 
The study came back more strongly than they could possibly have 
imagined, and the commanders talked about how it was affecting 
their readiness, how was it affecting their troops, how it was 
affecting their security clearances, how they were unprepared 
because they were not sleeping at night or because all they 
could think about was how much debt they were under. And 
Congress set a cap of 36 percent.
    My understanding is that, what are functionally the 
equivalent of payday loans are now being offered to the 
military and have been designed in a way to avoid that Federal 
limitation on interest for our military. Is that correct? Are 
there loans being made to our military with a closed end or 
open end that exceed 36 percent?
    Mr. Mooney. I am not aware of FDIC-supervised banks that 
are involved in anything approaching that. In fact, we held a 
conference where we highlighted the need for affordable lending 
to the military in 2006, and we partnered with the Department 
of Defense and military banks. And, actually, as a group at 
that conference, they developed a small-dollar loan template 
which would provide an alternative to high-cost payday lending 
and other lending that had been plaguing the military, as you 
have outlined.
    That template led to the FDIC's small-dollar loan pilot 
program, where small-dollar loans were being offered--
    Mr. Miller of North Carolina. What is the effective 
interest rate on those loans?
    Mr. Mooney. In our pilot program, for the 28 banks that 
ended the program, the average rate charged was between 14 and 
16 percent. The most common was 18 percent. We asked banks not 
to charge more than a 36 percent APR, and most charged well 
under that.
    Mr. Miller of North Carolina. Are there any loans being 
made to servicemembers, whether open- or closed-end, that 
presumably would be subject to the statute, that might not be, 
where the interest rate does exceed the amount allowed by 
Congress in 2006--36 percent per annum?
    Mr. Mooney. We examined banks for compliance with those 
rules and I am not aware that there are any exceptions, but we 
could look into that. I don't think that would be an issue with 
banks primarily.
    Mr. Miller of North Carolina. Would you support or oppose 
legislation that would make it clear that those lending 
programs are subject to a 36 percent cap?
    Mr. Mooney. I think the FDIC would have to review that. I 
wouldn't be able to comment on it today.
    Mr. Miller of North Carolina. Okay.
    The Center for Responsible Lending made several 
observations about today's hearing and suggested that any loans 
that the OCC required to comply with certain criteria, certain 
minimum standards that they repaid in affordable installments, 
and that there be a cooling-off period between installments, 
between borrowing, to prevent the repetitive use, which is one 
of the great evils of payday lending, that they be reasonably 
priced and that the cost of credit be expressed as the interest 
rate and not as penalties or fees where the borrower frequently 
has no idea what they are getting into--they understand an 
interest rate; they may not understand when they are being hit 
by penalties and fees--that they be based upon--that there be 
an ability to repay requirement for any lender, and that they 
not be paid through an automatic set-off against the customer's 
deposits, which they said effectively is a wage garnishment and 
really prevents the consumer from very effectively being able 
to contest the amount being charged.
    Do those seem like reasonable limitations? Do you support 
those limitations?
    Mr. Wides. We are very, very aware of the concerns that 
have been raised by the Center for Responsible Lending and 
other consumer groups about these types of products. All I can 
say is that we have received over 14,000 comments, many of 
which are very, very similar to the types of issues that you 
have just identified, and we are sifting through those comments 
now, as I mentioned that the comment period closed last month. 
But we are very aware of those issues and concerns as we look 
at determining how we move forward with this guidance.
    Chairwoman Capito. The gentleman's time has expired, and I 
believe that concludes all of the questions for this panel.
    I want to thank you all. You have given very, very 
excellent testimony.
    I would like to request unanimous consent to submit the 
following letters into the record: the National Association of 
Federal Credit Unions, and VantageScore. Without objection, it 
is so ordered.
    And I will dismiss the first panel and call up the second 
panel.
    Mr. Renacci. [presiding]. At this time I would like to call 
up our second panel of witnesses. I will introduce them 
individually for the purpose of giving a 5-minute opening 
statement.
    The first, Ms. Gerri Guzman, is the executive director of 
the Consumer Rights Coalition.

STATEMENT OF GERRI GUZMAN, EXECUTIVE DIRECTOR, CONSUMER RIGHTS 
                        COALITION (CRC)

    Ms. Guzman. Thank you.
    To the chairwoman and members of the subcommittee, I want 
to thank you for including us in this conversation. Your work 
and ours impacts the daily lives directly of consumers, so we 
should be working together to first do no harm, and then 
improve both their circumstances and their options.
    I am Gerri Guzman, the executive director of the Consumer 
Rights Coalition, or CRC. CRC is a nonprofit consumer-based 
organization dedicated to ensuring that Americans have 
increased access to credit.
    I am here today on behalf of more than 200,000 of our 
members who are consumers of alternative or nonbank financial 
services. Our members have traditional bank accounts, but they 
don't always have a financial safety net. They want to preserve 
and expand access to a full range of short- and intermediate-
term credit options and other basic financial services.
    Millions of Americans, as you know, are coming up short. 
They are struggling to make ends meet for several months at a 
time or they are dealing with a financial shock like a 
reduction in work hours, a medical emergency, or a broken down 
car or appliance.
    Millions of consumers don't have rainy day savings accounts 
to get them to the next paycheck or manage the unexpected. They 
may not have credit available on their credit cards or family 
to turn to for a few hundred dollars in order to get through a 
tough time.
    As stated in studies by other panelists, the previous, in 
addition to those reports, there was a second study that found 
that 64 percent of Americans don't have $1,000 on hand in case 
of emergency. If these consumers choose to go to a traditional 
bank for a loan, the vast majority of traditional banks and 
credit unions could not give them a typical $300 loan needed, 
to say nothing of $1,000 or $2,000.
    As a result, today almost 20 million Americans are turning 
to nonbank financial products, like check cashing, 
installments, payday, and pawn loans. The alternative to 
traditional banks is quickly becoming the mainstream.
    I know firsthand that traditional bank products don't 
always offer a realistic solution for people without a 
significant financial cushion to help absorb the unexpected. I 
relied on a payday loan when I was in danger of losing my home. 
It was simple, transparent, less expensive than bouncing a 
check or making a late payment, and I knew that it would not 
further damage my credit rating.
    Short- and intermediate-term loans are easily and 
conveniently available from alternative lenders in some States. 
Unlike most traditional banks, stores are located in minority 
neighborhoods. They are open at times the services are needed 
and the process is understandable, quick, and easy. Employees 
are likely to speak the language of the local residents, and in 
addition, these short-term loans will not ruin people's credit 
ratings like bouncing a check or failing to make a payment 
would.
    Short-term credit options are currently regulated at the 
State level, and regulations vary in many States: the fees; the 
types of loans; the terms that are offered. Research from the 
Federal Reserve and others indicates that States that have 
eliminated or restricted credit options have actually done more 
harm than good.
    For example, when the State of Washington restricted the 
number of loans an individual could take out, regulators found 
that it had the effect of driving consumers to more expensive 
options, further damaging their credit. Studies also found that 
consumers in North Carolina, Georgia, and Oregon were hurt by 
payday loan bans that drove them to bounce more checks, incur 
more late fees, and ultimately file more personal bankruptcies.
    Unfortunately, I hear from consumers all the time that they 
no longer have access to short-term credit because of 
restrictions in their States. They are now spending more on 
overdraft, bounced check, late fees, and in many cases banks 
are threatening to close their accounts.
    The fact is that people will always come up short. If 
access to one product is eliminated consumers will seek out 
another. And unfortunately, at times it is not a viable option 
that works for their household.
    Seventy-three percent of banks are aware of the significant 
unbanked or underbanked populations in their market, but less 
than 18 percent of banks have identified expanding services to 
this group. In listing the reasons why, they list profitability 
issues, regulatory barriers, and fraud concerns.
    A few banks are, however, beginning to compete in the 
small-dollar, short-term lending market. This is very good. The 
more options, the better. That will allow my consumers to make 
choices, weigh out those options, and certainly, ultimately 
choose the option that is best for their household.
    Laws need to further change, though, to open up the market 
to more competitors. We would like to see nonbank financial 
service providers already trusted in the communities throughout 
the United States have the opportunity to provide more and 
better credit services to underserved communities.
    All Americans need responsible credit options in order to 
build personal financial records, healthy credit ratings, move 
up to the traditional banking system, and ultimately build 
their own personal wealth and wealth for their neighborhoods 
and communities.
    Thank you.
    [The prepared statement of Ms. Guzman can be found on page 
72 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness will be Melissa Koide, vice president of 
policy, Center for Financial Services Innovation.

