[Senate Hearing 112-385]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-385
 
   CONSUMER PROTECTION AND MIDDLE-CLASS WEALTH BUILDING IN AN AGE OF 
                         GROWING HOUSEHOLD DEBT 

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
             FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

     EXAMINING CONSUMER PROTECTION AND MIDDLE-CLASS WEALTH BUILDING

                               __________

                            OCTOBER 4, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

     Subcommittee on Financial Institutions and Consumer Protection

                     SHERROD BROWN, Ohio, Chairman

            BOB CORKER, Tennessee, Ranking Republican Member

JACK REED, Rhode Island              JERRY MORAN, Kansas
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MIKE JOHANNS, Nebraska
DANIEL K. AKAKA, Hawaii              PATRICK J. TOOMEY, Pennsylvania
JON TESTER, Montana                  JIM DeMINT, South Carolina
HERB KOHL, Wisconsin                 DAVID VITTER, Louisiana
JEFF MERKLEY, Oregon
KAY HAGAN, North Carolina

               Graham Steele, Subcommittee Staff Director

         Michael Bright, Republican Subcommittee Staff Director

                                  (ii)































                            C O N T E N T S

                              ----------                              

                        TUESDAY, OCTOBER 4, 2011

                                                                   Page

Opening statement of Chairman Brown..............................     1

Opening statements, comments, or prepared statements of:
    Senator Corker...............................................     3

                               WITNESSES

Atif Mian, Associate Professor of Economics and Finance, Haas 
  School of Business and Department of Economics, University of 
  California, Berkeley...........................................     5
    Prepared statement...........................................    30
Katherine Porter, Professor of Law, University of California 
  Irvine School of Law...........................................     6
    Prepared statement...........................................    37
Robert M. Lawless, Professor of Law, University of Illinois 
  College of Law.................................................     8
    Prepared statement...........................................    44
Ray Boshara, Senior Advisor, Federal Reserve Bank of St. Louis...     9
    Prepared statement...........................................    49
G. Michael Flores, Chief Executive Officer, Bretton Woods, Inc...    11
    Prepared statement...........................................    54
Douglas Fecher, President and Chief Executive Officer, Wright-
  Patterson Federal Credit Union, Fairborn, Ohio.................    13
    Prepared statement...........................................    58
Ida Rademacher, Vice President for Policy and Research, 
  Corporation for Enterprise Development.........................    15
    Prepared statement...........................................    61
Susan K. Weinstock, Director, Safe Checking Project, Pew Health 
  Group, The Pew Charitable Trusts...............................    17
    Prepared statement...........................................    68

                                 (iii)


   CONSUMER PROTECTION AND MIDDLE-CLASS WEALTH BUILDING IN AN AGE OF 
                         GROWING HOUSEHOLD DEBT

                              ----------                              


                        TUESDAY, OCTOBER 4, 2011

                                       U.S. Senate,
                 Subcommittee on Financial Institutions and
                                       Consumer Protection,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 3:10 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Sherrod Brown, Chairman of the 
Subcommittee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Committee will come to order. Thank you 
all for joining us. I apologize. I thank Senator Corker for 
actually being on time, and I apologize for being late. We were 
trying to work through some details on the currency bill on the 
Senate floor. Senator Corker spoke against it; then I spoke for 
it; and then the two leaders were working out some details, as 
they are wont to do. And I needed to stay to start to manage 
the bill, but thank you, all of you, for joining us. I thank 
Senator Merkley and Senator Hagan also for joining us.
    With our economy still recovering from the financial 
crisis, it is critical to understand how excessive household 
debt remains a burden to our Nation's full recovery, 
understanding that we can better put our Nation back on the 
road to prosperity. Credit can be undeniably a good thing. It 
allows people to borrow against their future earnings to 
purchase essential goods and services. It allows families to 
buy homes and students to go to college. It helps people pay 
for food and clothing.
    It also can cause irreparable harm when those future 
earnings never materialize due to job loss or stagnant wages. 
It can undermine our economy when it is offered on terms 
designed to take advantage of consumers rather than to help 
their wealth grow. It is that capacity for wealth to grow that 
makes America a stable and prosperous country. It is that 
capacity to generate wealth and pass it down to future 
generations that really has created and preserved our middle 
class.
    But over the last three decades, in the last decade in 
several years in particular, the pathway to a strong economy 
and a strong middle class has been more and more difficult to 
travel. From 2000 to 2010, median income for working-age 
households fell by more than 10 percent. In that same decade, 
poverty increased overall by almost 4 percent. These are merely 
averages. The statistics, as we know, are far worse for 
Hispanic and African American households than they on the 
average in white households.
    Behind the statistics are stories of Americans forced to 
try to borrow as a substitute for stagnant wages and declining 
household value assets, and some were preyed upon by a 
burgeoning predatory lending industry. Cities like Cleveland 
and Dayton, here Doug is from, are clear examples of this 
devastating combination. In Cleveland, the same year that the 
LTV steel plant was filing for bankruptcy, Cuyahoga County 
officials were begging the Federal Reserve to crack down on 
predatory mortgage lending practices.
    Likewise, in Dayton, as Mr. Fecher knows all too well, we 
lost GM's Moraine plant, a large assembly plant, at the same 
time that groups like the Miami Valley Fair Housing Coalition 
were going door to door educating the West Dayton community 
about the dangers of predatory refinancing schemes. The growing 
reliance on debt led to a vicious cycle. Our declining 
manufacturing base contributed to the dangerous growth of the 
financial sector.
    Financial services industry output went from 15 percent of 
U.S. gross domestic product in 1980 to 21 percent of GDP in 
2010. Over that same period, manufacturing declined from about 
21 percent of GDP to not much over 11 percent of GDP. 
Encouraged by predatory lending practices and flawed Government 
policies, including financial deregulation and free trade 
agreements, household debt reached 133 percent of household 
income by 2007, the highest level since the beginning of the 
Great Depression. The ensuing financial crisis exposed failures 
throughout the financial sector. It continues to affect 
families across Ohio and the Nation who have been hurt by the 
tremendous destruction of jobs and wealth and assets. Just this 
week we learned that household incomes dropped during the month 
of August.
    But we had good news that the manufacturing sector 
expanded. Wages actually declined in manufacturing and services 
and goods-producing industries, and Americans were forced to 
tap their savings to cover those losses.
    The need to address these issues could not be clearer. I 
hope we can find some areas of agreement today because I know 
that Senator Corker shares some of my concerns about our 
indebtedness.
    I remember in our hearing in February Senator Corker 
wondered whether new rules for debit card fees would push 
consumers from checking accounts that are backed by a 
consumer's assets into credit cards that are debt instruments. 
We did not ultimately agree on the swipe fee issue, but I 
understand and appreciate his concerns from that.
    Professor Porter notes in her testimony that while Wall 
Street is too big to fail, American families are too small to 
save. And from reading the first chapter of your book, it is 
almost that American families were also too small to be noticed 
by policy makers.
    It is important to remember that excessive household debt 
is dangerous to individual families but also is a problem for 
all of us.
    Professor Mian estimates that the deleveraging process 
caused 4 million of the 6.2 million jobs lost between March of 
2007 and March of 2009. I wear a canary pin on my lapel 
signifying many things, one of them the canary in the mine the 
mine workers took down to the mines, where the mine worker had 
no protection of a union that was strong enough or a Government 
that cared enough in those days, and the mine worker was on his 
own. The canary--in many ways household debt in this country is 
the coal mine of our economic security.
    If you think that indebtedness will not cause greater 
problems for society, I would tell you to look at what is 
happening in cities across the country now--thousands of people 
in the streets protesting, among other things, illegal 
foreclosures, excessive student loan debts. Their activism 
reminds us that we ignore these issues at our own peril and the 
peril of the futures of our children and grandchildren.
    I look forward to exploring ways that policy makers can 
encourage responsible borrowing and sensible consumer 
protections. I am confident that the new Consumer Financial 
Protection Bureau will be a tool to help American families 
rebuild some of the wealth that they have lost over the last 
decade. I look forward to a vote in this Committee, I believe 
perhaps as early as Thursday, on whether to confirm former Ohio 
Attorney General Richard Cordray as the first Director. I think 
that would be good for American families and good for the 
American economy.
    Senator Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Thank you, Mr. Chairman, and I thank each 
of you. I will be very brief. I think one of you actually has a 
flight to catch, and I do not usually make long comments 
anyway.
    I will say that I am looking forward to your testimony. I 
probably more than anybody on our side of the aisle spent a 
great deal of time trying to negotiate a consumer protection 
bureau and really think that we should have one. It is my hope 
that the Administration will try to institutionalize and not 
cause it to be something that is personality-based where one 
person that is a know-all is setting the landscape for the 
entire financial industry, but instead of that there will be 
some appropriate checks and balances. And I think if that 
occurs ever, we will actually end up having someone leading the 
consumer protection agency with the appropriate type of 
institutional checks and balances.
    I will also say that while I very much agree with my friend 
regarding some of the concerns that I have with consumers, 
sometimes we as policy makers create policies that have 
unintended consequences. And, you know, it is pretty 
interesting to see the senior Senator from Illinois on the 
floor sort of apologizing to everybody in some ways that in 
creating the Durbin amendment we basically shifted money out of 
the pockets of consumers into the bottom line of Walmart and 
Target and other entities. So unintended consequences do occur.
    Whether you agree or disagree with what I just said, the 
fact is we need to be careful as policy makers, and I look 
forward to your help in making sure that we make prudent 
decisions. So thank you for being here.
    Chairman Brown. Thank you, Senator Corker.
    Senator Merkley, do you have an opening statement? Senator 
Hagan, an opening statement? OK. Thank you.
    I will introduce the panel with brief introductions, then 
go from left to right. And, Ms. Porter, thank you for being 
here, and if you have to leave, certainly we will be mostly 
concluded, perhaps entirely concluded by then.
    Atif Mian is an associate professor of economics and 
finance at the Haas School of Business at the University of 
California at Berkeley. His recent work is centered on 
understanding the origins of the global financial crisis, the 
political economy of Government intervention in financial 
markets, and the link between asset prices, household 
borrowing, and consumption.
    Katherine Porter is a professor of law at U.C.-Irvine where 
she teaches courses on consumer bankruptcy and consumer law. 
She is a regular contributor to Credit Slips, a blog that 
discusses issues related to credit and finance and bankruptcy. 
She is the editor of the forthcoming book, ``Broke: How Debt 
Bankrupts the Middle Class.''
    Robert Lawless is a professor of law at the University of 
Illinois College of Law, codirector of the program on law, 
behavior, and social science. He is a regular contributor to 
the blog Credit Slips. From January to May of 2000, he was a 
visiting professor at the Ohio State University's College of 
Law. I am sure that he still regrets leaving to this very day.
    Ray Boshara, also an Ohio native, is senior advisor at the 
Federal Reserve Bank of St. Louis. His work at the Fed focuses 
on household financial stability with an emphasis on 
strengthening the balance sheets of American families, how that 
contributes to economic growth. He served as an advisor the 
Clinton, George W. Bush, and Obama administrations. He is a 
graduate of Ohio State. No more comment on that.
    Michael Flores is president and CEO of Bretton Woods, Inc., 
a specialty management consulting firm serving financial 
institutions, with 30 years of financial institution experience 
through his employment in banking as well as consulting. 
Welcome.
    Douglas Fecher is president and CEO of Ohio's largest 
credit union, Wright-Patterson Credit Union, a credit union 
with $1.5 billion in assets. He worked his way up from a teller 
to become the CEO, a position he has held for almost 11 years. 
He is past director and chairman of the Ohio Credit Union 
League.
    IDA Rademacher is the vice president for policy and 
research at the Corporation for Enterprise Development. She 
leads its policy and research team in their efforts to advance 
comprehensive research and policy agendas that expand asset- 
and wealth-building opportunities for all Americans.
    Last, Susan Weinstock is the project director for the Pew 
Charitable Trusts' Safe Checking in the Electronic Age Project. 
Previously she was the financial reform campaign director at 
the Consumer Federation of America. Prior to joining them in 
2009, she worked on a number of different positions at AARP.
    Professor Mian, if you would begin. Thank you all for 
joining us.

 STATEMENT OF ATIF MIAN, ASSOCIATE PROFESSOR OF ECONOMICS AND 
 FINANCE, HAAS SCHOOL OF BUSINESS AND DEPARTMENT OF ECONOMICS, 
               UNIVERSITY OF CALIFORNIA, BERKELEY

    Mr. Mian. Thank you, Chairman Brown and Senator Corker, for 
inviting me. I am going to talk about the role of household 
leverage in the current economic crisis and the importance of 
household balance sheets in explaining macroeconomic 
fluctuations. My comments today are based on research that my 
coauthor Amir Sufi and I have done over the years.
    In order to understand the role of household balance sheets 
in the current economic slump, we must begin from the 
unprecedented and staggering increase in household debt during 
the 2000s. The sharp expansion in the supply of mortgage credit 
in the U.S. resulted in U.S. household debt doubling from $7 
trillion in 2001 to $14 trillion in 2007. This massive 
accumulation of debt by households with largely stagnant real 
wages was not sustainable. Correspondingly, toward the second 
half of 2006, mortgage delinquencies started to creep up, and 
about five quarters later the U.S. enters into a full-blown 
recession.
    Our research shows quite conclusively that the main reason 
for the U.S. economic collapse was a process referred to as 
``deleveraging'' of household balance sheets. That is, faced 
with reduced net worth, highly leveraged households sharply cut 
back on consumption to conserve debt capacity and pay back 
existing debt.
    For example, we find that consumption such as the sale of 
new automobiles drops significantly more in areas with highly 
leveraged households. This drop in consumption severely 
impacted job losses as well. For example, job losses in the 
nontradable sectors, such as retail where businesses must 
depend on local demand to survive, job losses in such sectors 
were much higher in highly indebted counties. Extending these 
job losses over the entire economy, we find that we can 
conservatively attribute 4 million of the 6.2 million jobs lost 
between March of 2007 and March of 2009 to this process of 
deleveraging. In other words, 65 percent of total jobs lost in 
the U.S. are due to this deleveraging, and the drop in 
aggregate demand as a result of it.
    Policy choices in the face of extremely damaging effects of 
deleveraging and aggregate demand cycle are somewhat obvious. 
We must do more to facilitate principal debt reduction for 
highly indebted and underwater homeowners. The economy can 
neither afford to foreclose these homes nor bear the costs 
associated with reduced aggregate demand. Despite almost 4 
years since the start of the deleveraging cycle, only $1 
trillion out of the $7 trillion of debt accumulated over 2001 
to 2007 has either been paid down or written off.
    The dilemma for efforts to reduce household indebtedness is 
that from a lender's perspective it is not in their interest to 
write down debt that continues to be serviced on time. But as 
my analysis highlights, the collective consequences of such 
individually rational actions are quite unpleasant. If a large 
number of financially distressed homeowners cut back on 
consumption in order to protect their homes and continue paying 
their mortgages, the aggregate demand and employment 
consequences hurt everyone. Therefore, I repeat, we must do 
more to facilitate principal debt reduction for highly indebted 
and underwater homeowners.
    In the long run, it is important to keep in mind that the 
relationship between high household leverage and long economic 
slumps is not limited to our current experience. In his seminal 
paper, Irving Fisher in 1933 described the role that high 
household indebtedness played in deepening and perpetuating the 
Great Depression. In order to prevent such episodes from 
happening again, we need to reevaluate our financial structure. 
In particular, I would submit that we need to put in place 
contingencies that will automatically write down the value of 
outstanding debt if the overall economic environment is 
sufficiently negative.
    For example, mortgage principal can be automatically 
written down if the local house price index falls below a 
certain threshold. If we had such contingencies in place in the 
current mortgage contracts, we could have avoided the extreme 
economic pain due to the negative deleveraging and aggregate 
demand cycle.
    I thank you very much for your time and consideration.
    Chairman Brown. Thank you, Dr. Mian.
    Dr. Porter, Ms. Porter, thank you.