 STATEMENT OF MELISSA KOIDE, VICE PRESIDENT OF POLICY, CENTER 
            FOR FINANCIAL SERVICES INNOVATION (CFSI)

    Ms. Koide. Thank you, Chairwoman Capito, Vice Chair 
Renacci, and Ranking Member Maloney. I am Melissa Koide, the 
vice president of policy at the Center for Financial Services 
Innovation. On behalf of CFSI, I appreciate the opportunity to 
be here today as a witness.
    CFSI, for those of you who may not know us, is a nonprofit 
organization in its 8th year of providing leadership, research, 
and insights on the financial services needs of underbanked 
consumers. Our vision is to see a strong, robust, and 
competitive financial services marketplace where the diversity 
of consumers' needs are met with a variety of financial 
products and services that are transparent and reasonably 
priced.
    We believe well-structured products can help consumers 
address their short-term credit needs and also build positive 
credit histories, which we all realize are not only critical 
for long-term asset goals, but more immediate needs: 
employment; housing; and insurance. In 2008, we conducted a 
study--a nationally representative study--and found that almost 
one-third of unbanked or underbanked consumers had borrowed for 
short-term needs in the prior 12 months.
    While the reasons for their borrowing varied, over a third 
cited the need to pay bills and to manage their expenses as 
their motivation for seeking out the credit. This result 
suggests that in addition to helping address emergency 
expenses, which we typically think about when we think about 
small-dollar credit, that credit is being used as a method to 
manage expenses, smooth income at times. And that is especially 
relevant in today's context.
    Looking at the supply side of small-dollar credit, we pay 
quite a bit of attention to some of the innovations in this 
area. Over the past half-decade, we have seen a handful of new 
and modified products that are emerging to better meet the 
demands of consumers with more consumer-friendly structures.
    Examples of these innovations include products that offer 
flexible loan terms, that use a variety of data to better 
underwrite and assess consumers who may have insufficient or 
poor credit histories, that link credit with other products and 
services, including transaction products and savings, and that 
also offer credit products intentionally to help consumers 
build or repair their credit records.
    But even with these promising trends, there are significant 
challenges to the growth of well-designed, small-dollar credit 
products, and there is without question concerns about products 
that are in the market today. Many, if not most of today's 
products are short-term, often with repayment due in a matter 
of weeks or when the next paycheck arrives. Many products draw 
the full repayment directly from the consumer's account, which 
on the one hand, we recognize helps to reduce the likelihood of 
default, but on the other hand, leaves some consumers with 
little left except the option to borrow again.
    Regulatory scrutiny of the product is warranted, but we 
also need additional research to shed light on how these 
products can be designed to avoid overindebtedness and to help 
consumers successfully manage their credit while also ensuring 
product sustainability.
    On the supply side, it is important, also, to call out the 
challenges that are constraining the growth of high-quality 
products. Those challenges include capital constraints, 
depending on the type of provider. They include regulatory 
inconsistency as well as regulatory uncertainty. It also 
includes negative stigma associated with the products 
themselves, and insufficient underwriting in order to assess 
risk.
    I think with a few ground rules and a level of regulatory 
consistency, we will see more and better small-dollar credit 
products emerge that help consumers safely access credit, 
reduce the price, and allow for product diversity and 
innovation.
    With respect to our policy recommendations, we believe 
policymakers should support the Consumer Financial Protection 
Bureau, as it is the appropriate Federal regulator to create 
and ensure consistent rules and balanced rules that take into 
consideration both the consumers using the products and the 
providers offering them, and that would be regardless of the 
type of provider that is offering the credit, looking at both 
the banks and the nonbanks across-the-board. As the Federal 
consumer protection regulator that will have rule-writing 
authority over consumer protection rules, and for many 
providers, supervision and enforcement authority over those 
providers, the CFPB will develop a deep knowledge about the 
range of small-dollar credit lenders and the products as well 
as a rich understanding about the consumers who are using these 
products.
    This, I believe, will lead to more informed roles that are 
coordinated across the Federal regulators as well as the State 
regulators that are responsive to the different business models 
and that are deeply attuned to the consumers using the 
products.
    It is also worth noting the CFPB's mission, which I think 
we tend to sometimes forget or not necessarily focus on. As 
defined in the Act, the CFPB is explicitly required to 
recognize its duty to ensure consumers have access to financial 
products and services. It also, of course, has the duty to 
ensure that those products are fair, transparent, and 
competitive.
    Before I conclude, I would like to also point out that we 
offer a set of consumer protection recommendations detailed in 
our written testimony that we think will help to ensure that 
these products, regardless of the type of provider, are 
prudently provided, that they are manageable for the consumer, 
and that they are helping consumers meet their short-term 
needs.
    Thank you, Chairwoman Capito, Vice Chair Renacci, Ranking 
Member Maloney, and the other subcommittee members. I look 
forward to your questions.
    [The prepared statement of Ms. Koide can be found on page 
74 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Ryan Gilbert, chief executive 
officer, BillFloat, Inc..
    Welcome.

STATEMENT OF RYAN GILBERT, CHIEF EXECUTIVE OFFICER, BILLFLOAT, 
                              INC.

    Mr. Gilbert. Chairwoman Capito, Ranking Member Maloney, and 
members of the subcommittee, good morning. My name is Ryan 
Gilbert and I am the CEO of BillFloat, based in San Francisco, 
California. It is a distinct honor to be here today speaking 
before you as an immigrant who has been in America for 13 
years, discussing the issue of consumer credit.
    Our company was founded in 2009 with the backing of PayPal, 
Silicon Valley venture capital firms, and angel investors. We 
represent a new generation of financial services providers that 
embrace technology and innovation to offer consumers hope.
    Customers come to BillFloat when they need more time to pay 
recurring monthly bills. The majority are mothers balancing a 
tight family budget.
    Our short-term credit products can only be used to pay 
bills. This includes cable bills, utility bills, phone, or 
insurance bills, the exact kind of sorely needed short-term 
credit options that have been abandoned by many banks.
    We offer our services in partnership with some of the 
largest billers in the country. These companies offer BillFloat 
to their customers as an alternative to late fees and service 
interruption.
    Central to our product model is our belief in alternative 
data, including customers' bill payment experience, cash flow, 
borrowing habits, and household expenditures. We are raising 
the technology bar with new algorithms that evaluate the 
consumers' ability to afford these products and to offer safe, 
feasible credit alternatives to consumers whose best option 
often is high-interest, short-term loans or simply not paying 
their bills.
    Meanwhile, the too-big-to-fail banks are, simply put, too 
scared to lend.
    A recent Federal Reserve Bank of New York report cited that 
$1.1 trillion of consumer credit has been removed from the 
market since Q3 of 2008 to Q2 of 2011. This retraction of 
credit flies in the face of initiatives from many Federal 
agencies, including the FDIC, to maintain access to loans and 
other viable financial products for underserved consumers.
    At the same time, demand for consumer credit has grown 
significantly, influenced by several trends, including a 
population increase and declining household income. We have 
heard often today of the recent paper from the National Bureau 
of Economic Research that found that almost half of the 
Americans surveyed considered themselves to be financially 
fragile. These consumers responded that they could not access 
$2,000 to cover a financial emergency, even if given a month to 
do so.
    The simple truth is that underserved consumers face a bleak 
landscape when a sudden expense derails even a responsible 
family budget. We do feel that there is hope.
    BillFloat represents a new breed of financial services 
provider that includes either start-up companies, like Kabbage, 
and On Deck Capital, which make loans to small businesses also 
suffering from a lack of credit; Square, out of San Francisco, 
that enables the long tail of merchants to be able to access 
merchant processing infrastructure, previously the domain of 
large, established corporations. And we share technology and 
market-driven approaches that are highly consumer-centric.
    None of us are asking for Federal funding, loan guarantees, 
or any other handouts. There is, however, one thing this 
subcommittee could do, and that would be to consider H.R. 1909, 
introduced by your colleague, Representative Joe Baca. This 
bill, the FFSCC Charter Act of 2011, would establish a much-
needed platform for financial services innovators to flourish 
and serve the underserved, and I believe this will have an 
immediate and hugely positive impact for many Americans and the 
economy as a whole.
    Today, one of the most difficult challenges facing any 
financial services innovator is accessing the critical banking 
infrastructure needed to deliver our service. We are frequently 
beholden to banks to market our products, from credit offerings 
to prepaid cards. It has been our collective experience, 
however, that the same banks that are not serving underserved 
consumers are not supporting technology and financial services 
innovators.
    With the charter, there will be a platform for nonbank 
providers to operate nationally. The pro-consumer requirements 
of the bill are very, very clear, including clear standards for 
credit disclosure, account access, financial literacy, and the 
breadth of product offerings.
    There is also a mission that each charter-holder will have 
to observe, which is to provide an array of financial services 
to the underbanked, and unbanked, and consumers with low credit 
scores. And most important, non-delivery of these services will 
mean noncompliance. I haven't seen too many terms like that in 
many bills.
    I think consumers have spoken clearly. They want access to 
convenient service from trustworthy sources, and by removing 
reliance on third-party banks and enabling national business 
and operating plans, many of these service providers can thrive 
and offer safe, affordable, and more convenient alternatives as 
opposed to overdraft protection, high interest loans, and 
credit card late fees.
    Once again, I appreciate the opportunity to speak with you 
today, and I would be very happy to answer your questions. 
Thank you.
    [The prepared statement of Mr. Gilbert can be found on page 
66 of the appendix.]
    Chairwoman Capito. Thank you very much.
    Our next witness is Mr. Michael Grant, president, National 
Bankers Association.
    Welcome, Mr. Grant.