STATEMENT OF KATHERINE PORTER, PROFESSOR OF LAW, UNIVERSITY OF 
                CALIFORNIA IRVINE SCHOOL OF LAW

    Ms. Porter. I appreciate the opportunity to talk to you 
today about the reasons that thoughtful consumer protection is 
a vital necessity to our country's future economic health. The 
decade of increases in consumer debt has reshaped the prospects 
of American families, and the recovery from the recession 
presents challenges for families trying to make prudent 
financial decisions and navigate this difficult economy. These 
challenges mean that consumer credit law will be a major 
determinant of the well-being of families for decades to come.
    Before the recession, for decades families added debt. In 
the mid-1980s, the ratio of debt to personal income, personal 
disposable income was 65 percent. By 2007, that U.S. household 
leverage ratio had more than doubled, reaching an all-time high 
of 133 percent. Unfortunately for families, the debt binge was 
not accompanied by meaningful increases in disposable income. 
While income crept up, debt jumped up.
    The growth in debt also outstripped the appreciation of 
assets, eroding the wealth of families. As far back as 1995, 
the amount of mortgage debt began to increase faster than house 
values, and between 2001 and 2004, a period of relative 
prosperity, the typical household's wealth actually declined. 
This expansion in borrowing spanned social classes, racial 
groups, sexes, and generations. Every age group except those 75 
years or older took on increased debt between 1998 and 2007. 
African Americans, Hispanics, and non-Hispanic whites all 
become more indebted in this same period.
    People who lack a high school diploma and families headed 
by households over age 65, between 65 and 74, had particularly 
sharp increases in debt. By 2007, when those debt burdens 
peaked, 77 percent of households had some type of outstanding 
consumer debt. Consumer debt has become one of the most common 
shared qualities of the middle class, higher than the fraction 
of the population that owns a home, is married, has graduated 
from college, or attends church regularly. And as that debt 
increased, so, too, did the risk of financial failure.
    Today millions of Americans are struggling to avoid 
financial collapse. We all hope that the worst of the financial 
crisis is over. Subprime lenders have gone bankrupt. Most 
subprime and nontraditional mortgage products were eliminated 
by the market and later, for good measure, by the Federal 
Reserve and the Dodd-Frank Act. In the aggregate, families are 
dialing down their debt loads, and lenders have changed their 
practices.
    Some may use this credit retrenchment to argue against 
consumer protection laws or to justify reconfiguring the 
Consumer Financial Protection Bureau. In my opinion, these 
efforts are misguided. They fundamentally misunderstand the 
nature of the consumer debt overhang that is harming families 
and the overall economy. It is precisely in today's turbulent, 
difficult economy that an energetic and dedicated consumer 
protection regulator is needed to aid families. Why?
    First, a regulator is needed because consumer debt remains 
at a level that would have been unthinkable a generation or two 
ago. Overindebtedness was not a temporary feature of the U.S. 
economy, and it is not a problem of the distant past cured by 
the recession, Government stimulus programs, or Dodd-Frank.
    Second, consumer protection is crucial because default 
rates remain very high. Foreclosures are a well-known story, 
but other worrisome trends exist, including significant 
increases in student loan default rates and a 28-percent 
increase last year in complaints to the FTC about debt 
collectors. Debt collection and default are not isolated 
experiences. They are now a routine and painful part of what it 
means to be middle class in the United States.
    Third, credit retrenchment, which has begun, will be a long 
and painful process. For many families it will mean lost homes, 
repossessed cars, second jobs, and dunning from debt 
collectors. Changes in credit standards and fears about taking 
on credit make it harder for families to hang onto the rung on 
the economic ladder where they are or to climb up it.
    Fourth, a Consumer Financial Protection Bureau can help 
ease anxiety about the turbulent economy. Americans' appetite 
for risk reflects in part the insecurity that they face because 
of their debt loads. Americans are frustrated with the lack of 
an effective and sustained Government response to their 
hardships. Asked in 2010 whom Government had helped a great 
deal during the recession, 53 percent said banks, 44 percent 
fingered large corporations, and just 2 percent thought 
economic policies had helped the middle class. The banks may 
have been too big to fail, but families seem to have been too 
small to save. Middle-class Americans feel abandoned and that 
the Government's response to the financial crisis missed their 
pain.
    Today families are in uncharted territory, facing risks in 
the job market, declines in Government service, and uncertain 
access to credit. It is precisely in this environment that 
consumer protection law can help families regain confidence in 
the American economy and make informed and smart decisions to 
rebuild their wealth. In this economy, the Consumer Financial 
Protection Bureau, which is charged with monitoring the 
functioning of the credit markets, can be of use to develop 
outreach and education initiatives and provide technical 
expertise to lawmakers.
    I urge the Committee to move forward with the Consumer 
Financial Protection Bureau, confirming a Director so that its 
important work can begin.
    Chairman Brown. Thank you, Professor Porter.
    Professor Lawless, welcome.

STATEMENT OF ROBERT M. LAWLESS, PROFESSOR OF LAW, UNIVERSITY OF 
                    ILLINOIS COLLEGE OF LAW

    Mr. Lawless. Thank you, and thank you for inviting. In your 
invitation letter, you asked me to address household debt and 
the trends in household debt and how those trends affect in the 
extreme bankruptcy filings. But before I get into that, I want 
to talk a little bit about the subtext of what is, I think, in 
everybody's mind as we're talking here--this new financial 
regulator that is about to come on board.
    One of the things that I think people have forgotten is 
that in the lead-up to Dodd-Frank, in the wake of the financial 
crisis, there was a lot of discussion about what should happen. 
Then there are people like me. I am a believer that there are 
some products out there that people just cannot possibly 
afford. And I think the best solution to fixing those products 
is to ban them altogether.
    Now, I understand that is a controversial position. Not 
everyone is going to agree with that. But people of good faith 
and good judgment can differ over those type of policy 
outcomes.
    I think one of the things that has been forgotten in 
today's debates and with the heated rhetoric is that one of the 
reasons the Consumer Financial Protection Bureau was so popular 
at the time of Dodd-Frank was that it was in many ways a 
compromise solution between those who would go further and 
those who felt that not a lot needed to be done.
    I would hope that, as we begin to discuss what the shape of 
the Consumer Financial Protection Bureau will look like going 
forward, we will remember that it was, again, in many ways a 
compromise solution.
    What you asked me here today mainly to talk about was about 
trends in household debt, and, Senator Brown, in your opening 
statement, you have already discussed some of this. I will not 
belabor the point. But one thing I would like to highlight that 
is in my written testimony is comparing the United States to 
other countries.
    You talked about the tremendous run-up in household debt 
over the past generations, and it is absolutely correct. In 
preparing for this testimony, I ran some numbers. Consumer debt 
in this country, even after you adjust for population growth 
and inflation, has increased 46 percent in the past 25 years, 
106 percent in the past 50 years. That is not counting 
mortgages. If you put mortgages into that calculation, private 
household debt is 220 percent more than it was 25 years ago, 
and 374 percent more than it was 50 years ago--almost 4 times 
as much.
    We live in a very different time than our parents and our 
grandparents. Today, people coming of age can expect to be 
indebted for most of their adult lives.
    The United States, according to statistics from the 
Organization for Economic Cooperation and Development, leads 
the world in short-term debt. We owe $9,663 per capita in 
short-term debt, things like credit cards and payday loans. 
These are the types of loans that are most likely to be taken 
out on short notice, most likely to be taken out under 
pressure, most likely to be taken out without full information, 
and most likely to be subject to abuse.
    Moreover, household debt is undoubtedly linked to 
bankruptcy. Indeed, I think it is a common fiction that what 
drives bankruptcy filings in this country are the ups and downs 
of the economy. That turns out not to be true. It is 
outstanding household debt. Debt creates conditions for 
bankruptcy in the long run. In the short run, decreasing 
availability of credit puts people who might otherwise be able 
to stave off the day of reckoning into bankruptcy. You can 
actually have increased bankruptcy filing rates in economic 
boom times, like the 1990s, when high consumer borrowing in the 
early part of the decade laid the conditions for people to need 
bankruptcy and then some lesser availability of consumer credit 
drove them into the bankruptcy courthouse.
    You can also have decreased bankruptcy filing rates in 
economic busts, as is going to happen this year when bankruptcy 
filing rates will be down about 10 percent. Why? In the 
immediate aftermath of the 2007-08 financial crisis, people 
were less able to borrow, creating less need for bankruptcy 
today. And according to the Federal Reserve, consumer credit is 
now slightly easier to get than it was at this time last year. 
People are able to use borrowing to stave off the day of 
reckoning.
    So it is not the economy, which, again, I think people 
mistakenly blame for bankruptcy rates. They think that layoffs 
or unemployment is what is driving bankruptcy. Statistically, 
it turns out to be the amount of household debt.
    Now, the Consumer Financial Protection Bureau, of course, 
was not created to stop debt. As Senator Brown noted, 
responsible borrowing is good. People borrow to finance their 
houses, to finance automobiles, to finance their education. But 
what the Consumer Financial Protection Bureau is there to do is 
to stop the abuses that place individual households at risk of 
things like bankruptcy and to act as a check on runaway lending 
practices that place our whole economy at risk, as Professor 
Mian indicated.
    Thank you again for inviting me.
    Chairman Brown. Thank you very much, Mr. Lawless.
    Mr. Boshara, proceed. Thank you.

STATEMENT OF RAY BOSHARA, SENIOR ADVISOR, FEDERAL RESERVE BANK 
                          OF ST. LOUIS

    Mr. Boshara. Well, I am not only a proud graduate of OSU, 
but Revere High School in Akron, Ohio, and I worked for 
Congressman Tony Hall for many years, so plenty of Ohio 
credentials here.
    I need to say that, of course, these are my own views and 
not necessarily the views of the Federal Reserve Bank of St. 
Louis or the Board of Governors of the Federal Reserve System.
    I was asked to talk about solutions more on the other side 
of the balance sheet: How do you help families build up savings 
and assets? Let me get right to my punch line.
    Looking back, we have seen the damage to families, 
communities, and the broader economy derived from three severe 
balance sheet shortcomings:
    First, we as a Nation let debt levels rise to damaging 
levels.
    Second, we did not help families buildup their savings.
    And, third, we failed to help families diversify their 
assets beyond housing.
    Going forward, we must address, proactively, each of these 
shortcomings. We need adequate savings, good wealth-building 
debt, and a diversity of assets. In other words, we need to 
look at the entire balance sheet, especially of low- and 
moderate-income families.
    When we build up net worth, we will see two things:
    First, we are going to see a stronger economy. Several 
people have identified weak balance sheets at the core of the 
economic downturn. The IMF, the Bank for International 
Settlements, others on this panel. If we strengthen balance 
sheets, we can turn that around and help revive the economy.
    Second, when we buildup net worth, we are going to see 
stronger families and better economic mobility outcomes. What 
researchers have done over the last several years is isolate 
what is called the ``asset effect.'' What do you get from asset 
ownership, independent of income, education, and a whole other 
series of factors? What do you get when you own assets that you 
do not otherwise get? You get more mobility. You get better 
health outcomes, and better child outcomes, better educational 
outcomes. So building assets gets you better financial 
security, and a better society as well.
    I have five ideas in my written testimony, but first let me 
say something that unifies my recommendations. Building assets 
is not a new idea. The Federal Government is already very 
generously in the asset-building business. Through tax breaks 
for retirement, home ownership, college savings, investment, 
and business ownership, we have very generously encouraged 
better-off families, the upper half of the population, to build 
savings and wealth. I, therefore, think that the core policy 
challenge is to take this great policy that we have for 
building wealth for better-off Americans and make it work for 
those in the bottom half. How do we extend the savings 
mechanisms and incentives so that they work for people below 
median income? We need to ``bundle'' savings and investment 
opportunities for the lower half just as we have for the upper 
half. So it is not a new idea here; we just have to extend what 
we are doing already.
    So what are my five ideas? First, build assets early in 
life. As I mentioned, when one has assets, the better he or she 
will do. It turns out that the earlier in life you have assets, 
the better you are going to do. The best idea that I know of is 
to establish savings accounts at birth for every child born in 
America with greater resources directed at lower-wealth 
families. And I am pleased to recognize the leadership of two 
Members of the Subcommittee for their work on this issue: 
Senator Schumer and Senator DeMint. If we cannot achieve such 
an ambitious policy, I would encourage us to think about 
something like a ``Kid's Roth'' or a ``Young Savers Account'' 
or a ``Roth at Birth''--a voluntary account that would let kids 
start saving for some kind of a long-term asset.
    Second, we need to build assets at tax time. The IRS now 
has a ``split refunds'' form, which lets you take your refund 
and send it to three separate accounts. We can do a lot with 
that infrastructure. We also can improve the Federal Saver's 
Credit, which Senator Menendez has provided leadership on.
    Third, we can build assets at the workplace. I benefit, 
many of the folks in this room benefit, from the Federal Thrift 
Savings Plan. That and other kinds of retirement plans have 
built enormous pension wealth in this country. We can use that 
infrastructure to build other kinds of wealth as well for low-
income families.
    Fourth, build unrestricted savings. You know, this is a 
``sweet spot.'' Families with unrestricted savings get better 
wealth-building financial services, better debt, and the 
ability to purchase long-term assets.
    And fifth, think about the 529 college savings platform as 
an opportunity to build savings and wealth. In Oklahoma, they 
are testing the idea of giving every child a 529 savings 
account at birth. And in the city of San Francisco, they are 
testing the idea of giving every kindergartner a college 
savings account. We can learn from these innovations.
    Finally, let me close by saying that we do not necessarily 
have to spend new money to move forward on this agenda to build 
assets for the bottom half of the population, for two reasons:
    First, we can imagine a more efficient allocation of 
current asset-building subsidies. We should strive to subsidize 
economic activity that would not otherwise occur, which is the 
case for the bottom half of the population.
    And, second, we can tweak existing products, forms, and 
systems. As a matter of fact, ``auto 401(k)s,'' ``split 
refunds,'' my proposed ``Kid's Roth,''--none of these have or 
would cost the Federal Government any money but could generate 
literally millions and billions of dollars of new savings and 
assets by the poor.
    Thank you.
    Chairman Brown. Thank you, Mr. Boshara.
    Mr. Flores.