  STATEMENT OF MICHAEL A. GRANT, PRESIDENT, NATIONAL BANKERS 
                          ASSOCIATION

    Mr. Grant. Thank you very much, Chairwoman Capito, Ranking 
Member Maloney, and members of the subcommittee. First, Madam 
Chairwoman, I owe you an apology. At the end of my statement, 
you have been downgraded from ``Madam Chair'' to ``Mr. 
Chairman,'' so I want to apologize for that.
    And second, I have to leave after this statement because I 
have another prior engagement I have to make. Thank you very 
much to the whole committee.
    I represent the National Bankers Association. It is a 
consortium of minority banks in the country, and those who have 
studied our organization and the banks that we represent know 
that we are representing the heart of this problem that we are 
having in our country. The urban areas of our country were 
hardest hit by this ongoing financial crisis, so we are super 
sensitive to the issue that we are discussing today.
    Specifically, I would like to address the subcommittee's 
desire to better understand credit products that are available 
for consumers who cannot always access more traditional 
financial institutions' products and services.
    In a nutshell, the underbanked and the unbanked, usually 
with low to moderate incomes, continue their historical 
struggle to access credit for a number of reasons. The number 
one reason is that many of these individuals create such high 
risk for lending institutions that they do not meet the minimum 
underwriting requirements imposed by the regulators of 
traditional financial institutions.
    Madam Chairwoman, I picked one of our banks as an example 
of how these banks are trying to address this problem of 
providing credit for folks in the low- to moderate-income 
range, and actually, we chose Citizens Trust Bank of Atlanta, 
Georgia. It is kind of a microcosm. It is an urban area, and 
the unemployment rate is high, and so forth and so on.
    And basically, in 2008 the bank tried to implement this 
small-dollar loan program to see how it would work in 11 
branches and three different markets: in Atlanta; Columbus; and 
in Birmingham. Although the bank's intention was to meet the 
pressing economic needs of the consumers in this market, a 13 
percent default rate rendered the program a costly failure.
    With comparative lenient underwriting criteria, the bank 
sought to help consumers with housing payments or car payments 
or other financial needs with small loans that ranged from $500 
to $1,500. At the beginning of the program, the following 
underwriting criteria were established: a score--a FICO score 
of only 500; allowed a higher debt-to-income ratio, along with 
a $48 document preparation fee, which was financed into the 
loan document; 12-month same residence; credit report could not 
have outstanding liens or judgments; allowed for collection 
items on the report; must provide 6 months' income from the 
same employer; 2 years discharged from bankruptcy that is 
Chapter 13; no Chapter 7 bankruptcy was allowed.
    The result was still a 13 percent default rate, which was 
subtracted from the bank's loan loss reserves. Today, the bank 
provides this small-dollar program in only one of its branches, 
and the requirements are now more rigid. Interestingly enough, 
that branch is in Green County, Alabama, one of the poorest 
counties in America. The default rate is near zero.
    The only recommendation I would like to make today, Madam 
Chairwoman, is that if Regulation E were modified to allow 
banks to debit borrowers' bank accounts, the bank's risk would 
be mitigated and borrowers would probably act more responsibly. 
Having direct deposit accounts would also help to ensure that 
lenders could make timely payments.
    But the largest issue, Madam Chairwoman, and subcommittee 
members, is the issue of the cost of risk, and I haven't heard 
that kind of analysis today. How can we decide whether it is 
predatory lending or banks--how can we decide whether a loan--
the cost of that loan--is excessive if someone hasn't done the 
calculus to decide, how do you cover high risk, you know? If 
you want to make a loan to someone who has very poor credit and 
maybe has not had a history of being consistently employed for 
more than a year at a time, we need to find out--we know the 
need is great. The credit needs of the poor are great.
    But we have to be fair and say, listen, what constitutes 
excessive? The cost of these loans can be very high. So the 
committee could wrestle with the issue of what constitutes 
excessive payment for these loans, and I think we could get to 
the heart of the issue.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Grant can be found on page 
70 of the appendix.]
    Chairwoman Capito. Thank you very much.
    Our next witness is Dr. Kimberly Manturuk--did I say that 
correctly?
    Ms. Manturuk. It is ``Manturuk.''
    Chairwoman Capito. ``Manturuk''--with a name like 
``Capito,'' you would think I would get that right--research 
associate, University of North Carolina Center for Community 
Capital.
    Welcome, Doctor.