   STATEMENT OF G. MICHAEL FLORES, CHIEF EXECUTIVE OFFICER, 
                      BRETTON WOODS, INC.

    Mr. Flores. Good afternoon. Thank you, Mr. Chairman, 
Senator Corker, Senator Merkley. I appreciate the opportunity 
to be here today.
    I take a little bit different approach to this. As you 
noted in my bio, I have been in the financial services industry 
for 30 years. Actually, I have been consulting for 30 years. I 
started in banking about 7 years before that. I have seen a lot 
of changes in the industry, and what I want to focus on today 
is the impacts, as Senator Corker had mentioned, on unintended 
consequences of regulations, some that we are seeing right now, 
and then relate that to the CFPB and some concerns that I have 
there, not that I do not agree that we need a CFPB, it is how 
it is structured, how it is implemented.
    First of all, let me talk about the banking business model 
and why we are having less access to the middle class, the 
people we are talking about are starting to be marginalized out 
of traditional mainstream banking. The banking model is a 20th 
century banking model. The commercial banking system has not 
figured out the 21st century model yet, and it is for good 
reason.
    They have two sets of customers. They have their legacy 
customers, and I hate to say baby boomers, but the older 
customers that still want the branch, still deal with checks, 
still use cash, and still go to the teller line. Then you have 
the Gen Y customers that will probably never step into a branch 
and do everything off their PDA. This is their bank.
    The bank has to support both those cost structures right 
now, so there is extreme pressure on their earnings. Banks have 
had margin compression for the last 15 years. What do they do 
to address that? They try to get more to a fee model. How do 
they do that?
    Well, overdrafts were the first shot at that, and I am a 
guilty party. I helped install some of those overdraft 
programs. But we did it for checks because that was a service 
to the consumer. If you returned the check, you are going to 
pay two to three times more than if you paid that check in the 
overdraft originally. Where we went off the rails with this 
thing is opening it up to debit card transactions. There was no 
value in that $3 plus $35 cup of coffee that everybody talks 
about.
    Then we ended up with interchange fees, and interchange was 
not driven initially as a source of fee income. It was driven 
to push people to a new service delivery model. Use that debit 
card. Stop writing checks. Get rid of the paper out of the 
system. Reduce reliance on cash. Use that debit card. People 
started using the debit card. The income started rising, so 
this is a great deal. Then we have regulation that addressed 
that and has reduced both overdraft income as well as 
interchange income.
    Expenses--we have increased interest expense in banks by 
fee regulating, Reg Q, and allowing payment of interest on 
business accounts.
    And finally, and all my clients talk about this, are 
compliance costs. Banks under $1 billion, one, do not know if 
they have the money to afford good compliance officers, and 
two, where are they going to find good compliance officers? 
They are few and far between and it is an extreme cost that is 
being added.
    So the bank is being squeezed from revenue, on the expense 
side, and what needs to be done, then, to address this? Why are 
banks not offering the services to the middle class? Service 
charge income--you have read in the last two or 3 days the new 
service charges going in, and as you had said, we have now had 
a transfer of wealth from the consumer through the bank to the 
merchant, which was not the intended consequence of the 
original legislation.
    Alternatives to checking accounts--with these high rates, 
people are going to start dropping checking accounts. What is 
the alternative? Right now, it is the general purpose 
reloadable prepaid card. Well, there are some restrictions in 
that that say if you allow the consumer as a service to pay 
their bills with that card, then we are going to not allow the 
exemption for the prepaid cards on interchange.
    And so the providers are faced with, do we cut service or 
do we cut our revenues, and that is yet to be determined what 
is going to happen.
    Finally, let me talk about the CFPB for a moment. As I said 
earlier, I think it is needed. My concern is there is a 
concentration of power the way it is currently structured, and 
I am concerned about accountability. I think my opinion is it 
should be accountable to Congress.
    And finally, I believe the Director ought to report to a 
board, and let me tell you why. I think that board ought to be 
representative of prudential regulators and members of the 
industry. That way, when regulations are proposed, all those 
people can deal with--the prudential regulators can deal with 
safety and soundness issues, because right now we separate 
safety and soundness from consumer protection. And members of 
the industry can make their point of what is the potential 
unintended consequences of the proposed regulation.
    So what are the options that are available out there right 
now? Well, overdrafts are still there for checks, and I still 
maintain that is a valuable service to the consumer. The other 
option for credit are what some of the larger banks are 
testing, deposit advance products, which our next member of the 
panel will talk about his product. Yes, they are expensive, but 
they are in demand. And it is interesting when you talk about 
demand. With Reg E, you are requiring the consumer to opt in 
for debit card transactions, which I thought would be very low 
because I did not see the value. It has turned out to be an 
extraordinarily high opt in. Why? I do not understand. It is 
the consumer acting, saying they want that service. So I think 
we need to strike a balance, consumer needs, consumer-driven, 
market-driven solutions versus strictly regulatory-driven 
solutions.
    I will be happy to answer any questions. Thank you.
    Chairman Brown. Thank you, Mr. Flores.
    Mr. Fecher, welcome.

  STATEMENT OF DOUGLAS FECHER, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, WRIGHT-PATTERSON FEDERAL CREDIT UNION, FAIRBORN, OHIO

    Mr. Fecher. Thank you. Thank you, Mr. Chairman. We have 
spent a lot of time talking about consumer balance sheets, and 
I am with Wright-Patterson Credit Union and we are in the 
business of fixing consumer balance sheets. We are in Dayton, 
Ohio, as you noted. We are a community hard hit by this 
economy. In the last 3 years, we have lost 33,000 jobs in 
Dayton. Our members are facing an uncertain financial future.
    I have a lot of the same statistics some of the other 
witnesses had on the incredible rise in consumer debt over the 
years, the drop in their savings rates, which at one point even 
became negative, the drop in their home prices, and the one 
that is most alarming to me, household net worth is $5.5 
trillion less today than it was at the beginning of the 
financial crisis.
    But I am the one on the street trying to serve these folks 
who come in that are overloaded with debt. They cannot afford 
to make their next car payment. They are worried about their 
house. They do not know what to do next and they come to see me 
at the credit union and our staff.
    Clearly, the need for our affordable financial services 
have never been greater, and that is where I think the 
cooperative credit union model comes into play. Our mission is 
simply this. We help folks achieve financial freedom for 
themselves and their families.
    Specific to debt, this whole issue of debt, the way you 
make good loans is you make them up front in a way that they 
can afford to be repaid and you know that going in. You make 
them for provident and productive purposes, not speculative 
purposes. You tell the members exactly what their loans are 
going to cost. You make sure they know every single fee that 
they might be faced with in the future. You take every 
opportunity to advise the member on how to increase their 
savings accounts, even when they are taking out a loan. And if 
they do happen to fall behind, you treat them with dignity and 
respect and work with them on a plan to bring them back to 
financial health, if that includes modification, adjusting 
their rate, or whatever it takes to get them back to financial 
health, although I do not agree that reducing principal 
balances ultimately will just shift the cost somewhere else in 
the economy.
    These principles are the foundation of the way Wright-
Patterson Credit Union lends money. We try to create an 
environment where we help people change their lives. In my 
written testimony, you will see several stories of how we serve 
members through mortgage modifications, credit cards that are 
not designed to tempt people to spend money but designed to 
help them pay down their debt. We have emergency payday loan 
products that are affordable for a borrower who runs into a 
short-term need of emergency cash.
    We educate. We serve the airmen and airwomen of Wright-
Patterson Air Force Base and we find them in great need of 
first-time car buyer loans, but they have never borrowed money 
before and they do not know how. So we teach them how to do 
that through our financial counseling and education services, 
just to name a few of the things that we have done.
    We are proud of the way we help our members save because we 
can see the impact it makes on their lives, but I have to take 
the other side on some parts of this. Like all smaller 
financial institutions--we are under about $2 billion in 
assets--we face challenges that make it harder for us to do 
this stuff. Since 2008, we have been given more than 160 new 
rules and regulations from some 27 different financial 
agencies, or Federal agencies, despite the fact that our 
Nation's credit unions had nothing to do with the financial 
crisis.
    While we would rather hire loan advisors, the people that 
can meet with our members to teach them how to make better use 
of their own money, we find ourselves trying to hire compliance 
officers, and that is the truth. It is not a statement other 
than the truth. And all we really do with those compliance 
officers is demonstrate that we have always tried to do the 
right thing. The fact is, our Nation's community-based 
financial institutions, as I sit here today, are worried that, 
ultimately, if you are under a billion dollars in assets, you 
could be regulated out of business. This country does not need 
fewer small institutions, it needs more of them.
    I would also like to comment briefly on the CFPB. I have to 
admit, we are a little concerned that it might create another 
level of regulation for us to follow, but we support the goals 
of the agency. There are abuses going on that need to be 
curtailed. I note that we have a branch in an area of town next 
to a pawn shop, next to a payday lender, and the only one there 
that is regulated is us. The CFPB needs to address that fact.
    I also think that the greater transparency in the 
simplified disclosures that a new agency such as this would 
require would highlight the way credit unions have always done 
business. I can also talk about Richard Cordray. He has 
outstanding qualifications and he understands the unique role 
of credit unions and what they do in the lives of consumers. 
But I have to say this. We hope the agency empowers credit 
unions and other lenders to do their jobs of helping consumers 
to save and make better use of their loans without adding an 
excessive regulatory cost. And we hope Congress will ensure the 
Bureau fulfills its mandate to address unnecessary and 
burdensome regulation.
    I will close quickly with an email I received just last 
week from a member who personifies the typical financial 
challenge faced by our membership. I quote, ``I am writing you 
today to inform you of the difference your company has made in 
my life. My previous car payment was $348, and with my rent 
being $699 a month, including my other household bills, I could 
barely make ends meet. Some weeks, I could not feed myself due 
to the strain of having this enormous car payment. Just 2 weeks 
ago, your credit union approved me for a car payment of $192. 
You guys saved me $156 each month. My interest rate went from 
24 percent to 8 percent. You guys helped me keep food on the 
table.''
    I get emails like this all the time and it affirms to me 
that we are doing exactly what you want us to do. We are taking 
care of consumers, helping them improve their financial 
situation, putting money back in their pockets. In fact, this 
year alone at Wright-Patterson Credit Union, we have saved our 
members more than $10 million in loan interest costs by 
refinancing their high-interest loans to lower rates.
    To conclude, I believe in the power of America's 
cooperative credit unions. We have always been here for 
consumers, often when they have had nowhere else to go, in good 
times and bad. A credit union cannot be bought and it cannot be 
sold. If Congress strengthens and empowers credit unions, 
credit unions will do even more to help people keep more of 
their hard-earned money.
    I will be happy to take any questions that you have. Thank 
you.
    Chairman Brown. Thank you, Mr. Fecher.
    Ms. Rademacher.

  STATEMENT OF IDA RADEMACHER, VICE PRESIDENT FOR POLICY AND 
        RESEARCH, CORPORATION FOR ENTERPRISE DEVELOPMENT

    Ms. Rademacher. Thank you. Good afternoon, Chairman Brown 
and Ranking Member Corker and also Senator Merkley. I commend 
you for devoting a hearing to the issue of building middle-
class wealth at a time when our collective and individual 
balance sheets are very much in the red, as we have been 
hearing about.
    Some would argue that in the current economic climate, it 
is not realistic to focus on saving and wealth building, but 
saving is exactly the right issue to focus on. It is critical 
for low, moderate, and middle-income households precisely 
because these are the families most vulnerable to income shocks 
from job loss, medical emergencies, and other costs which can 
knock them totally off course financially. And borrowing one's 
way out of one emergency often sets up a downward spiral of 
debt that can be extremely difficult to recover from.
    The need for short-term credit can also be understood as a 
need for liquidity and for savings. Research from the Urban 
Institute shows that a relatively small nest egg of about 
$4,000 provides as much protection against material hardship in 
the face of an economic shock as being in the next highest 
third of the income distribution.
    The middle-class squeeze in America is more pronounced and 
more consequential than at any time in modern history. 
Regarding savings, over half the population does not have that 
$4,000 nest egg I just mentioned. And regarding wealth, the 
latest report from the Pew Hispanic Center found that the 
median household wealth for Hispanics fell 66 percent from 2005 
to 2009, 53 percent for African Americans, and 16 percent for 
white households. The net worth of white families now stands at 
18 to 20 times that of Hispanic and black households in 
America, the largest gap in 25 years.
    Regarding credit and debt, I will not go over all of the 
statistics my colleagues here have already talked about. I 
would say that over half of consumers in the U.S. have what can 
be considered subprime credit scores at the moment.
    The recession has clearly exacerbated financial problems, 
but at another level, these problems reflect years of 
Government policy decisions that disproportionately, if 
unintentionally, help high-income households build assets while 
virtually ignoring the needs of middle-class and explicitly 
penalizing efforts by low-income households to save and to 
invest.
    Last year, CFED and the Annie E. Casey Foundation published 
a report called ``Upside Down'' which showed the Federal 
Government spends upwards of $400 billion a year to encourage 
Americans to save and to build assets. But the policies are 
primarily embedded in the tax code, and as a result, they are 
overwhelmingly inaccessible to middle- and lower-income 
households who do not itemize and who have a limited tax 
liability.
    In the study, we found that taxpayers making $1 million or 
more in 2009 received a tax break of about $95,000, which is 
enough to help finance a pretty good college education for one 
of their kids. Tax filers making less than $20,000 got a break 
worth about $5, which is enough to pay for 2 days of school 
lunch. This expensive, ineffective, and skewed allocation of 
tax subsidies has been relatively ineffective at generating new 
net savings and has added to both the Federal deficit and the 
growing wealth gap.
    Without adequate savings, without adequate income, or 
without adequate product options, the real financial choices of 
millions of Americans are limited. I would urge Members of the 
Subcommittee to take the following actions to improve the 
financial security of all Americans.
    First, confirm a Director to lead the CFPB. One of the main 
goals of Dodd-Frank was to unify the entire financial services 
marketplace under one set of clear, transparent rules with 
consumer financial well-being in mind. Without a Director, the 
CFPB is limited in its ability to regulate in many sectors of 
the market, including nonbank financial institutions, payday 
lenders, private education lenders, consumer credit rating 
agencies, and mortgage servicers.
    Congress should also encourage the CFPB to focus on 
improving disclosures for all consumer financial products and 
on helping consumers build their credit scores by ensuring the 
accuracy of credit reports and by expanding the amount of 
information reported to consumer credit rating agencies that 
could help build the credit files of thin and no-file 
consumers.
    Beyond the CFPB, Congress can do much more to support the 
goals of wealth building in low and moderate-income families. 
Specifically, Congress should remove penalties in our safety 
net programs for developing savings that can help families move 
beyond--move into financial independence. Congress should 
follow the lead of States like Ohio that have eliminated asset 
tests in their TANF program. Congress could also consider 
reforming the asset test in the SSI program, following the 
trend of asset limit reform occurring at the State level for 
TANF, SNAP, and Medicaid programs.
    By expanding the savers' credit and making the credit 
refundable, Congress could provide a powerful, easy, safe 
incentive to as many as 50 million lower-income tax filers who 
desperately need to build savings. Congress additionally 
enacting the automatic IRA would enable the 78 million workers 
who lack access to employer-sponsored retirement plans to use 
payroll reductions to open and fund IRAs with minimum effort.
    Congress should reauthorize the Assets for Independence 
Act, which supports one of the few programs geared specifically 
to low-income families that helps to support wealth building 
and financial education to help these households get ahead.
    And Congress could also support, as my colleague raised, 
the creation of child savings accounts to greatly expand the 
economic mobility of millions of children.
    Taken together, these policies cost a small fraction of the 
billions of dollars the Federal Government currently spends to 
subsidize asset building, and they could easily be funded by 
capping some of the existing and exclusive tax breaks now in 
place. More importantly, they would begin to address some of 
the long-term inequities that contribute to the wealth gap, and 
they would help millions of families build a more secure 
economic future. Thank you.
    Chairman Brown. Thank you, Ms. Rademacher.
    Ms. Weinstock, welcome.

   STATEMENT OF SUSAN K. WEINSTOCK, DIRECTOR, SAFE CHECKING 
      PROJECT, PEW HEALTH GROUP, THE PEW CHARITABLE TRUSTS

    Ms. Weinstock. Thank you. Thank you for the opportunity to 
discuss Pew's research on the importance of transparent and 
fair financial products and services as well as their use as a 
means to build and sustain wealth. Based on research and 
critical analysis, the Pew Health Group seeks to improve the 
health and well-being of all Americans, an important component 
of which is consumer financial product safety.
    The most common of these products is the checking account, 
which 9 out of 10 Americans have. In October 2010, the Pew 
Health Group's Safe Checking Project began a study of more than 
250 types of checking accounts offered online by the 10 largest 
banks in the U.S. which held nearly 60 percent of deposits 
nationwide. Through this research, we identified a number of 
practices that put consumers at financial risk, potentially 
exposing them to high costs for little benefit.
    I would like to highlight three of our policy 
recommendations. Number one is the need for a disclosure box 
laying out account terms, conditions, and fees. Number two is 
complete disclosure of overdraft options. And number three is 
prohibition of transaction reordering that maximizes overdraft 
fees.
    First, 111 pages. That is the median length of disclosure 
documents from the 10 largest banks in the United States. I 
think we all can agree that disclosures are critical for 
consumers to make informed decisions, but the information needs 
to be presented in a format that is clear and understandable. 
Obviously, with 111 pages, the checking accounts in our study 
did not meet this transparency standard. These documents are 
not user friendly, with highly technical and legalistic text. 
For this reason, we developed a model disclosure box to provide 
relevant information to checking account customers which is 
included in my written statement.
    In developing a disclosure box, we tested drafts with 
consumers in three cities. Participants thought the box would 
be useful if they wanted to investigate a bank's offerings and/
or compare multiple banks on the basis of fees. As a follow-up, 
in July of 2011, we commissioned a national survey of U.S. 
checking account holders. Seventy-eight percent of account 
holders believe it would be a positive change to require banks 
to provide a one-page summary of information about checking 
accounts' terms, conditions, and fees, while only 4 percent 
think this would be negative.
    Our second research finding concerned overdraft options. 
Currently, there are two main categories of overdraft products. 
We define overdraft penalty plans as short-term advances made 
for a fee by the bank to cover an overdraft, the median cost of 
which is $35. Overdraft transfer plans involve a transfer from 
another account, either a savings account, a credit card, or a 
line of credit, with a median cost of $10.
    As of August 15, 2010, new Federal Reserve rules required 
that customers must opt into an overdraft penalty plan that 
covers debit card transactions at points of sale and ATMs. If a 
customer does not opt in, any debit card transactions that 
overdraw the account will be denied and no fee will be charged. 
While Pew supports this rule, we would have preferred for the 
Fed to also require that comprehensive information about all 
available overdraft options, including fee amount, be provided 
to consumers who need to understand that they have three 
overdraft options and what each costs: Not opting in, which is 
free; overdraft transfer plans; and overdraft penalty plans.
    Now that these rules have transferred to the Consumer 
Financial Protection Bureau, we believe that the CFPB should 
amend the overdraft rules to ensure that overdraft policy 
disclosures are clear and comprehensive. They should require 
full disclosure of all three overdraft options prior to opt in 
and as part of the disclosure box.
    Americans strongly support this added disclosure. In our 
July survey, 83 percent of account holders said they want banks 
to be required to provide a summary of information about 
overdraft options, while only 2 percent said this would be a 
negative change.
    An additional research finding is on bank processing of 
deposits and withdrawals. Banks' reorderings of transactions 
can greatly impact the overdraft fees that consumers incur. At 
the time of our study, all banks and all accounts reserved the 
right to process all debits presented in a given day from 
highest to lowest dollar amount. Since that time, Wells Fargo, 
Chase, and Citibank disclosed that they will no longer reorder 
certain types of transactions for at least a portion of their 
accounts.
    Posting orders that maximize overdraft fees, especially 
those that post withdrawals from largest to smallest, continue 
to be the subject of court challenges. A Federal judge in 
California ruled against a bank on this practice and stated in 
his summary of the case, quote, ``The essence of this case is 
that Wells Fargo has devised a bookkeeping device to turn what 
would ordinarily be one overdraft into as many as 10 
overdrafts, thereby dramatically multiplying the number of fees 
the bank can extract from a single mistake.''
    Depository institutions should be required to post deposits 
and withdrawals in a fully disclosed, objective, and neutral 
manner that does not maximize overdraft fees, such as 
chronological order. Our July survey shows that 70 percent of 
checking account holders agree.
    Finally, this month, we will release a longitudinal study 
of 2,000 low-income Los Angeles area households. We found, not 
surprisingly, that between 2009 and 2010, a time of great 
economic turmoil, the ranks of those without a bank account 
increased, with more families leaving banking than opening 
accounts. But what was surprising was the most common reason 
these households cited for leaving banking was unexpected or 
unexplained fees, not the loss of a job or a decrease in 
salary. We also found in times of economic decline, consumers 
with a bank account fared better and were more likely to be 
able to pay bills and also save for the future.
    Our research demonstrates the central role that bank 
policies and practices have in allowing consumers to understand 
the terms and conditions of their bank accounts. Making this 
marketplace fairer would allow consumers to manage their money 
responsibly. Providing information in a clear, concise 
disclosure box will enhance competition and make the market 
more efficient.
    In addition, practices that maximize fees, like transaction 
reordering, should be prohibited. Transactions should be 
processed in a predictable, objective, and neutral manner that 
responsible consumers can follow. These changes will allow 
consumers to build and sustain wealth by removing much of the 
hidden risk currently found in checking accounts. Thank you.
    Chairman Brown. Thank you, Ms. Weinstock. Thank you all.
    Mr. Boshara noted in his testimony that family wealth has 
been concentrated in home ownership, which he said, quote, 
``has contributed to the stability and upward mobility of 
millions of families in this country.'' Well, we know the 
effects of the housing crisis, including both predatory 
mortgages and foreclosure fraud, on middle-class wealth 
building. Let me ask a specific question that all eight of you, 
I would like to answer. Be as brief and as concise and 
prescriptive as you can.
    What can consumer protection do to promote home ownership 
as a vehicle for saving? And you, unfortunately, Professor 
Mian, had the least time to think about the answer, but I will 
start with you. What can consumer protection do to promote home 
ownership as a vehicle for saving in the sort of traditional 
ways that we used to or have in this country, and many people 
still are able to?
    Mr. Mian. I think that the main problem, at least in 
hindsight and from our historical experience, has been that 
even when these kind of policies are successful, sometimes they 
may be too successful in the sort run, like we saw in the 2000s 
when the home ownership rate increased by a lot, and that, in 
turn, can lead to a boom or a bubble in house prices, as well.
    So as we think about incentivizing people to build value in 
their houses, we should also think about what if the economy as 
a whole makes a mistake and things turn south. Do we have the 
protection, the downside protection, that is, and that is 
something I was emphasizing in my initial remarks, as well. We 
also need to think about downward protection. And that is why I 
was talking about we should--when we put these regulations in 
place, we should also think about circumstances. How will the 
regulated and the economy react in case house prices fall by 20 
percent and we have to reallocate the savings and debt across 
the economy?
    That is the fundamental problem that we are facing right 
now, and I would just urge lawmakers to think about those 
scenarios, as well, and not just expanding or helping 
homeowners with more access, but in circumstances when things 
turn south, how will the economy react, or will we force people 
to go into foreclosure and things like that.
    Chairman Brown. Professor Porter.
    Ms. Porter. I think one answer is that buying a house is 
one of the biggest financial decisions people will make and it 
is an opportunity for them to have conversations with 
thoughtful, concerned financial institutions like the community 
financial institution that Mr. Fecher works for, about their 
overall financial profile.
    So one of the things we have already seen the Consumer 
Financial Protection do is respond to its mandate in Dodd-Frank 
to simplify disclosures and create a combined Truth in Lending 
and RESPA disclosure. So go from multiple disclosures enforced 
by multiple regulators to one disclosure enforced by one 
regulator. That kind of simplification and the kinds of 
financial education that the Consumer Financial Protection 
Bureau is doing, that conversation about purchasing a home 
needs to be seen as part of a larger financial strategy, not as 
a one-off decision that is a sure bet in the economy, because 
as Professor Mian says, it may not be.
    So I think part of it is to continue to emphasize 
counseling, purchasing, disclosures, and to think about home 
ownership as one step toward building a financial future rather 
than as the only step or as a sure bet financial strategy for 
middle-class families. We have too many families who put all of 
their savings eggs in the housing basket, and I think the 
financial education role of the Bureau and the initiatives they 
have already rolled out in this regard, their ``Know Before You 
Owe'' initiative is a good example of how to combat some of 
that.
    Chairman Brown. Thank you.
    Professor Lawless.
    Mr. Lawless. Yes. I will try to be really brief, because I 
think there is consensus here, and I think this is a consensus 
in the academy that there has been too much of an overreliance 
on home ownership as a way to build wealth rather than focusing 
on housing as an item of consumption.
    So, Senator, with all due respect, I would somewhat argue 
the question. I do not think that we ought to use home 
ownership as a wealth-building strategy, although I do agree 
home ownership is something that many people will aspire to and 
something that we ought to encourage. But I would encourage us 
to think about housing costs rather than home ownership, and as 
Professor Porter and Professor Mian said, have home ownership 
just be part of a much bigger financial picture.
    Chairman Brown. Thank you.
    Mr. Boshara.
    Mr. Boshara. Well, I agree very much, of course, with the 
recommendation to diversify a family's assets beyond their 
homes, as I have mentioned. I think that is the most important 
thing.
    Second, we need to be clear that home ownership is 
something that is not for everybody. We have to balance risks 
and rewards and be smart about how we do home ownership going 
forward.
    Specifically, though, to generate savings, there are a 
couple of ideas. One is that we could escrow savings, just like 
we escrow mortgages, mortgage insurance and property taxes, so 
that when you make your payment, a portion of your payment goes 
automatically into a savings account and you just buildup this 
savings account without thinking about it, and so that when the 
roof breaks or you have some sort of emergency, you have a 
stock of savings already generated. So, you know, I would think 
about building in that savings product into the payment itself.
    The other thing I would think about is thinking of ways to 
let families capture the upside of wealth accumulation through 
their homes, which is what we want, and then, therefore, using 
that equity for other asset building purposes, but to pool the 
risk of a down market. You know, is there a way to somehow 
socialize the risk of price decreases. Professor--I wrote down 
his name and do not have it here--you know, there are proposals 
out there right now to basically pool the risk of a down market 
so more homeowners can reap the upside of a good housing 
market.
    Chairman Brown. Thank you, Mr. Boshara.
    Mr. Flores.
    Mr. Flores. I think we are getting there. I think banks are 
getting back to the traditional underwriting requiring 20 
percent down. That is going to say a lot of people are not 
going to qualify for home at this point in time. If they save 
and get to that 20 percent down, then they will.
    The next issue, and I take a little bit different tack than 
my colleague over here is home equity lines of credit. Over the 
last 10 years, it has been a piggy-bank for consumption and 
that is eaten--even if we did not have a down economy, that has 
eaten up their equity. That economy just exacerbate it.
    So I think if somebody has that, if they have got the 
equity, if they are going to go in for a home equity line, then 
certainly counseling about what is the impact, what are the 
appropriate purposes of home equity should suffice, and this 
all boils down to financial literacy. Whatever form that takes, 
whoever provides it, it is a need in this country.
    Most people do not understand how to handle money. They do 
not understand the basics of banking. And then when we get into 
these high dollar credits that they are involved in, they need 
some assistance in understanding that.
    Chairman Brown. Mr. Fecher.
    Mr. Fecher. Thank you, Senator. I would agree with some of 
the previous commenters, that we need to be careful to think 
that just owning a home is a way to build wealth. In some cases 
it is; in very many cases it is not. If I were advising a 
member, I would make sure that they have a savings account set 
up and get in the habit of putting money into it before they 
ever thought about building wealth through a home, because when 
the downside hits the housing market, it hits hard, as we have 
seen, and it can wipe out every bit of wealth that a moderate 
income person might have.
    So I think as part of the bigger financial picture, just as 
has been discussed on the disclosure side of it, I agree. We 
need a shorter way to tell members what, or consumers, what a 
mortgage loan is going to cost them and their family, what the 
consequences of future events might be, for example, if it is a 
variable rate loan, not what the first payment is going to be, 
but what the highest payment of the loan might be so that they 
do not spend money they do not have to spend on a loan that 
they can put back toward their health.
    So it is a complex answer, but it is part of a bigger 
financial picture and it takes sitting down with the member and 
showing them what is best for them, and each situation is 
different.
    Chairman Brown. Thank you, Mr. Fecher. Ms. Rademacher.
    Ms. Rademacher. Thanks. I think it is important to think 
about saving as both something that has to do with the product 
and the protections, and when you think about a house, in terms 
of the product and what it takes to get the right product, 
consumer education, specifically home purchase education and 
the home prepurchase counseling is critical.
    Also, the types of disclosures that are available so that 
somebody can understand the kind of product they are 
purchasing. It is a very important piece of the mix. In terms 
of protections, I think that the CFPB is already looking into 
this in pretty expensive ways.
    I would say that one of the studies we did a couple of 
years ago when we looked at home owners who had purchased 
homes, low-income homeowners who had purchased with an IDA, 
compared to other low-income homeowners in those same 
communities that had purchased homes at the same time, that IDA 
gave them prepurchase counseling and ensured that they had 
savings and skin in the game when they went into that.
    When we looked at long-term rates of home ownership and 
long-term foreclosure rates, we found that if you compared the 
low-income homeowners from the IDA study with other low-income 
homeowners in that area, less than 1 percent of the IDA 
purchasers used a subprime loan versus 20 percent in the larger 
market, and the foreclosure rate was about three times less.
    So I would say that home ownership is still a value for us 
to think about in terms of a way for low-income communities to 
build wealth. It has to be done very clearly, concisely, with 
the kinds of inputs and the kinds of education and the kinds of 
protection others have talked about. Thanks.
    Chairman Brown. Thank you. Ms. Weinstock.
    Ms. Weinstock. I should first say that Pew is a data-driven 
organization and we really have not looked at housing per se, 
but I also want to say that I think it is very important that 
people be banked, and that the research that we did in Los 
Angeles proved that.
    Forty-seven percent of the banked said that they saved when 
they could, and one-third of all banked used an automatic 
savings feature to move money regularly into a savings account. 
And also, I think the savings part is the first step to moving 
on to greater purchases or whatever.
    Chairman Brown. Thank you. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and again, thank 
each of you for your testimony. As I look at the panel, sort of 
Mr. Boshara over, I think most of the witnesses have talked 
about solutions and ways of moving ahead. I look at the first 
three witnesses as more talking about consumers as victims. And 
it has really been interesting to sort of have that dichotomy 
here on the panel.
    It seems to me that western democracies in general, 
governments have over-levered, consumers have over-levered. I 
mean, it has been sort of the culture, if you will, of western 
democracies in many ways, not every one of them, but certainly 
in our country, and Senator Brown and I were talking and I 
certainly could not blame Democrats for all of this occurring.
    There have been some policies that they have pursued. I 
certainly could not say that Republicans were to blame. It just 
seems to me that as a society, what we have done over the last 
20 years or so is really move toward people consuming a lot 
more and taking on more credit, and much of what we are seeing 
happen today is just a result of our culture.
    I wonder if the first three witnesses, in any way, would 
respond to that briefly.
    Mr. Mian. Thank you, Senator. Yes, I think that is a 
question that I analyze almost on a daily basis. I apologize if 
my speech kind of sounds more like an academic or an economist, 
but that is just the nature of how things are.
    Any economy has two kinds of people, borrowers and those 
who lend them money, the lenders and the savings, and that is 
true for the U.S. and that is true everywhere. That is number 
one, that is basic fact number one.
    Basic fact number two is economies overall are going to 
make mistakes. Things are going to go up and sometimes things 