    STATEMENT OF KIMBERLY R. MANTURUK, RESEARCH ASSOCIATE, 
   UNIVERSITY OF NORTH CAROLINA CENTER FOR COMMUNITY CAPITAL

    Ms. Manturuk. Thank you.
    Good afternoon, Chairwoman Capito, Ranking Member Maloney, 
and distinguished members of the subcommittee. I am Kimberly 
Manturuk, from the Center for Community Capital at the 
University of North Carolina in Chapel Hill, and I am honored 
to have the opportunity to share some thoughts and research on 
credit options available to underbanked and unbanked American 
households.
    This hearing comes at a time when families of all income 
levels are struggling with financial insecurity and need all 
the help they can get rebuilding their financial lives. North 
Carolina has long been at the forefront of promoting a 
financial services environment in which both consumers and 
lenders prosper, and our center has developed a body of 
research on credit options available. In addition to 
summarizing this research, I will also discuss several emerging 
and innovative products that meet consumer demand for credit in 
ways that are both affordable and sustainable.
    First, our research indicates that most lower-income 
families have multiple options available when facing an 
immediate financial shortfall. Very few families rely on a 
single coping strategy alone.
    Among people who use credit to handle their emergencies, 
mainstream products such as credit cards and bank loans were 
used more commonly than alternative products, such as pawn shop 
loans or auto title loans. The use of multiple options suggests 
an elaborate level of management where consumers are layering 
in resources in some order of preference. However, it also 
suggests that none of these products are currently fully 
meeting consumer needs.
    Second, we have found that consumers who do use alternative 
credit products were attracted to them because the loans were 
private, fast, and above all, easy to obtain. People cited the 
short application process, lack of a credit check, and 
guaranteed acceptance of such loans.
    When we asked former payday loan borrowers whether they 
thought they would have been able to get a loan if there had 
been a credit check, they generally thought not. However, there 
was also overwhelming agreement that these products did not 
sufficiently meet their needs.
    In our research with payday loan borrowers, we found strong 
support for small-dollar credit with a lower interest rate. The 
former payday loan customers we spoke to, including those who 
wanted to retain the option to take such loans, wanted a lower 
APR, a longer amortizing repayment term, as well as limits on 
renewals and the amounts borrowed.
    Current industry best practices do not begin to approach 
the requirements that our focus group's participants wanted. 
There are, however, some emerging products in the small-dollar 
consumer credit space which offer reasonable terms and 
conditions while retaining profitability for lenders. I would 
like to conclude today by highlighting a few of these products.
    First, a product called FlexWage works with employers to 
give workers access to a payroll card with a linked salary 
advance feature, an alternative to the traditional payday loan. 
Through the WageBank product, the company makes available wages 
that have been earned but not yet paid.
    Customers are charged a flat convenience fee for the pre-
disbursement of earned wages. There is no loan, and therefore, 
nothing to repay.
    For consumers who need to borrow more than their already 
earned wages, Workers Choice USA allow employees to borrow up 
to 50 percent of their monthly salary at a competitive interest 
rate. The lender remains profitable because there are low 
underwriting costs associated with this loan since most of the 
borrower's information has already been verified by the 
employer. Repayment is done via payroll deduction over time and 
there is no cost to the employer to offer these loans.
    Finally, in 2001 the North Carolina State Employee's Credit 
Union introduced a 12 percent APR product called the salary 
advance loan. Over the past 10 years, the credit union has made 
over 5 million loans and lent a total of over $2 billion. They 
have had an average annual charge-off or bad debt expense of 
less than 1 percent. The credit union calculates that it is 
saving members an average of $33.6 million per year in payday 
loan fees.
    In conclusion, our research indicates that there is strong 
demand for small-dollar consumer credit that is ill-served by 
existing products, such as payday loans, credit cards, or bank 
loans. Consumers want credit that is affordable, repayable, and 
closed-ended.
    This promise is found in the FDIC's affordable small-dollar 
loan product guidelines, issued in June 2007, which calls for 
FDIC-supervised financial institutions to promote consumer 
credit products with an APR not to exceed 36 percent and 
amortizing repayments. The guideline also recommends 
underwriting for ability to repay, incorporating a savings 
component in the product, working with other organizations, and 
providing an avenue for financial education.
    We encourage lawmakers to promote policies which encourage 
these types of loans as well as to continue to encourage 
lenders, particularly non-depository institutions, to better 
leverage emerging technologies to increase consumer access to 
low-cost credit options.
    Thank you for your time.
    [The prepared statement of Dr. Manturuk can be found on 
page 82 of the appendix.]
    Chairwoman Capito. Thank you.
    And our final witness is Ms. Ida Rademacher, vice 
president, policy and research at CFED, which stands for 
Corporation for Enterprise Development.
    Welcome.

    STATEMENT OF IDA RADEMACHER, VICE PRESIDENT, POLICY AND 
  RESEARCH, THE CORPORATION FOR ENTERPRISE DEVELOPMENT (CFED)