are going to come down, house prices, other kinds of assets and 
so on. The problem that we are having in the U.S. and, indeed, 
the problem that we having globally is the following: We had a 
big bubble, let us assume that happened, in the housing market, 
for example.
    As things come down, we have to distribute losses across 
the population. That is just a fact of how the things are. And 
the question is, how are those losses distributed across the 
population? Under the way our financial system is structured, 
which is largely a debt-based financial system, debt is the 
losses.
    The first person to get hit with those losses is the 
borrower. That is just the nature of those contracts, and that 
is fine. I think at the individual level that is fine. We can 
say each person is responsible for how much they borrow. But 
none of us individually control the macroenvironment.
    So when the macro environment turns negative, the losses 
are disproportionately shifted on one segment of the economy. 
So internationally that happens to be Greece. Within the U.S. 
that happens to be underwater homeowners and the borrowers.
    And the big question is, what do they do in response to 
that financial pressure that is being shoved in one segment of 
the economy? This is what I talked about in my opening remarks. 
They are cutting back. Many of them are still paying back their 
mortgages and so on, but they are cutting back drastically on 
their consumption, which is affecting aggregate economy and 
total output and employment.
    The big question is, that problem can be solved if people 
who are the lenders and the savers correspondingly increase 
their consumption. But interest rates have fallen to zero and 
they are still trying to save. That is why interest rates are 
zero, because they still want to save more and more.
    So there is this dichotomy that on the one side, the savers 
and those without the wealth, they actually are still trying to 
save a lot more when they should be reallocating their money 
back into society in goods and services. But they are not being 
convinced to boost their consumption and their investment.
    And that is the misbalance that we have had, because of 
this over-leveraging of the economy in the household sector for 
the U.S., and also more globally with the sovereign debt 
problem. And we have to realign this tension, this dichotomy 
between the saving class and the borrowing class, and part of 
it has to be that we have to distribute losses more equitably. 
That is a challenge for the financial system as a whole.
    Senator Corker. I find your solution really odd. I mean, 
you have got 9 out of 10 borrowers who are current on their 
mortgages. You have got 1 out of 10 that are not, and what you 
have really thrown out is the bank creating a partnership with 
the borrower so that when things are all good, the borrower 
bears the fruits of--or has the fruits of home equity, but when 
things go bad, then the principal amount goes down as far as 
what the bank is owed. That is really strange.
    And what that does, I think, is drive up everybody else's 
borrowing cost within the system. So I have to say, that is one 
of the oddest proposals I have ever heard and really goes 
against the grain of those people who are responsible being 
able to get lower rates to borrow their loans because they are 
responsible. Those people that are irresponsible, in essence, 
are creating a burden for every other borrower. And you think 
that is the way we should solve this problem?
    Mr. Mian. I think partly one can argue that it is true that 
the cost of credit was too cheap or too low. So to the extent 
that we put part of the perceived burden looking forward back 
on the lenders so they price these costs in, it might actually 
be useful to limit the over-leveraging of the sector.
    So just the fact that the cost of credit goes up, it is not 
always good for the cost of credit to go down if people do not 
take into account these macroeconomic costs, or extranalities 
as they are sometimes referred to. That is number one.
    But I think that the broader principle is that one can 
design these contracts in a way that you can also give some of 
the upside to the lender so as to minimize the cost up front. 
And certainly, if someone comes in with enough of a 
downpayment, it will actually build into the downpayment 
requirement as well.
    If someone comes in with enough of a downpayment, then you 
do not have to worry about the bank absorbing too much of the 
down side.
    Senator Corker. Obviously during the Dodd-Frank debate, I 
tried to cause there to be a minimum downpayment. I think what 
you are actually arguing is what many folks on my side of the 
aisle have argued for years, and that is that people ought to 
have a reasonable downpayment.
    I think Mr. Flores alluded to that and I think Mr. Fecher 
agrees with that. People ought to have a downpayment and we 
should not subsidize the interest rates for housing. They ought 
to be based on fair market values, and that is something that 
many of us have been arguing for years. Hopefully we will get 
to that point.
    But I have to say, the idea of basically creating a 
partnership whereby if things go good, one side wins. If things 
go bad, the lender loses. It is really odd and I doubt that 
will make it into the mainstay here. But do you want to go 
ahead, Mrs. Porter, and respond?
    Ms. Porter. So you hypothesize that--you said that you 
think it has been sort of the culture of democracies to over-
lever?
    Senator Corker. The culture recently in many western 
democracies has been over-consumption, by Government, by 
individuals, by--you know, it has just been an over-spending 
type of arrangement. And I find many of these solutions, 
solutions that are being created to sort of cause people's 
culture to overcome the culture that has been created, when 
maybe the real solution is just causing people to not consume 
as much and not borrow as much.
    I mean, what really happened was, it seems to me that 
financial institutions were meeting the needs of consumers. 
Consumers wanted to be able to borrow more and they did. There 
is no doubt there are products that were out there that were 
tricky, and I understand all that, and I am all for disclosure.
    I myself, I feel like I am fairly sophisticated, but have a 
difficult time reading some of these disclosure forms. I am all 
for that, but the fact is, it seems like many of the solutions 
or many of the things that you all talked about was people 
being victims when, in essence, it is kind of way society has 
been in general over the last 20 or so years.
    Ms. Porter. OK. So I do not think of consumers as victims 
and I do not think I used that word. What I do think is that 
there have been decades of taking on increased debt. Part of 
that increased debt reflects stagnation in wages and 
difficulties in keeping up with levels of consumption.
    So we have had very sharp increased costs in health care, 
sharp rises in tuition costs, a run-up in the housing market 
which in part was fed by cheap credit in the housing market. So 
some of the costs of treading water have been met by borrowing.
    I think that one of the major justifications for getting 
the Bureau put to work quickly is I think we have gone from, as 
you said, cultures of over-levering to just sort of cultures of 
panic. And so we see families who really do not know what to do 
in today's economy. Should I still buy a home? Is buying a home 
still safe? If it is, what kinds of products are out there? How 
should I navigate in this economy?
    And I think that having the Bureau fully operational with a 
confirmed director, it lets the financial institutions know 
where to take their questions and concerns. It lets families 
know where to take their questions and concerns. So I think it 
is finding that new culture going forward. We need certainty in 
order to do that.
    And so, I think that part of this cultural change is we 
know consumers are dialing down on consumer debt and that 
consumer debt is dropping. What they do not always know, as 
some of the other panelists have talked about, is where to put 
that money if they are not going to consume it, how to save it 
properly.
    And so, I think the CFPB, the Bureau, is a very important 
part of rethinking our culture and engaging in conversations 
with financial institutions about their role and engaging in 
conversations with families and bringing those two parties 
together for conversation. I think right now you just have 
uncertainty about the future of the Bureau.
    Senator Corker. This Bureau is going to have an even more 
expanded role than I thought in causing culture to change. Let 
me ask you this. I mean, would it be detrimental, do you think, 
to this new Bureau to have a board of directors that this new 
person who is doing all these things you just mentioned could 
bounce off decisions? I mean, would that be something that you 
think might be helpful to someone who might be heading this 
Bureau?
    Ms. Porter. I think there already are procedures in place 
in the design of the Bureau that Congress enacted.
    Senator Corker. But would a board be harmful?
    Ms. Porter. I think a board could be harmful, yes. I think 
that the procedures that are there, like the normal 
Administrative Procedures Act rulemaking provide a well-known, 
long-standing mechanism.
    Senator Corker. What kind of organization do you have? What 
is the name of your organization?
    Ms. Porter. Oh, sorry. Who I work for?
    Senator Corker. Yes.
    Ms. Porter. I am a law professor.
    Senator Corker. OK. And does the school that you work with, 
do they have a board of directors?
    Ms. Porter. We have regents, but we also have a president 
that wields an enormous amount of power.
    Senator Corker. And does he have a board of trustees?
    Ms. Porter. We have regents. That is what they are called.
    Senator Corker. So board of regents.
    Ms. Porter. They do not have control over everything and 
they are different than Federal regulators. Most Federal 
agencies, the Department of Transportation, the Department of 
Agriculture, they have single secretaries that are headed by 
single institutions, single people, and we have chosen that 
structure for the vast majority of Government organizations for 
a reason.
    Our financial regulators, like the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, 
the FDIC are headed by single people. So I think the Bureau has 
important checks built into it and I support those checks.
    The fact that they have to go through the rulemaking 
process and allow for rules to have public comment, the fact 
that the Financial Stability Oversight Council has a role in 
looking at what the Bureau is doing, and if necessary, in their 
belief, to serve this financial system, vetoing those rules.
    So I strongly support the checks that are there. I think 
Congress thought very hard about them just 1 year ago. But I 
would not restructure the entire Bureau. And I think this 
threat of restructuring is delaying the Bureau from beginning 
its really important work. I think families need that work to 
start. They are tired of waiting.
    Senator Corker. Well, look, I do not think I have been as 
constructive today, Senator Brown. I apologize. I want to say 
to all of you who have testified, from Mr. Boshara over, that I 
really appreciate the comments you have made. I know our staff 
has made notes and I think there have been a lot of 
constructive comments made.
    I do think as it relates to the Bureau, that it is 
unlikely, based on just reading the tea leaves, that there will 
be a Bureau head unless there are appropriate checks and 
balances, and it is my hope, very soon, I know that I have 
reached out to the Administration, I know others have.
    I hope that very soon those types of checks and balances, 
just having a board and an appropriate veto process, will 
actually occur. I do not think that that is an end-all by any 
stretch solution to many of the problems that have been laid 
out.
    I do want to thank the panelists on this side for many of 
the solutions that you have laid out and the input that you 
have given today, and certainly, Mr. Fecher, the proactive 
activities that are taking place within your organization, and 
certainly the savings issues that you brought forth, Mr. 
Boshara.
    Chairman Brown. Thank you. Now, Ms. Porter, I know that you 
need to leave at 4:30. It is 4:30. We are not asking you to 
leave because you disagreed with Senator Corker because you 
actually agreed with me or I agreed with you. But thank you.
    I have one question, two more questions, and then if 
Senator Corker wants to go again he certainly can too. Any of 
you can answer, any or all of you. Ms. Rademacher said 
something, she pointed out in her written testimony, consumers 
accumulated $18-plus billion in new credit card debt in the 
second quarter of 2011, a 66 percent increase over the same 
quarter in 2010.
    What do any of you make of that? Anybody want to answer 
that? Do not feel obligated, but if any of you want, I would 
like to hear any thoughts.
    Mr. Flores. I think you are operating from a much lower 
base. From 2007 to 2008, credit card lines were cut 
significantly. Balances were reduced significantly. So when you 
look at the growth, that percentage is from a smaller base than 
we have dealt with historically.
    Chairman Brown. Anybody else? Ms. Rademacher.
    Ms. Rademacher. I would agree. I think, especially if you 
look 2 years past, the growth from 2 years ago was 368 percent. 
So I do think there is a rebound. People in the last couple of 
years have gotten comfortable with the credit available again 
and are becoming--moving more toward the use of credit in the 
ways that we had seen it before. So I agree that it was a shock 
that had dipped credit use and then it is actually building 
again.
    Chairman Brown. OK. Professor Lawless.
    Mr. Lawless. Yes, I just wanted to add that this 
illustrates the falsity of the idea that somehow we are now in 
a changed society, that we had this big run-up in consumer 
credit and now, with the financial crisis, subprime lending is 
gone, we are going to be in a different society going forward. 
I think that is just a falsehood and I think the recent 
statistics probably indicate that.
    Chairman Brown. OK. Thank you. One more question. In an 
August Subcommittee hearing, I asked the minority's witness 
about the lack of a permanent director at the Consumer Bureau. 
He said, quote, The anomaly of not confirming Mr. Cordray is 
there will be imposition of the banking sector of consumer 
rules, not a bad thing, but there will not be an imposition of 
those rules in the nonbank financial sector, the shadow banking 
system not a good thing.
    Mr. Fecher, your discussion of the credit union that you 
recently opened to members Center and West Dayton and the 
Wright-Dunbar area of Dayton, what does the lack of a full-time 
director mean for your credit union in relation to who your 
competitors are in that neighborhood?
    Mr. Fecher. Well, I think it is exactly as you just said. 
The fact of the matter, I am the most regulated financial 
service provider in that neighborhood. The least regulated are 
the payday lenders and the pawn shops that are right next door 
to me.
    It is difficult on the consumers. It is difficult on us. We 
support the CFPB and what it tries to do, but the first place I 
would put them is at the unregulated financial service 
provider, the shadow banks and so forth that you talked about 
because that is where the real abuses are taking place. They 
are not taking place in the typical banking sector for the most 
part, in my opinion.
    Chairman Brown. You talked in your testimony, Mr. Fecher, 
about the increasing number of regulations. Can the Consumer 
Bureau help you streamline those regulations and small 
institutions generally?
    Mr. Fecher. I certainly hope so. I certainly hope so. The 
burden--when I first got into this business back in '80s, to 
make a first mortgage loan took a handful of pieces of paper to 
disclose the loan to the borrower. Today the package can be 100 
pages or even 200 pages long.
    When I think of 200 pages that we have to print, train our 
employees how to understand, how to explain them, I just see 
dollar signs adding up. And here is the twist to it. It has 
gotten so complex, I think as Ms. Weinstock said, people do not 
read them. They do not understand them. They do not even try 
because it is a daunting task to look at this stack of pieces 
of paper.
    So what I would like to see the CFPB do is just make it 
easier on the consumer to understand the cost of what they are 
doing in a page or two, if possible, and we need to get rid of 
these entire stacks of disclosures that just confuse everybody.
    Chairman Brown. Thanks. Mr. Flores, last comment.
    Mr. Flores. I would just like to make one comment on the 
shadow banking system. I have done research in the alternative 
financial services space, and yes, payday loans are not 
legislated or regulated at a Federal level, but they certainly 
are at a State level, and in some States, rather significantly 
just like State-chartered banks are.
    So I think it is a bit misleading saying they are 
unregulated.
    Chairman Brown. OK, thank you. I found Senator Corker's 
comments interesting and we have discussed briefly, and he 
expanded on it, the culture of sort of borrowing and spending 
in this society. I think it is exacerbated. I think that is 
part of the story and I agree with him on that. I think it is 
exacerbated by how we have seen incomes go up at the top and 
incomes pretty stagnant for most Americans.
    There was an interesting piece in the Washington Post, a 
front page piece today about CEO pay and how it is not really 
paying for performance anymore, and I was recently at a 
company--well, I will not go into that. But I have just seen 
that there is not the more spouses working, the decline in 
wages, how hard it is for somebody in the middle class now.
    Anyone that wants to make additional comments may submit 
anything in writing in the next week. Appreciate Senator Corker 
being here always, and thank you, all seven of you, for your 
patience and your testimony and your insight and your public 
service. The Subcommittee is adjourned.
    [Whereupon, at 4:37 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
                    PREPARED STATEMENT OF ATIF MIAN
 Associate Professor of Economics and Finance, Haas School of Business 
    and Department of Economics, University of California, Berkeley
                            October 4, 2011
    I thank the Senate Subcommittee on Financial Institutions and 
Consumer Protection for inviting me to talk about the role of household 
leverage in the current economic crisis and the importance of household 
balance sheets in explaining macroeconomic fluctuations. My discussion 
on this topic--which is based on my research over the years with Amir 
Sufi of University of Chicago Booth School of Business--is divided into 
three parts.
    First, I discuss the magnitude and nature of household debt 
accumulation in the U.S. over the past decade. Second, I show how the 
timing and severity of the current economic collapse is closely related 
to the deleveraging of U.S. household balance sheets in the aftermath 
of the housing market downturn. Deleveraging by highly indebted 
households forces them to cut back on consumption. The resulting loss 
in aggregate demand is responsible for a majority of the jobs lost 
during the 2007-09 recession. Finally, I discuss the type of reforms 
needed to resolve the U.S. household leverage crisis and put the 
economy back on track.
Section 1: The Accumulation of U.S. Household Debt
    The increase in household leverage prior to the recession was 
stunning by any historical comparison. From 2001 to 2007, household 
debt doubled from $7 trillion to $14 trillion (see, Figure 1). The 
household debt to income ratio increased by more during these 6 years 
than it had increased in the 45 years prior. In fact, the household 
debt to income ratio in 2007 was higher than at any point since 1929. 
Recent data suggest that over a quarter of mortgaged homes in the U.S. 
are underwater relative to their mortgage value.
    Why did U.S. households borrow so much and in such a short span of 
time? What kind of households borrowed the most? I explore this 
question in a couple of papers with Amir Sufi (Mian and Sufi 2009 and 
2011a). Our explanation for the increase in household debt begins with 
the dramatic expansion in mortgage originations to low credit quality 
households from 2002 to 2007. Mortgage-related debt makes up 70 to 75 
percent of household debt and was primarily responsible for the overall 
increase in household debt.
    We argue that the primary explanation behind the dramatic increase 
in mortgage debt was a securitization-driven shift in the supply of 
mortgage credit. The fraction of home purchase mortgages that were 
securitized by non-GSE institutions rose from 3 percent to almost 20 
percent from 2002 to 2005, before collapsing completely by 2008. 
Moreover, non-GSE securitization primarily targeted zip codes that had 
a large share of subprime borrowers. In these zip codes, mortgage 
denial rates dropped dramatically and debt to income ratios 
skyrocketed.
    An important lesson regarding mortgage expansion during the 2000s, 
is that the expansion does not reflect productivity or permanent income 
improvements for new borrowers. In particular, mortgage credit growth 
and income growth were negatively correlated at the zip code level from 
2002 to 2005, despite being positively correlated in every other time 
period back to 1990. Mortgage credit flowed into areas with declining 
incomes at a faster pace.
    One consequence of the rapid increase in supply of mortgage credit 
was its impact on house prices. As credit became more easily available 
to households that were historically rationed out of the credit market, 
house prices began to rise. Moreover, the increase in house prices was 
not uniform across the U.S. House price appreciated faster in areas 
that had difficult-to-build terrain, i.e., where housing supply was 
inelastic. While this mechanism does not explain all of the cross-
sectional variation in house price growth across the U.S., it does 
explain a major proportion of it. \1\
---------------------------------------------------------------------------
     \1\ In particular, cities in Arizona and Nevada are important 
outliers. See, Mian and Sufi (2009 and 2011a) for more details.
---------------------------------------------------------------------------
    The increase in house prices had a large impact on further 
encouraging the accumulation of debt by households. In Mian and Sufi 
(2011a) we focus on the feedback effect from house prices to household 
borrowing by analyzing individual level borrowing data on U.S. 
household that already owned their homes in 1997 before mortgage credit 
expanded. We find that existing homeowners borrowed 25 to 30 cents 
against the rising value of their home equity from 2002 to 2006.
    The home equity-based borrowing channel is strongest for low credit 
quality borrowers, borrowers with high credit card utilization rate, 
and younger borrowers. Moreover, home-equity borrowing was not used to 
purchase new properties or to pay down expensive credit card balances, 
implying that the new debt was likely used for real outlays such as 
home improvement and consumption. Overall, we estimate that the home-
equity based borrowing channel can explain 50 percent of the overall 
increase in debt among homeowners from 2002 to 2006.
    To summarize, rapid increase in the supply of securitization-driven 
mortgage credit in early 2000s induced U.S. households particularly 
those in subprime neighborhoods to accumulate debt. The expansion in 
credit supply also fueled a remarkable increase in house prices and 
U.S. homeowners borrowed aggressively against the rising value of their 
houses. While overall debt increased by 7 trillion dollars, the 
increase was not uniform across the U.S. Household leverage growth was 
concentrated in areas with relatively inelastic housing supply, and 
among younger households and households with low credit scores.
Section 2: Household Deleveraging, Aggregate Demand, and Unemployment
A. The Beginnings of the Crisis
    The accumulation of debt by households with largely stagnant real 
wages was not sustainable. Markets began to realize this towards the 
second half of 2006 as mortgage delinquencies crept up. In fact many of 
the first set of borrowers to default were those who could not even 
afford to carry their first few months of mortgage payments. Unable to 
refinance or sell their homes at a higher price, many homeowners began 
defaulting on their loan obligations.
    Figure 2 plots the quarterly change in mortgage defaults and 
unemployment, and shows that default rates kept increasing for five 
straight quarters before there was an increase in the unemployment rate 
in the second quarter of 2007. This evidence is suggestive of the 
causal role that high household leverage and a weak housing market 
played in generating employment and output declines (see, Mian and Sufi 
2010 for details). The next section shows more direct evidence of this 
channel.
B. Deleveraging and Aggregate Demand
    How has the sharp rise in household debt from 2002 to 2007 affected 
economic recovery? When a large class of consumers see the value of 
their houses decline and realize that they can no longer rely on 
further borrowing to sustain their standard of living, they go into a 
``deleveraging mode''. Deleveraging refers to the process where 
consumers stop relying on more credit for consumption and start making 
efforts to pay down existing debt to more manageable level. The scale 
of this problem can be judged from a recent study by Core Logic that 
reports that almost a quarter of homeowners who are current on their 
mortgages are underwater.
    Once a large fraction of homeowners start cutting back on 
consumption as a result of deleveraging, there is a reduction in 
aggregate demand and the economy goes into a recession. Interest rates 
fall to help slowdown the fall in consumption and output. However, 
whether interest rate drop is sufficient to halt aggregate demand 
decline depends critically on the extent to which lenders (i.e., 
savers) increase their consumption in response to declining interest 
rates. If--as has been the case in the current slump--even an interest 
rate of zero fails to boost consumption sufficiently for the lending 
class, aggregate demand will fall and the economy goes into a 
recession.
    I explain below how this deleveraging--aggregate demand channel is 
responsible for the large drop in U.S. output and employment. As noted 
earlier, the accumulation of leverage across the U.S. differed widely, 
depending in part on the elasticity of housing supply in an area. There 
are thus important differences across the U.S. in the extent to which a 
given area has suffered from the deleveraging shock. These differences 
are illustrated in Figure 3 that comes from Mian and Sufi (2011c).
    Figure 3 splits U.S. counties into four quartiles based on the debt 
to income ratio as of 2006. High (low) household leverage counties are 
counties in the top (bottom) quartile of the 2006 debt to income 
distribution. The top left panel shows that high household leverage 
counties experienced much more severe house price declines during the 
recession and afterward. House prices declined from 2006 to 2010 by 40 
percent in these areas.
    The decline in house prices represented a severe credit shock to 
households. As the top left panel shows, home equity limits from 2007 
to 2010 declined by 25 percent in high leverage counties. The shock to 
credit availability translated into lower household borrowing. From 
2007 to 2010, debt in these counties dropped by 15 percent, which 
translates into $600 billion.
    The deleveraging shock also translates into aggregate demand. The 
lower right panel shows that consumption--as proxied by sale of new 
automobiles--drops significantly more in high leverage counties. High 
household leverage counties experienced a drop in auto sales of 50 
percent from 2006 to 2009, with only a slight recovery in 2010. Mian, 
Rao, and Sufi (2011) show that the pattern in auto sales in Figure 3 
also holds for consumption across other goods, including furniture, 
appliances, grocery, and restaurant spending. Moreover, within high 
leverage counties, the drop in auto sales is significantly higher in 
more subprime neighborhoods that are hit larger by the deleveraging 
shock.
    The magnitude of the drop in these variables is far smaller in 
counties with low household leverage before the recession. As of 2010, 
house prices were down only 10 percent, home equity limits had dropped 
only 8 percent, and household borrowing was down only slightly relative 
to the 2008 peak. Auto sales dropped sharply even in low leverage 
counties, but the drop was much less severe and the recovery in 2010 is 
stronger.
C. Deleveraging and Unemployment
    Figure 3 shows evidence of weak consumer demand for durable goods 
in high household debt counties. How does the sharp decline in 
consumption in high leverage areas affect aggregate unemployment? 
Answering this question with geographical variation has been difficult 
given an obvious barrier: the goods consumed in one part of the country 
are not necessarily produced in that area. For example, if Californians 
sharply reduce auto purchases because of excessive leverage, the 
decline in auto purchases will likely reduce employment in Michigan. 
Given this one only examines job losses in high leverage areas such as 
California.
    However job losses in goods and services that are nontradable and 
hence must be produced in the city where they are consumed do not 
suffer from this problem. We therefore split consumption goods into 
those consumed locally (nontradable) and those consumed nationally 
(tradable), and use the impact of deleveraging shock on local 
nontradable employment to back out the total effect of deleveraging and 
reduced aggregate demand on employment (see, Mian and Sufi 2011c for 
details).
    The central insight of our approach is that one can estimate the 
aggregate effect of household deleveraging on unemployment by examining 
how nontradable employment varies across counties with varying degrees 
of deleveraging shocks. We classify industries as nontradable if they 
are focused in the retail or restaurant business. Given that high 
leverage counties are those with a large boom and bust in residential 
investment, we explicitly remove construction from the nontradable 
sector. In other words, our nontradable industry category does not 
include construction or any other real estate related business.
    The first step of the empirical methodology is to estimate the 
effect of deleveraging on employment in industries producing 
nontradable goods. The left panel of Figure 4 show a very strong and 
quantitatively large relation between household leverage measured as of 
2006 and employment declines in nontradable industries from 2007 to 
2009. For example, going from the 10th to the 90th percentile of county 
distribution by leverage increase job loss as a fraction of total 
employment in the county by 4.4 percentage points.
    The right panel of Figure 4 repeats the analysis for employment 
losses in the tradable sector and shows that there is no relationship 
between county deleveraging shock and job loss in the tradable sector. 
The reason for this is that losses in the tradable sector are 
distributed equally across the U.S. as mentioned earlier. However, we 
can use the relationship between job losses and deleveraging shock in 
the nontradable sector to back out the number of nationwide jobs that 
have been lost in the tradable sector due to the deleveraging shock and 
resulting decline in demand.
    We do this calculation carefully in Mian and Sufi (2011c) and 
perform a number of checks to ensure that the number we compute is 
driven by the deleveraging--aggregate demand phenomena and not any 
alternative explanation. The total number of job losses that we can 
conservatively attribute to the deleveraging--aggregate demand channel 
is staggering. We estimate that deleveraging of the household sector 
accounts for 4 million of the 6.2 million jobs lost between March 2007 
and March 2009 in our sample. In other words, 65 percent of total jobs 
lost in the U.S. are due to deleveraging and the drop in aggregate 
demand as a result of it.
Section 3: Policy Choices
    The analysis above identifies the deleveraging--aggregate demand 
channel as the most important mechanism responsible for economic 
downturn and job losses in the American economy. The sharp drop in 
consumer demand in areas that accumulated the most leverage and large 
employment losses associated with the drop in consumer demand highlight 
the economic importance of the deleveraging--aggregate demand channel.
    Unfortunately the current deleveraging cycle in the U.S. is 
painfully slow. How long will this cycle last? Despite more than 3 
years since the start of this cycle, the amount of debt paid off or 
written down remains stubbornly small. Out of the 7 trillion dollars 
accumulated over 2001-2007, only about one trillion has been paid down 
or written off. U.S. household balance sheets remain highly levered by 
historical standards. The most recent monthly auto sales data also 
continue to show significant weakness in consumer demand among high 
leverage counties.
    In the face of the very slow deleveraging process and its high 
economic cost, we urgently need policies that help reduce leverage for 
highly indebted households without forcing them into costly actions 
such as bankruptcy and foreclosures. \2\ The threat of foreclosure and 
losing one's home may force many underwater homeowners to continue 
paying their mortgage bills but the resulting drop in aggregate demand 
hurts everyone. Indeed most recent data from Core Logic suggests that a 
quarter of U.S. homeowners owe more than their house is worth, and yet 
continue to make mortgage payments.
---------------------------------------------------------------------------
     \2\ Foreclosures is a very costly mechanism to reduce 
indebtedness, especially in the current environment. In a recent paper, 
Mian, Sufi, and Trebbi (2011), we show that foreclosures significantly 
reduce the value of homes in the neighborhood of foreclosed home and 
lower house prices have a negative feedback effect on local consumption 
and investment.
---------------------------------------------------------------------------
    The dilemma for efforts to reduce household indebtedness is that 
from a lender's perspective it is not in their interest to write down 
debt that continues to be serviced on time. But as my analysis 
highlights, the collective consequences of such ``individually 
rational'' actions are quite unpleasant. If a large number of 
financially distressed homeowners cut back on consumption in order to 
protect their homes and continue paying their mortgages, the aggregate 
demand and employment consequences hurt everyone.
    An obvious policy proposal to facilitate leverage reduction is 
principal write-down on underwater mortgages. While the Government did 
initiate some related programs in the past, they have been largely 
ineffective in achieving the desired goal. To be sure, there are 
complicated legal issues pertaining to mortgage debt restructuring. 
Similarly any orderly mechanism of debt restructuring should minimize 
unwanted disruptions in the banking and financial system. These are 
difficult and complex problems, but not impossible to address and 
require collective regulatory and legislative action.
    While the focus of my discussion has been the recent U.S. economic 
downturn, the relationship between high household leverage and long 
economic slumps is not limited to our current experience. In his 
seminal paper, Irving Fisher (1933) described the role that high 
household indebtedness and the process of deleveraging played in 
perpetuating the Great Depression. More recent empirical work by 
scholars such as Mishkin (1978), Olney (1999), and Eichengreen and 
Mitchener (2003) further supports this view of the Great Depression. 
Evidence from Japanese and European recessions (e.g., King 1994) also 
highlights problems associated with leverage.
    Our collective experience from historical recessions as well as the 
most recent global slump point to a fundamental weakness in the modern 
financial system: its inability to distribute downside risk equitably 
and efficiently across the population. The tendency to rely too much on 
debt-financed economic activity implies that in the event of a negative 
economywide shock, most of the financial pain is pushed on a particular 
segment of the population (i.e., the borrowing class). As the recent 
U.S. experience reminds us, pushing most of the downside risk on one 
segment of the population is seriously damaging for the overall 
economy.
    Going forward, in order to avoid deep economic slumps resulting 
from an over-levered household sector, we need to put in place 
contingencies that will automatically write down the value of 
outstanding debt if the overall economic environment is sufficiently 
negative. There is a lot to think through here before implementing a 
particular policy. However, it is practically feasible to redesign debt 
covenants by introducing contingencies for economic downturns.
    For example, mortgage principal can be automatically written down 
if the local house price index falls beyond a certain threshold. Since 
such contingencies are written on aggregate states of nature, they do 
not suffer from the standard moral hazard criticism. Lenders will 
obviously price such contingencies in before extending credit, but it 
is a price that benefits borrowers and the economy in the long run. If 
we had such contingencies present in the current mortgage contracts, we 
could have avoided the extreme economic pain due to the negative 
deleveraging--aggregate demand cycle.
Bibliography
Barry Eichengreen and Kris Mitchener, ``The Great Depression as a 
    Credit Boom Gone Wrong'', BIS Working Paper 137, September, 2003.
Irving Fisher, ``The Debt-Deflation Theory of Great Depressions'', 
    Econometrica, 337-357, 1933.
Mervyn King, ``Debt Deflation: Theory and Evidence,'' European Economic 
    Review, 38: 419-445, 1994.
Atif R. Mian and Amir Sufir, ``The Consequences of Mortgage Credit 
    Expansion: Evidence From the U.S. Mortgage Default Crisis'', 
    Quarterly Journal of Economics 124: 1449-1496, 2009.
Atif R. Mian and Amir Sufir, ``Household Leverage and the Recession of 
    2007 to 2009'', IMF Economic Review, 58: 74-117, 2010.
Atif R. Mian and Amir Sufir, ``House Prices, Home Equity-Based 
    Borrowing, and the U.S. Household Leverage Crisis'', American 
    Economic Review, August, 2011a.
Atif R. Mian and Amir Sufir, ``Consumers and the Economy, Part II: 
    Household Debt and the Weak U.S. Recovery'', FRBSF Economic Letter, 
    January 18, 2011, 2011b.
Atif R. Mian and Amir Sufir, ``What Explains High Unemployment? The 
    Deleveraging--Aggregate Demand Hypothesis'', Working Paper, 2011c.
Atif R. Mian, Kamalesh Rao, and Amir Sufi, ``Deleveraging, Consumption, 
    and the Economic Slump'', Working Paper, 2011.
Atif R. Mian, Amir Sufi, and Francesco Trebbi, ``Foreclosures, House 
    Prices and the Real Economy'', NBER Working Paper # 16685, 2011.
Frederic S. Mishkin, ``The Household Balance Sheet and the Great 
    Depression'', Journal of Economic History, 38: 918-937, 1978.
Martha Olney, ``Avoiding Default: The Role of Credit in the Consumption 
    Collapse of 1930'', Quarterly Journal of Economics, 114: 319-335, 
    1999.