    Ms. Rademacher. Thank you.
    Thank you, Chairwoman Capito, and thank you, Ranking Member 
Maloney, and members of the subcommittee. On behalf of the 
Corporation for Enterprise Development, I appreciate, as well 
as the others here, the opportunity to present testimony today 
on this important subject.
    The Corporation for Enterprise Development, or CFED, is a 
32-year-old economic nonprofit that fosters social innovations 
to build wealth in low-income communities and for low-income 
families. We see access to high-quality credit as a fundamental 
tool in the effort to help households build wealth, but it is a 
tool that must be used with great care and with great 
intention, and the overwhelming majority of evidence in recent 
years shows that while there are many, many fundamental 
barriers to financial wellbeing that American families are 
struggling with today, some of the research on debt-to-income 
ratios shows that access to credit is actually not probably the 
top priority barrier that families are struggling with in this 
case. In fact, the proliferation of alternative credit products 
and accumulated debt is actually a large part of the problem.
    Even a cursory review of recent data on the status of the 
American household balance sheet puts us--there is 
perspective--puts some perspective on this issue. Simply put, 
Americans are unemployed, underemployed, and overleveraged. We 
have a consumer credit problem in this country for sure, but a 
lot of the problem is inadequate access to high-quality and 
affordable credit, not credit in general.
    We are literally drowning in debt. Just last week, the 
company CardHub.com published its Q2 2011 Credit Card Debt 
Study, showing that consumers accumulated $18.4 billion in new 
debt in the second quarter of 2011. That was a 66 percent 
increase over the same quarter in 2010, and a 368 percent 
increase over the same period in 2009.
    Couple this information with what we know about the 
increasing ratio between household debt and income. Economist 
Edward Wolff discussed the explosion of debt-to-income ratios 
in his most recent analysis of household economics. Middle-
income households' debt-to-income ratios were about 67 percent 
back in the mid-1980s; they rose to 100 percent debt-to-income 
ratios in 2001; and in 2007, they were at 157 percent.
    He further concluded that the debt buildup, to Ms. Koide's 
point, was for normal consumption, not enhanced consumption. 
And findings from the 2009 FINRA Financial Capabilities Study, 
administered by the Financial Industry Regulatory Authority 
Investor Education Foundation substantiates the finding, with 
nearly half of survey respondents reporting facing difficulties 
covering monthly expenses and paying bills. And the majority of 
respondents didn't have any type of rainy day funds set aside 
for financial emergencies.
    With inadequate incomes and inadequate savings, the only 
option for millions of Americans is to turn to credit 
alternatives to finance basic consumption, but our own analysis 
of consumer credit scores suggest that over 60 percent of those 
consumers have subprime credit scores, so the credit product 
options that are available are often sub-optimal, and the most 
vulnerable households who can least afford additional financial 
burden end up paying a premium for access to the credit they 
need simply to make ends meet.
    The ultimate lens through which we think we should be 
looking at any financial product or policy is relatively 
intuitive and straightforward: Does the product help a consumer 
improve their financial situation long-term or does it make 
their financial situation worse? A growing body of evidence 
shows that many of the short-term alternative credit products 
that are available in the market for cash-strapped consumers 
today with either thin credit files or no or low credit scores 
don't pass this fundamental principle of ``do no harm.''
    Less than 2 percent of payday loans--according to recent 
research by the Center for Responsible Lending--went to 
borrowers with the ability to repay in the first cycle of 
getting that loan. And in fact, the executive director of 
TitleMax himself, in testimony, stated that the average 
customer with a car title loan renews that loan 8 times.
    CFED's Assets and Opportunity Initiative provides some in-
depth information at the State and local levels on the kinds of 
policies that can help households increase financial stability 
and build and protect assets. We support the regulation of 
short-term consumer lending products. Small-dollar installment 
loans, when responsibly regulated, can be a very safe product, 
but we recommend capping the interest rate charged on loans, 
such as payday loans, car title lending, and small-dollar 
installment loans.
    To date, 10 States have banned or capped all three types of 
predatory loans I just mentioned. That includes the short-term 
lending and basic consumer protection laws. Fourteen States do 
not effectively regulate any of the three predatory loan 
products. And nine States include short-term lending in their 
basic consumer protection laws. All other States protect 
consumers against some, but not all types of short-term loan 
products.
    So what can and should the Federal Government do? I will 
just leave you with three broad recommendations to consider. 
CFED feels these would go a long way toward helping families 
truly regain their financial footing.
    First, protect consumers from financial products that 
exacerbate financial distress. We absolutely support the 
Consumer Financial Protection Bureau's mandate in that regard.
    Second, help families save. Credit and emergency savings 
are actually substitutes at this level of the household, so 
helping families learn how to save and incentivizing that 
savings gives them another option when emergencies happen.
    Finally, help families build good credit. I will finish 
where I started: The quality of credit available to families is 
all-important. We do believe that with full file reporting, as 
many as 120 million consumers could build and improve their 
credit score, and we should really help to end the regulatory 
uncertainty and provide permission to utility and telecom 
companies to report on-time payment to credit reporting 
agencies, to that end.
    Thank you for your time.
    [The prepared statement of Ms. Rademacher can be found on 
page 151 of the appendix.]
    Chairwoman Capito. Thank you.
    I am going to begin the questioning with Mr. Gilbert. How 
does an individual customer find out about BillFloat? Is it on 
the Internet, or--
    Mr. Gilbert. Thank you for the question. They are able to 
access us through our Web site at BillFloat.com, but our 
strongest point of messaging is through the billers themselves.
    Chairwoman Capito. So that would be the utilities, or the--
    Mr. Gilbert. The phone companies, insurance companies, the 
existing entities that have relationships with these customers 
who get the phone call in the call center to say, ``My bill is 
due today or in a week. I won't be able to pay it on time. Can 
I get more time to pay?''
    And they will often get a response from the call center 
reps that, ``We are not in that business. You have to go and 
find credit from someone else.'' Now, with BillFloat as a 
payment option in those workflows, at least there is a solution 
that the utility companies know comes from a reputable company 
with terms and conditions that are very clear to consumers.
    Chairwoman Capito. Do you have any challenges offering 
services across State lines?
    Mr. Gilbert. Certainly, it is a challenge. We are dependent 
on banks, based on their license and regulations, and also 
State laws for direct lending we are doing ourselves. 
Compliance across State lines means that we have to increase 
our costs of goods for product, which does impact our product 
overall.
    Chairwoman Capito. So if you forward somebody's power ill--
say it is $300--then do they pay you within the 30-day period, 
what interest do you charge, and--
    Mr. Gilbert. Our product is a 30-day product. We charge an 
interest rate of 36 percent APR based on the standards put 
forth from the FDIC small-dollar loan template, which we use as 
a guideline for our business as well.
    Chairwoman Capito. Are there other competitors in this 
space with you? I am sure there are.
    Mr. Gilbert. I believe consumers have a lot of credit 
options that they could access in order to pay bills. No one 
has taken credit options specifically to address this problem 
of bill payment.
    What drove us into this space was the data point in the 
2009 FDIC study which showed that 47 percent of the times 
consumers get high-dollar loans, it is to pay bills. So we took 
the approach, ``Let us build a product to help bill payment.''
    Chairwoman Capito. I am interested in the innovation 
because I think all of you all have remarked that to have a 
competitive marketplace in this arena is extremely important 
for the consumer to make sure that they can--hopefully give 
them some sort of reasonable rates and reasonable parameters 
for them to be able to pay this back.
    I have a question for Ms. Koide. You mentioned the CFPB in 
terms of regulating these products, and how important that you 
feel that is. But, for instance, we just had the FDIC testify 
that they are regulating in some of this space, too. Do you 
think that there is any--not conflict there, so much as a 
potential for, ``They are regulating, so we don't need to 
look?''
    Ms. Koide. Excellent question. I think right now it has 
been interesting to see how the regulators are stepping out and 
focusing on certain products, under the auspices of safety and 
soundness, even if it looks like a consumer protection matter 
or a consumer protection matter under the auspices of safety 
and soundness. I think those things are inextricably linked; it 
is hard to pull them apart.
    I think the fact that we don't have a CFPB that is in full 
standing with a Director in place right now leaves a bit of a 
void, and so I am encouraged to see the regulators focus on 
some of these products and realize that there is more that 
needs to be done to understand what is underneath them and what 
are the products that are coming out.
    I also realize that having this new bureau, once it is 
fully standing, is going to create another regulator that is 
going to take positions. I think it has been very explicit in 
the sort of formation of the CFPB and many of the discussions 
that have happened around it how critical it is going to be 
that the entity is conferring, developing rules, guidance, best 
practices in coordination with the other regulators, because I 
think you are hearing innovation talked about a lot here. What 
is underneath a lot of that is that it is not just one entity 
that is a part of the provision of the services; it is, 
perhaps, a depository who sits in the back and does the 
processing or provides the capital, that there are other 
players in that product offering, and we have to have a 
regulatory system that recognizes that complexity and 
coordinates around it.
    Chairwoman Capito. But at the same time, I think some of 
the barriers that were talked about by one of the witnesses is 
capital--the regulatory inconsistency. I am not sure we are 
solving this problem, but I will move on.
    I am really curious to know, and I wanted to ask the other 
panel this--this will be my final question; I am back to the 
Internet again--we know that financial literacy is extremely 
important, but we know that Internet access and capabilities 
has really grown exponentially, and certainly with the 
generation behind me, it will be a way of life for all. How do 
you see that as--do you see that as a plus or a minus for the 
underbanked and unbanked population, in terms of trying to 
reach capital? And I will ask the three of you all over there.
    Ms. Guzman. I think consumers are demanding more options 
based on convenience and accessibility. We find that, of 
course, like you, Madam Chairwoman, the younger generation is 
using strictly technology. They are using their phones as their 
checking account; they are wiring money via an iPhone.
    However, other options need to be available because there 
are different markets, nonbank as well as traditional banking. 
And then, of course, we need to look at the variety of products 
and ensure that at all times, our consumers are protected. I 
think all these will make the availability of access to cash 
when we need it just more convenient and available so that 
people don't find themselves spiraling out of control when it 
comes to their finances and maintaining their obligations.
    Chairwoman Capito. I am going to move on, because I am kind 
of violating my own rule here.
    So, Mrs. Maloney?
    Mrs. Maloney. Thank you. This hearing certainly points out 
that the unbanked population is growing, the need is growing, 
and the challenge is there. Quite frankly, I was not aware of 
the FDIC's model program or the OCC's efforts in this area, and 
the programs that came forward today, such as BillFloat, 
FlexWage, salary advance on credit cards, and other things that 
you talked about.
    I think at the very least, this committee or some regulator 
should get out where all these programs are so consumers can 
know where they are to go for these services. I think that 
there is a growing need; there is no question about it.
    And there have been several legislative proposals that have 
been put forward, one, actually, by my colleague, Mr. Baca, 
today--I was not aware of it until he told me about it today--
which would create optional Federal charters for nonbank 
financial institutions. And under this proposal, the OCC would 
be the principal regulator and State laws in the area would be 
preempted.
    Can the members of the panel comment on the merit of this 
proposal? Anyone? All of you? We will start at this end and go 
down the line.
    Ms. Rademacher?
    Ms. Rademacher. Yes, thanks. So, I think, as I mentioned, 
States are--
    Mrs. Maloney. I can't hear you.
    Ms. Rademacher. Thank you. States are, in terms of this 
policy space, out in front addressing these issues. A lot of 
them are on the ground seeing what is happening with consumers 
in the short-term lending space.
    I think it would be a real shame for a Federal charter 
process to create a way around some of--create a new type of 
ceiling that is actually, perhaps--and I don't know the details 
of it--if it is lower than where the States have already gone 
to protect their citizens, I think that would be 
something that we would want to look at very closely before we 
said much. I do think that to the point of coordinating 
efforts, understanding that this is a very complex marketplace 
and growing more complex every day, being able to coordinate 
and regulate with some consistency and open communication is 
imperative, so a sense of some piece of this moving back to the 
OCC but actually serving in a space where there are multiple 
types of financial institutions, it raises some questions for 
me, and I would want to look at that more closely.
    I certainly think that, at the very least, nothing that 
happens should preempt the places where States have gone with 
some of the ways they are trying to protect their consumers at 
the State level.
    Mrs. Maloney. Ms. Manturuk?
    Ms. Manturuk. Thank you.
    We haven't done any research specifically looking at 
preemption effects or what they would be in the consumer credit 
space. I can say, within North Carolina we have a long 
tradition of pretty rigorous regulation of consumer credit, and 
there is pretty strong research evidence that the regulations 
that we have in place right now are meeting consumers' demands.
    We just finished doing some research looking at finance 
company lending, which is subject to an 18 percent cap above a 
certain level and a 36 percent cap at $3,000 and below. And our 
research found that industry in North Carolina, with the 
current regulations, is profitable for lenders and is also 
meeting consumer demand. So I would have to agree that any 
regulation which would preempt what we already have that is 
working for us would be something to think very carefully 
about.
    Mrs. Maloney. Ms. Guzman?
    Ms. Guzman. I like the idea of having a balance for 
consumers of a regulated option that protects consumers, 
offering more expanding access to options that work for them 
and allowing them to make choices for their own household. 
Unfortunately, well-intended legislation in States has had very 
adverse outcomes for my consumers. I constantly hear, 
especially in the States where they have regulated--put a ban 
or a cap on the amount of times, etc.--that they have been 
forced to use the more expensive bank option that has 
negatively impacted their credit, which is what they are trying 
to avoid to begin with. They are trying to get back on their 
feet.
    And so, I have to really question some of the regulations 
in some States, and certainly at this time we are looking at 
the Federal Government to help us protect our consumers, yet 
expand options. Thank you.
    Mrs. Maloney. Mr. Gilbert?
    Mr. Gilbert. Thank you, Congresswoman.
    One of the biggest challenges that I have in running my 
business is getting banks to work with me in order to offer my 
products. When colleagues back in the startup world heard that 
I was going to be testifying this morning, they started 
inundating me with e-mails about my bill. I responded to them, 
``It is not my bill.'' I heard about this bill for the first 
time back in May, and I think it is a great bill because it can 
allow entrepreneurs to get on with their business.
    I also believe that uniformity will be very much helpful to 
consumers, and that uniformity can be achieved in a way that is 
also very respectful of the rights of States and State caps.
    Mrs. Maloney. My time has expired, but if you would like to 
give your point of view, Ms. Koide?
    Ms. Koide. Thank you. I would.
    I absolutely recognize the need to get banks to play more 
with the nonbanks. It has to happen, because these are volume 
businesses and they need volume to be able to affect the price.
    I completely recognize the need for coordination among the 
regulators. I need to read the bill again; it has been about a 
year- and-a-half since I looked at it. But I don't know that 
adding another regulator in the mix of regulators is ultimately 
going to get us what we need.
    Mrs. Maloney. Then, how do you force some institutions to 
work with these independents to provide this?
    Ms. Koide. I also wanted to say that I think we absolutely 
need uniformity and clarity of the rules across the different 
types of products. I think that emphasis from Congress on the 
regulators--this new bureau, once it does get up and running, 
is going to be working with the other regulators to create 
joint guidances, for instance, on what good consumer 
protections look like.
    I need to look further at the bill, but I would pause on 
that.
    Chairwoman Capito. Thank you.
    Mr. Renacci, for 5 minutes?
    Mr. Renacci. Thank you, Madam Chairwoman.
    And thank you to all of the individuals participating 
today.
    There is a little bit of confusion for me because we do 
have a problem. We are hearing that there are a number of 
underbanked individuals who need these type of loans.
    And then we had the regulators in earlier who were saying 
we had pilot programs, but when I questioned whether they were 
working, they said they don't have a conclusion as to whether 
they are working because we don't have the numbers. So 
hopefully, I will get some numbers that will show whether they 
are working.
    Mr. Grant testified that banks are having issues with the 
profitability of these loans, so it tells me that--and then, of 
course, I have had discussions with many banks who have said 
that it is very difficult to manage these loans and make a 
profit on these loans. So we have a need and we have to be able 
to provide for that need.
    So I would question, first, Ms. Guzman. With the States 
getting away from some of these types of short-term lenders and 
short-term loans, and not wanting them, do you have any 
research as to where these individuals are going when there is 
an emergency and they need the cash?
    Ms. Guzman. The only research I have is, being that our 
mission and our actions are driven through our consumer 
feedback, is the feedback from our consumers. And they tell us 
they are forced either to more expensive options, such as 
bouncing a check. In almost all cases, their credit was 
negatively impacted.
    And basically, ultimately they have lost their housing, 
they have had their utilities turned off, they have lost child 
care, which is critical for some of our single heads of 
households. It has just become basically a nightmare. It 
restricts options.
    And, they somehow feel very slighted, considering they are 
hardworking Americans who pay their taxes, and yet they don't 
have the choices that they need because government has 
restricted them.
    Mr. Renacci. I have seen somewhere--I can't find it here--
but I even saw that some were going offshore, doing whatever is 
necessary to get the dollars.
    Ms. Guzman. Absolutely. Unregulated offshore lenders always 
find their way to our consumers, unfortunately.
    I would just hate to see something that is not regulated on 
any level make its way to our consumers. We certainly want the 
options to be expanded and the access to be there, but we want 
to make sure our consumers are protected, also.
    And choice seems to be the number one thing that is 
mentioned. They feel a sense of pride in being able to weigh 
out choices and choose the option that works best for their 
homes and their families.
    Mr. Renacci. Mr. Gilbert, are these some of the individuals 
who would be the profile of your typical customer?
    Mr. Gilbert. Yes. Our typical customer is a female head of 
household, probably age 35, with children, one person in the 
household working, and an income in the $45,000 to $65,000 
range. In our consumer studies, choice is the number one 
objective or the number one goal for these consumers.
    But trust comes in right there. These organizations need to 
be very, very clear about who they are to their customers so 
trust can be earned and maintained.
    Mr. Renacci. Do you have any competition from small banks 
or community banks?
    Mr. Gilbert. I wish we did have a lot more. We have been 
working very, very hard with a number of community banks, 
particularly in the State of California.
    The challenge that they are finding, because they are 
insured by the FDIC, is I often receive a message that there is 
no space for small-dollar lending, really, in an insured 
deposit system. Safety and soundness of the banks is really the 
overarching concern when looking at these types of programs.
    But we continue to push on, because I am quite sure that 
soon enough, we will find the right bank. I also believe that 
some federally chartered credit unions could be the right 
partners for us over time.
    Mr. Renacci. Can you give me an idea of what your default 
ratio is?
    Mr. Gilbert. We are seeing a default ratio of approximately 