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                 PREPARED STATEMENT OF KATHERINE PORTER
    Professor of Law, University of California Irvine School of Law
                            October 4, 2011
Introduction
    My testimony addresses the reasons that thoughtful consumer 
protection is a vital necessity to our country's future economic 
health. In the last two generations, increases in household borrowing 
and changes in consumer financial services have reshaped the economy. 
The result is that consumer credit law will be a major determinant of 
the well-being of middle-class families for decades to come. To monitor 
this marketplace and its role in family economic security and the 
entire economy, lawmakers need the expertise and energy of a dedicated 
regulator on consumer credit such as the Consumer Financial Protection 
Bureau.
    I am Professor of Law at the University of California, Irvine, 
School of Law. I have worked at several leading law schools, including 
Harvard Law School and the University of California, Berkeley, School 
of Law. I have conducted research on household economic security and 
consumer debt since 2001. My empirical research on abuses in the 
mortgage servicing industry was among the first efforts to document 
misbehaviors in foreclosure and bankruptcy cases that violate the rule 
of law. I am a principal investigator of the 2007 Consumer Bankruptcy 
Project, the Nation's largest study of families that file bankruptcy. I 
am the author of more than a dozen law review articles on consumer 
credit issues and am the editor of a forthcoming book, Broke: How Debt 
Bankrupts the Middle Class (Stanford Univ. Press, 2011).
Debt: The New Middle-Class Marker
    The middle class is a powerful concept. Historically, the size and 
prosperity of the American middle class has been heralded as a great 
social and economic achievement. Membership in the middle class is 
associated with home ownership, educational opportunity, comfortable 
retirement, access to health care, and last but certainly not least, an 
appetite for consumer goods. \1\ The middle class also has political 
appeal, as demonstrated by President Obama's decision during his very 
first week in office to establish a Middle-Class Task Force. \2\ As 
chair of the task force, Vice President Biden explained that middle-
class life is the ``old-fashioned notion of the American Dream'' and 
that he and the President ``have long believed that you can't have a 
strong America without a growing middle class. It's that simple. It's 
that basic.'' \3\ The task force has focused its energy on job 
creation, retirement security, work-family issues, and higher 
education. \4\
---------------------------------------------------------------------------
     \1\ Homi Kharas, ``The Emerging Middle Class in Developing 
Countries'', Working Paper no. 285 at 7, Organisation for Economic Co-
operation and Development Centre, Washington, DC, 2010. http://
www.oecd.org/dataoecd/12/52/44457738.pdf
     \2\ White House, ``White House Announces Middle Class Task 
Force'', Press Release, January 30, 2009. http://www.whitehouse.gov/
the-press-office/obama-announces-middle-class-task-force
     \3\ White House, ``Remarks by the President and Vice President at 
Middle Class Task Force Meeting'', Press Release, January 25, 2010. 
http://www.whitehouse.gov/the-press-office/remarks-president-and-vice-
president-middle-class-task-force-meeting
     \4\ Joseph I. Biden, ``Annual Report of the White House Task Force 
on the Middle Class'', Washington, DC: Office of the Vice President of 
the United States, 2010. Accessed August 16, 2010. http://
www.whitehouse.gov/sites/default/files/microsites/100226-annual-report-
middle-class.pdf
---------------------------------------------------------------------------
    But the task force has largely ignored a revolutionary change in 
the lives of middle class Americans: the increase in household debt. In 
the mid-1980s, the ratio of debt to personal disposable income for 
American households was 65 percent. During the next two decades, U.S. 
household leverage more than doubled, reaching an all-time high of 133 
percent in 2007. \5\ Measured in the aggregate, the ratio of household 
debt to GDP reached its highest level since the onset of the Great 
Depression. \6\ This record debt burden, which crested just as the 
financial crisis began, set up families to suffer deeply as 
foreclosures, unemployment, and wage stagnation set in for the years to 
follow.
---------------------------------------------------------------------------
     \5\ Federal Reserve Bank of San Francisco, ``U.S. Household 
Deleveraging and Future Consumption Growth'', FRBSF Economic Letter 1, 
no. 2009-16 (May 15, 2009). Accessed October 2, 2011. http:// http://
www.frbsf.org/publications/economics/letter/2009/el2009-16.pdf
     \6\ Atif R. Mian and Amir Sufi. ``Household Leverage and the 
Recession of 2007 to 2009'', Working Paper 15896 at 1, National Bureau 
of Economic Research, Cambridge, MA, 2010. http://www.nber.org/papers/
w15896
---------------------------------------------------------------------------
    The consumer debt overhang, however, began long before the 
financial crisis and recession. Exhortations about subprime mortgages 
reflect only a relatively minor piece of a much broader recalibration 
in the balance sheets of middle-class families. Debt began to climb 
steeply around 1985, with its growth accelerating in nearly every 
subsequent year until the onset of the recession. The run-up in 
consumer debt coincided with a period of deregulation of financial 
institutions and the preemption of State consumer protection laws and 
State usury laws that regulated interest rates. Unfortunately for 
American families, the debt binge was not accompanied by meaningful 
increases in disposable income. While income crept up, debt shot up, as 
Figure 1 illustrates. As debt grows relative to income, families must 
stretch their dollars further to pay for current consumption, while 
keeping up with debt payments. At some point, income simply becomes 
insufficient, and families must either curtail spending or default on 
debt. We are suffering these consequences now, as consumer spending 
stagnates and families shed debt through foreclosures and default.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The growth in debt outstripped the appreciation of assets during 
the last several decades. In other words, increases in liabilities--
mortgage debt, home equity lines of credit, student loans, and credit 
cards--collectively grew faster than increases in assets--houses, cars, 
stocks, or cash savings. Edward Wolff of the Levy Economics Institute 
has calculated that as far back as 1995, the amount of mortgage debt 
began to increase faster than house values. \7\ The result of the 
increased borrowing was to constrain or retard growth in household 
wealth. Indeed, between 2001 and 2004, the typical (median) American 
household's wealth actually declined. \8\ This was an unprecedented 
event because the wealth decline occurred during a period of overall 
economic expansion.
---------------------------------------------------------------------------
     \7\ Edward N. Wolff, ``Recent Trends in Household Wealth in the 
United States: Rising Debt and the Middle-Class Squeeze--An Update to 
2007'', Working Paper no. 589 at 34, Levy Economics Institute, Bard 
College, Annandale-on-Hudson, NY, 2010. http://www.levyinstitute.org/
pubs/wp_589.pdf
     \8\ Ibid., 47, table 5.
---------------------------------------------------------------------------
    For the middle class, household debt outstripped household asset 
accumulation. For households with wealth between the 20th and 80th 
percentiles of the entire distribution, the debt-equity ratio climbed 
from 37.4 in 1983 to 51.3 in 1998, and then topped off at 61 percent in 
2004 and 2007. \9\ Whether assessed against income or assets, debt grew 
in proportion to other changes in families' balance sheets. What looked 
like a boom economy in the first half of the 2000s actually produced an 
increase in financial risk for families by loading them with 
unsustainable debt.
---------------------------------------------------------------------------
     \9\ Ibid., 50, table 8.
---------------------------------------------------------------------------
    The expansion in borrowing spanned social classes, racial and 
ethnic groups, sexes, and generations. Every age group, except those 75 
years or older, had increased leverage ratios between 1998 and 2007. 
\10\ Similarly, African Americans, Hispanics, and non-Hispanic Whites 
all saw their leverage ratios grow from 2001 to 2007. \11\ This is not 
to suggest that the debt explosion was equally distributed. For 
example, between 2004 and 2007, typical people who lacked a high school 
diploma and typical households headed by a person between ages 65 and 
74 had particularly sharp increases in their debt burdens. \12\ In 
particular periods, some groups saw modest declines in consumer debt, 
but the overwhelming trend was increased amounts of debt among nearly 
every type of family. By 2007, when debt burdens peaked, 77 percent of 
American households had some type of outstanding debt. \13\ Consumer 
debt has become one of the most common shared qualities of middle-class 
Americans, usurping the fraction of the population that owns their 
home, is married, has graduated from college, or attends church 
regularly. \14\
---------------------------------------------------------------------------
     \10\ Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and 
Kevin B. Moore. ``Changes in U.S. Family Finances From 2004 to 2007: 
Evidence from the Survey of Consumer Finances'', Federal Reserve 
Bulletin 95, A37, table 12 (February 2009).
     \11\ Wolff, ``Recent Trends in Household Wealth in the United 
States'', 26.
     \12\ Bucks et al., ``Changes in U.S. Family Finances'', A42.
     \13\ Ibid., p. A37.
     \14\ In 2007, the U.S. home ownership rate was 68.1 percent. 
United States Census Bureau. ``Housing Vacancies and Homeownership 
(CPS/HVS) Annual Statistics: 2007''. Last revised February 20, 2008. 
http://www.census.gov/hhes/www/housing/hvs/annual07/ann07t12.html. As 
of 2007, 54.7 percent of American men and 51.2 percent of American 
women were married. United States Census Bureau. ``America's Families 
and Living Arrangements: 2007''. Accessed January 2, 2011. http://
www.census.gov/population/www/socdemo/hh-fam/cps2007.html. In 2007, 27 
percent of adults aged 25 or older reported having at least a 
bachelor's degree. Sarah R. Crissey. Educational Attainment in the 
United States: 2007. Washington, DC: U.S. Census Bureau, 2009. Accessed 
August 16, 2010. http://www.census.gov/prod/2009pubs/p20-560.pdf. A 
2007 Gallup survey found that more than 40 percent of Americans claimed 
to attend church or synagogue regularly. Frank Newport. ``Just Why Do 
Americans Attend Church?'' Gallup, April 6, 2007. Accessed January 24, 
2011. http://www.gallup.com/poll/27124/Just-Why-Americans-Attend-
Church.aspx.
---------------------------------------------------------------------------
Too Big to Fail and Too Small To Save: Families in the Recession
    As debt increases, so too does the risk of financial failure. This 
is as true for American families as it is for large corporations, where 
the catchy phrase ``highly leveraged'' captures a profound tilt into 
the red on a balance sheet. The staples of middle-class life--going to 
college, buying a house, starting a small business--carried with them 
more financial risk in recent decades because they required more 
borrowing and new riskier forms of borrowing. The escalation in debt 
turned the smart financial decisions of the prior generation, such as 
purchasing a home or taking on student loans, into high-stakes economic 
gambles for middle-class families. Today, millions of Americans are 
losing those bets, struggling to avoid financial collapse.
    One place to see the pain of overindebtedness is in the experience 
of bankrupt families. Over the long haul, increases in consumer debt 
seem to explain a significant portion of the increased numbers of 
consumer bankruptcies. \15\ This year approximately 1.4 million 
families will file bankruptcy. \16\ They will publicly ``fall from 
grace,'' skidding down the economic spectrum. \17\ These families' 
aspirations of middle-class security evaporated under pressure from 
debt collectors, looming foreclosures, and the loss of hope of earning 
their way out of their financial problems. At least for now, their 
version of the American Dream has been replaced by a desperate hope 