10 to 12 percent for first-time consumers and 5 to 8 percent 
for returning customers.
    Mr. Renacci. Okay.
    Ms. Rademacher, you made the comment--you had some good 
conclusions. The problem I had with your conclusions was they 
would be for somebody who was not in trouble, who was not in an 
emergency situation, does not have the need today for those 
dollars.
    What would you say for those people? Where should they go? 
Because your conclusions are, we need to teach people that they 
need less debt; we need to find financial institutions with 
better interest rates.
    All of those things are great when you don't have an 
emergency. But these people are coming up with emergency 
situations, which we all could have in life. What are your 
thoughts on that and where should they go?
    Ms. Rademacher. Sure. No, it is a great point, and I 
actually knew that there would be a number of people talking 
about some of the alternatives that I might have cited myself. 
So I didn't spend as much time talking about where they can go 
today.
    In addition to the innovation in the marketplace, as with 
some of the folks who are here on the panel, there are a lot of 
cities and States trying to innovate, as well. They recognize 
that you cannot just create parameters around the conditions of 
emergency loan products without making sure that there are 
alternatives available in this space. That is where the 
Virginia small-dollar loan pilots are coming from.
    There is certainly a lot of evidence, I think, from the 
work that has been done in North Carolina as well, with the 
profitability for a credit union, on the large scale, with the 
kinds of emergency loans that can be offered safely and 
relatively affordably to people in crisis already in existence, 
but do need to be promoted there.
    I think that the--
    Mr. Renacci. I am running out of time, but just one really 
quick question: So you believe that as long as they were 
regulated properly, some of these nonfinancial institution 
providers of short-term loans would be a working solution?
    Ms. Rademacher. Yes. I think to the points made here, 
capping the interest rate, capping the amount of churn that can 
happen, or the amount of rollover that needs to happen, 
understanding the needs of both the consumer and the 
marketplace for a sustainable product is paramount.
    Mr. Renacci. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Baca?
    Mr. Baca. Thank you, Madam Chairwoman.
    Ms. Guzman, there has been limited effort by the Federal 
Government to tap into the market and allow federally regulated 
institutions to offer products to underbanked and unbanked 
populations, and we are still seeing a large number of 
consumers still limited to this option, and I appreciate your 
personal story that you told earlier.
    In your opinion, what has held back the Federal programs 
from reaching out to these people who clearly still need access 
to credit? And then, I want to follow up with another question, 
if I can, and what are the obstacles in place that have limited 
the private nonbank lenders from reaching all of the people who 
need credit?
    Ms. Guzman. First, it is a simple answer. Banks are the 
only answer. That is what we are literally being told. My 
consumers are being told, if you don't deal with a main banking 
institution, you have no options. So, they go to alternative 
financial services that are working very well for them.
    I understand from my colleagues in the banking industry, 
they don't really care about my consumers that use 
alternative--that is not their job. That is not the business 
they are in. They are in the business of--
    Mr. Baca. Why don't they care? Why do they say that they 
don't care?
    Ms. Guzman. Because they are held accountable to a board of 
directors for whom the bottom line demands a profitability, and 
these are high-risk people who, for any reason--
    Mr. Baca. But these are people in need of an emergency 
loan. Is that correct?
    Ms. Guzman. Yes. Or sometimes it is not just an emergency. 
Someone loses a job or has a cut in hours or a cut in pay for a 
period of time, maybe 5, 6 months--it is not something anyone 
intends to do or I think does out of lack of responsibility. 
Everybody enters into their commitments well-intended.
    The problem with regulations, while they are well-intended, 
is no one is asking consumers what they need. The intentions 
are done.
    I am a local school board member, so I do this also. I make 
decisions for my constituency based on what I feel is in their 
best interest. However, often State laws and other laws are 
made that are actually hindering consumers from being able to 
manage their finances in their household because their options 
are limited and they are forced to do something that creates a 
larger problem.
    I think sometimes--
    Mr. Baca. That is because, also, the credit card--there is 
a credit card option, but the credit card option then means 
that it is a higher interest rate, as well. Isn't that correct?
    Ms. Guzman. Absolutely. And I have a video of my consumer 
testimony I would be willing to share with all the committee 
and send to your offices that shows that the Credit Card Act 
negatively impacted many consumers by dropping consumers who 
had good-standing credit down to a $1,000 minimum. That didn't 
give them very many options to keep cash flowing in an 
emergency or during a period of time when they have a tough 
time making ends meet.
    They certainly want, again, more access to choices so they 
can identify their problem and choose the option that works for 
them and their household. That is pretty much what we want them 
to do so that at some point, they can work their way up to 
traditional banking, and own a home, and acquire the American 
dream.
    Mr. Baca. My next question is for Mr. Gilbert.
    Everyone is saying that competition and innovation is the 
key to coming up with answers to the problems. What are the 
biggest problems for these nonbank lenders to expand and fill 
these needs that 50 percent of the Americans need--and I will 
say 50 percent of the Americans needs--and can the current 
patchwork of the State regulations allow for this?
    Mr. Gilbert. I think the biggest challenge, Congressman--
and thanks for the question--is finding the right platform to 
conduct business. For innovators, before one rolls out a full, 
complete program across millions of consumers and potentially 
multi-States, we always try to consider pilot programs, much 
like the FDIC spoke about, and I think it could be very 
enabling if there were pilot initiatives under any of the 
agencies, or perhaps the purview of the Bureau, to enable true 
pilots.
    We can learn a lot from the pilots if they are run on 
reasonable terms and over a reasonable period of time. And for 
me, I describe reasonable as at least 2 years--the first year 
to get it up and running, and the second year to get the data 
and continue reporting.
    I think, also, the patchwork of State laws is something 
that we have to appreciate and live with in the United States, 
but also respect the need for uniformity. The cost of 
compliance can bring down even the most successful business.
    As an entrepreneur, many will ask me, ``Why are you in 
financial services?'' I could be in social networking, or sell 
widgets online. This is a challenge, and that is why we are 
standing up to the challenge.
    Thank you.
    Mr. Baca. Thank you very much.
    I know that my time is going to expire, so I will yield 
back the balance of my time.
    Chairwoman Capito. Thank you.
    Mr. Westmoreland for 5 minutes?
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    Ms. Koide--I am not really good with names--where does your 
company get its operating funds from?
    Ms. Koide. We get our funding from a variety of sources. We 
are an organization that began with funding from the Ford 
Foundation. Our president, 10 years ago, when there was so much 
focus on access to credit and realization that there are these 
consumers who are out there who we don't really understand what 
drives their choices and the products that they use, she sought 
out funding from the Ford Foundation in order to do a pretty 
comprehensive study to understand those consumers with the 
objective and appreciation that ultimately scale solutions 
reside in the market.
    So we began with funding from the Ford Foundation, and we 
have significant funding from other national philanthropic 
funders. We also have resources that are generated through 
roundtables that we hold. We also hold an annual conference 
each year for underbanked innovators. So it is a range of 
sources.
    Mr. Westmoreland. No Federal, though? No grants?
    Ms. Koide. No Federal money, no.
    Mr. Westmoreland. And, Ida--I am going to call you that, 
rather than destroy your name, but--I am assuming that you get 
your funding from private sources, also?
    Ms. Rademacher. We do. Primarily, the model is we have 
about 80 percent of our funding from philanthropic sources.
    We do have some new Federal contracts. We are partnering 
right now with the Department of the Treasury to build out some 
of the basic tools and data for the financial access types of 
initiatives that are happening in communities around the 
country--somebody mentioned Bank On initiatives. So we are 
doing a number of things with that at the moment.
    We are creating estimates at the local level for unbanked 
and underbanked based on the FDIC's data. We are looking across 
the financial institutions to look at what it means to be 
sustainably engaged in this work--what is the kind of--
    Mr. Westmoreland. Okay. That is fine. I just wanted to know 
about the--
    Ms. Rademacher. That is where I am from, yes.
    Mr. Westmoreland. I found your testimony pretty 
interesting. I come from a construction background, and I 
actually have seen people in dire need of $200, $300, $400, 
$500. You can see it in their eyes; I have seen it.
    And you said that one of the things that you think the 
ultimate test was, is does this product help consumers improve 
their financial situation or does it make the situation worse? 
Then, you go on to talk about the no credit, low credit, 
whatever. And then you talk about the amount of interest that 
somebody should be capped, as far as charging.
    Would staying out of jail be something that would help the 
financial situation or hurt the financial situation?
    Ms. Rademacher. That would obviously help. I am not saying 
that we should--I think the whole point of what I was trying to 
say and what I--we have continued to say is that it is an 
unfortunate situation we find ourselves in in America right 
now, that people have to choose between immediate urgency and--
    Mr. Westmoreland. No, ma'am. I couldn't agree with you 
more. But if you were counseling somebody, would you tell them 
that it is going to be better to go to jail than to borrow $300 
from somebody? Would you tell them it is going to be better to 
pay $30 in an insufficient check fund to cover a $5 check?
    Are those some of the things that you would weigh when you 
are looking at financial responsibility?
    Ms. Rademacher. Yes. I had this conversation, preparing 
this testimony, with my sister, about her experiences with 
short-term lending and where she has been for very similar 
reasons, the choices she has made. Nobody can knock the choices 
somebody makes in an urgent place. They--
    Mr. Westmoreland. --to make choices in life, but you have 
to do it, so--
    Ms. Rademacher. Yes. She wishes she didn't have to make 
them, and she hopes in the long run she has opportunities so 
she can get out of that trap.
    Mr. Westmoreland. I understand. But a lot of people find 
themselves in the situation where they can't, and what I have 
found is that somebody who really needs $400, they are going to 
either borrow it from somebody who is licensed, they are going 
to borrow it from somebody who may do physical harm to them if 
they don't pay it back at a very large interest rate, or they 
are going to break into somebody's house or car or steal 
something to go pawn to get the money.
    So I think there is a place for some of these financial or 
nonfinancial institutions, whatever you want to call them, that 
really go into some of these areas to locate, to service the 
needs where a lot of people don't. And so when I read your 
testimony, I just felt that it was very, very interesting that 
you are weighing what it is in the financial balance, but in 
real life, a lot of those people weigh that every day between 
going to jail, not going to jail, being able to go to work, or 
not being able to go to work.
    Thank you very much.
    Chairwoman Capito. Thank you.
    Mr. Meeks, for 5 minutes?
    Mr. Meeks. Thank you, Madam Chairwoman.
    And let me just say, Mr. Westmoreland, I actually concur. 
My own life experiences tell me that you are absolutely 
correct.
    There are a number of individuals out there who are not 
just considering their financial situation or their financial 
health, they are thinking about survival. They are thinking 
about, ``How do I make it to the next day? How do I keep my 
family intact?''
    They are not thinking about, ``Oh, I have to have a FICO 
score of 700, and I have to make sure that my financial 
situation is in order.'' They are not there.
    They are saying, ``How can I live to make it another day, 
keeping my family together?'' And they have these options that 
they have to choose from.
    Now, personally, my point of view is if they had more 
options on a legal way, then they will be able to make better 
choices. But if we limit the options that they have--because 
guess what? If you happen to have the 750 credit score and a 
lot of money, you have a lot of options. The options are 
limited for those who do not.
    And for them, when you talk to--my family back then, if you 
talk to them and you ask them, or folks are telling them, ``Get 
your financial life in order,'' when they are trying to get 
their life in order for the next day, they say, you have to be 
out of your mind.
    And if you go to a bank whose interest is not that 
consumer, that is not their interest. That is not who they are 
going to--they are bored with--get them off the board of that 
is what they were focused on.
    So to me, if there is a group of individuals or businesses 
that says, ``Okay, we want to compete for this unbankable 
population. We think that it is viable. We think that we could 
make some money doing it. But we think that we can compete for 
this population,'' the people who I know that are in that 
situation will say, ``Thank you. You understand my needs. Give 
me some options of people who want me because they know that I 
am struggling every day to make it.''
    I have somebody--I won't say who--on my staff who has been 
trying to get a $500 loan to fix their car so they can go to 
work. They have gone to bank after bank after bank. The banks 
won't give them the money.
    Finally, I know someone who gave them the money so they can 
get back and forth to work. But if they had institutions that 
were competing for them--but guess what? We talk about the 
interest rates. I think even in that population, that 
competition would draw the interest rates down if you had as 
many people as you could that would be going after them, that 
is how you bring the rates down.
    They would be competing for them just as people in the 
other end. What do they do to get people with money to bank in 
their banks? They lower the rates. They give you free checking. 
They find ways to try to entice you in to them because that is 
the customer that they want.
    It is the same thing on the bottom end. There is no 
difference for those who have been on the bottom, it is just 
that nobody has been competing for them. And I think it would 
be wrong for us that if we have institutions that now want to 
compete for that business to say, ``Nope. You can't do it. We 
are going to regulate you out of the business; we are going to 
end it because you are bad. You can't do it.''
    And in essence, you are saying to those people, ``You can't 
exist.''
    I do financial literacy in my district all the time, and we 
do need to teach and educate folks. But in order for them to be 
able to advance into the sphere of financial literacy, they 
first have to survive. So if they allow them to survive and 
then teach them financial literacy, then hopefully one day they 
will have some money to lend to others and compete. They can go 
from one end of competition to the other end of competition, 
because that is what this is really all about if you live the 
life.
    I have been there. I have been there, believe me. And so, I 
don't just speak from theory; I speak from very real life.
    I had these questions and I know I took up my time, so I 
will stop there. I had a bunch of questions, but you just hear 
this stuff, and because it is so close to me, I just had to 
make these comments.
    But I want to thank all of you for being here, and I look 
forward to working with you.
    Thank you, Madam Chairwoman, for this hearing.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer, for 5 minutes?
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    And I thank all of the panel for being here today, and I 
certainly thank Mr. Meeks for his passionate words there. I 
think that we are all here to try and find a way to help those 
who need some help with access to credit.
    That is what this is all about today, and I think we need 
to find a way to structure this environment so that people can 
have access to it, and structure it in a way that they can 
afford whatever alternatives they pick, yet allow the business 
climate to be able to fund itself, make enough money so that it 
can continue that service. We are all looking for that balance; 
we are all looking to help these folks. And it is the give and 
take, and it is the struggle we are with here.
    So I know Mr. Meeks and Mr. Westmoreland made some great 
points.
    Quick question for Ms. Manturuk: In your testimony, your 
research says that you show that there was no real impact on 
the abolition of small-dollar lending in North Carolina, yet 
the Federal Reserve of New York published a study, and also, 
according to my information, the Federal Reserve Bank of Kansas 
City published something in the Economic Review that said 
whenever the payday loans were banned in Georgia and North 
Carolina, households bounced more checks, complained more to 
the FTC about lenders and debt collectors, and filed Chapter 7 
more often than households in other States where payday lending 
was permitted.
    Can you tell me what the difference is between the studies?
    Ms. Manturuk. I read that study probably a couple of years 
ago, so I am a little bit rusty on it. My recollection was that 
study didn't account for macro-level economic changes that 
might have changed in the before and after climate.
    Our research was aimed at actually talking to people who 
were former payday borrowers themselves, and getting their 
impacts and their evaluation of the impact it had on their 
lives, and that is where we derived the finding. Interestingly, 
when we targeted people who lived in communities where there 
had been a proliferation of payday lenders, most of them did 
not even realize that the option was gone, which, I think, 
speaks to the fact that this really wasn't something that was 
important in their financial lives.
    When we focused exclusively on people who were former 
borrowers themselves, though, they overwhelmingly said that 
they felt that they were grateful that the option was gone. One 
of the more interesting things, as one customer told us, is 
that not having what she considered to be a negative option had 
actually prompted her to change the way she managed her money 
on a regular basis.
    Mr. Luetkemeyer. That is interesting. They were glad it was 
gone. That is curious.
    One of the things--I used to be the chairman of the 
Financial Services Committee in Missouri, and we instituted a 
lot of new rules and regulations with regard to payday loans, 
title loans, small-dollar loans. And one of the things that we 
did was put it in what I call the ``Fed box.'' I am a banker, 
and on your housing forms you have a disclosure box, or we call 
it the ``Fed box'' a lot of the time. It discloses all the 
interest rates, and the origination fees, and any other fees 
that are in this that are there.
    I know that is what we did with regards to the forms there 
in Missouri, and I was just kind of curious, in your experience 
do you see any consumers that shop the rates? Do they shop for 
rates at all?
    Ms. Guzman?
    Ms. Guzman. Absolutely. And their method of shopping is by 
walking into a bank or a credit union and being told, ``No. We 
don't have a product that fits your needs,'' or actually being 
told they can apply for an option and then not qualifying for 
it for a multitude of reasons.
    Unfortunately, this becomes very humiliating and very 
degrading. And then, when they look at their other options in 
other locations, they find that it will work for them.
    I don't think there is much--you don't need too much common 
sense, and my consumers certainly have great common sense--they 
are short on funds, but not on common sense--that you need your 
money today but they are going to hold your check for 3 days at 
the bank that has your account. Naturally, you are going to go 
to a check casher. The same thing goes for access to funds.
    Mr. Luetkemeyer. That is kind of interesting, because we 
haven't heard a lot of testimony today that has been a negative 
about the small-dollar loan folks, but I know when I was the 
chairman, because I oversaw that area, I would constantly check 
with the regulators and see once if there were a lot of 
complaints filed. And it was interesting to see that there were 
fewer complaints filed against small-dollar loan lenders than 
the banks themselves--
    Ms. Guzman. Yes.
    Mr. Luetkemeyer. --which tells you that they are delivering 
a good service at prices that are competitive, that it is a 
service that people want.
    And I noticed in your testimony, Ms. Guzman, you were 
talking about how they want more choices that help them get 
credit back for themselves. And we had a lady who testified in 
this committee at a hearing recently--several months ago--that 
she used it as a way to get back her regular credit so that she 
could get back and actually be able to go buy a house and start 
a business.
    And so while it may not be for everybody, it certainly 
fills a gap for those who need some quick access to cash in 
small amounts.
    So with that, thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I think that concludes our hearing, and I want to thank all 
the panelists from the second panel. You were very great 
witnesses, with very good information.
    The Chair notes that some Members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    With that said, the hearing is adjourned.
    [Whereupon, at 12:52 p.m., the hearing was adjourned.]










                            A P P E N D I X



                           September 22, 2011






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