that things do not get even worse. Driven by debt, these families are 
at rock bottom.
---------------------------------------------------------------------------
     \15\ Robert M. Lawless, ``The Paradox of Consumer Credit'', 
University of Illinois Law Review 2007 no. 1 361-362 (2007).
     \16\ Robert M. Lawless, ``Bankruptcy Filings Dropping More Rapidly 
Than Expected'', Credit Slips: A Discussion on Credit, Finance, and 
Bankruptcy (blog), September 9, 2011. http://www.creditslips.org/
creditslips/2011/09/bankruptcy-filings-dropping-more-rapidly-than-
expected.html#more
     \17\ Katherine Newman, ``Falling From Grace 9'', New York: Free 
Press, 1988.
---------------------------------------------------------------------------
    Households that file bankruptcy have typically struggled seriously 
with their debts for the previous 1 to 2 years. In fact, many 
households spent months simply scraping together the money and 
paperwork needed to file a bankruptcy petition. Nearly all of these 
families will remember their few minutes with the bankruptcy trustee as 
one of the most painful moments of their lives. Bankruptcy is a head-on 
encounter with promises to pay that cannot be honored and privations 
suffered trying fruitlessly to make ends meet.
    Millions of families suffer serious financial hardship but do not 
file bankruptcy. The number of foreclosures outstrips bankruptcy 
filings by nearly a two-to-one margin. \18\ The Department of Education 
reported last month a Federal student loan default rate of 8.8 percent 
in fiscal 2009, and increase from 7 percent the previous year. \19\ 
Last year, 140,000 people complained to the Federal Trade Commission 
about the tactics used by debt collectors, an increase of 28 percent 
from 2009. \20\ A survey by RAND researchers found that between 
November 2008 and April 2010 39 percent of families had experienced one 
or more indicators of financial distress: unemployment, negative equity 
in their home, or being 2 months behind on their mortgage or in 
foreclosure. \21\ Debt collection and default are not isolated 
experiences; they are becoming a routine part of the middle-class 
experience, albeit a painful one. The ``new normal'' of the U.S. 
economy--a world of layoffs and job losses, cuts in social programs, 
and continued housing depreciation--only means that more people will 
find themselves collapsing under the weight of debts incurred in 
brighter economic times. \22\
---------------------------------------------------------------------------
     \18\ In 2010, Americans filed just over 1.5 million nonbusiness 
bankruptcies, compared to nearly 2.9 million foreclosure filings. 
Leslie E. Linfield, 2010 ``Annual Consumer Bankruptcy Demographics 
Report: A Five Year Perspective of the American Debtor'', 7n10, 
Institute for Financial Literacy. (September 2011) Accessed October 1, 
2011. http://www.financiallit.org/PDF/2010_Demographics_Report.pdf; 
Julie Schmit ``Joblessness Drove Foreclosures in 2010'', USA Today, p. 
6A (January 27, 2011).
     \19\ The default rate represents the percentage of student loans 
that fell into default among those whose payments were first due in the 
prior fiscal year. Kevin Helliker, ``Student-Loan Defaults on the 
Rise'', The Wall Street Journal, p. A2 (September 13, 2011).
     \20\ Federal Trade Commission, ``Annual Report 2011: Fair Debt 
Collection Practices Act'', 5 (March 2011). http://www.ftc.gov/os/2011/
03/110321fairdebtcollectreport.pdf.
     \21\ Michael Hurd and Susan Rohwedder, ``Effects of the Financial 
Crisis and Great Recession on American Households'', Working Paper WR-
810 at 27. RAND Corporation, Santa Monica, CA, 2010. http://
www.rand.org/pubs/working_papers/WR810.html
     \22\ Nelson D. Schwartz, ``Jobless and Staying That Way'', New 
York Times, WK1, August 8, 2010. Accessed February 4, 2011. http://
www.nytimes.com/2010/08/08/weekinreview/08schwartz.html
---------------------------------------------------------------------------
    The experiences that are so evident in the wake of the recession 
highlight the fact that some people will lose the borrowing game that 
has become the American economy. The consumer spending that drove the 
economy at the end of the 20th century was not costless. It was bought 
and paid for with interest charges, late fees, increased stress about 
making ends meet, and sometimes, with the humiliation of bankruptcy. 
Increased consumption was largely financed by debt, rather than by 
increases in wages or appreciation of assets. Heavy household debt 
burdens ratchet up risk and reduce the security of the middle-class 
families.
    The consumer debt phenomenon is not a temporary one; it will be a 
defining feature of American society for decades. It is a fact that 
consumer debt levels are going down. The ``deleveraging'' process of 
paying down debt and increasing savings that began in late 2007 has 
lasted 4 years and shows no signs of reversing. The Federal Reserve 
Board calculates the household debt service ratio for each quarter. 
This is an estimate of the ratio of debt payments on outstanding 
mortgages and consumer debt to disposable personal income. In 2011, the 
ratio declined to levels not seen since the late 1990s. \23\ But these 
levels still remain far beyond those of the prior decades. 
Overindebtedness is declining but it is not a problem of the distant 
past, cured by the recession, Government stimulus programs, or the 
enactment of the Dodd-Frank financial reform law.
---------------------------------------------------------------------------
     \23\ Federal Reserve Board, ``Household Debt Service and Financial 
Obligations Ratios'', Last Updated September 20, 2011. http://
www.federalreserve.gov/releases/housedebt/
---------------------------------------------------------------------------
    Retrenchment has been and will be painful--both for families and 
for lenders. For many families, it has meant homes lost to foreclosure, 
cars taken in repossession, trade-offs in family time for second jobs, 
and dunning from debt collectors. Opportunities to launch a new 
business, attend college, or start a family have been foregone. Changes 
in credit standards and fears about the consequences of credit have 
pushed many families further down the economic ladder, reducing assets 
and consumer confidence. Credit retrenchment, just like the increases 
in consumer credit in years before, dramatically reshapes the well-
being of the middle class.
    Consumer confidence is critically affected by consumer debt. The 
lack of access to credit that is a consequence of the financial crisis 
is making Americans pessimistic about their futures. In a September 
2010 poll, only half of Americans agreed that ``the American Dream--
that if you work hard you'll get ahead--still holds true''; more than 4 
in 10 said it no longer did. \24\ This middle-class discontent runs 
deep and retards efforts to stimulate economic growth. Americans are 
famously opportunity loving, but even back in 2005 during a robust 
economy, 62 percent favored the ``stability of knowing your present 
sources of income are protected over concern with the opportunity to 
make money in the future,'' which attracted 29 percent of respondents. 
\25\ Problems in managing consumer debt have increased economic 
anxiety.
---------------------------------------------------------------------------
     \24\ Holly Bailey, ``ABC News/Yahoo! News Poll: People Are Losing 
Faith in the American Dream'', Yahoo! News, September 21, 2010. 
Accessed January 30, 2011. http://news.yahoo.com/s/yblog_upshot/abc-
newsyahoo-news-poll-people-are-losing-faith-in-the-american-dream
     \25\ Jacob S. Hacker, in Katherine Porter (ed.), ``Broke: How Debt 
Bankrupts the Middle Class, 227'', Stanford University Press, 2011 
(citing The Tarrance Group and Lake Snell Perry Mermin and Associates, 
Battleground XXVII, 29. Washington, DC: George Washington University, 
2006. http:/www.lakeresearch.com/polls/pdf/bg305/charts.pdf).
---------------------------------------------------------------------------
    Americans' appetite for risk and the aspirations of the middle 
class reflect in part the financial insecurity of consumer debt levels. 
With this type of uncertainty, the middle-class struggles to hang on, 
rather than propelling itself forward.
    At a conference that I attended, someone quipped that while banks 
were ``too big to fail,'' families were ``too small to save.'' In part, 
this comment reflects the powerful importance of the risk frame in 
public policy, and that small incidences of harm rarely receive the 
attention of large ones--even if the accumulation of small harms dwarfs 
the single large harm. This preference to prioritize single large 
events over multiple smaller ones shortchanges middle-class families. 
For example, the Treasury's bold intervention in the capital markets is 
a stark contrast to its anemic response to foreclosures at the family 
level. Neither the Home Affordable Modification Program, nor the 
Government's most recent effort, the Emergency Homeowners' Loan 
Program, delivered on its promises, with delays in program roll-out and 
problems in administration. Overall, an estimated less than 1 million 
Americans have received a mortgage modification, refinance, or loan 
from these programs. In that same period, since 2007, over 2 million 
foreclosures have been completed. Today, estimates are that more than 6 
million homeowners are delinquent on their mortgages and 16 million 
homeowners have no equity in their homes.
    Americans are frustrated with the lack of an effective and 
sustained Government response to their financial hardships. Asked in 
mid-2010 whom Government had helped ``a great deal'' during the 
downturn, 53 percent of Americans said banks and financial 
institutions; 44 percent fingered large corporations. Just 2 percent 
thought economic policies had helped the middle class a great deal. 
\26\ Middle-class Americans feel abandoned. Although their reactions 
range from anti-Government rhetoric to calls for more intervention, 
people are united across the political spectrum in feeling that 
Government's response to the financial crisis missed the mark. The lack 
of a Government regulator focused on consumer credit, including home 
ownership markets, is a likely contributor to the feeling that families 
are too often an afterthought in the design of economic policy.
---------------------------------------------------------------------------
     \26\ Hacker, Broke, supra n25, at 230.
---------------------------------------------------------------------------
From Subprime to Safe? Changing Financial Services
    The debt loads that are commonplace among today's families would 
have been simply unthinkable a generation or two ago. While the 
recession that began in mid-2007 has widened the scope of the financial 
pain caused by overindebtedness, the problem predated the large-scale 
economic meltdown that captured headlines. Put another way, the 
bursting of the housing bubble and subprime loans are not the problem, 
or certainly not the entire problem, to be solved by consumer 
protection. The rising levels of household debt and the burdens they 
impose on families are not about a few bad actors or a couple of 
innovative loan products gone awry. Certainly, subprime loans and that 
market are poster children for the need for better oversight of 
consumer credit. However, they are only one part of a larger revolution 
in our economy that imposes more debt and more financial risk on 
families.
    The receding financial crisis and the elimination of a subprime 
mortgage market do not mean that families today enjoy the economic 
security that traditionally characterized the middle class. Indeed, 
families today face a level of uncertainty about jobs, taxes, 
Government services, and credit access that leave them in uncharted 
territory. It is precisely in such an environment that consumer 
protection law can help families regain confidence in the American 
economy and make informed and smart financial decisions to build and 
protect their wealth.
    A few examples illustrate the point. In the 1990s and first half of 
2000s, home equity loans provided a solution for families who had 
unexpected expenses or a temporary loss of income. Those products are 
unavailable to homeowners who are underwater or who have limited 
equity. This reduction in home wealth leads families to look for other 
options, such as taking on increased student loans to pay for college 
rather than refinancing a house to pay tuition. Yet this alternative 
has its own risks; the generation graduating today and in upcoming 
years is more likely to have student loans and owe thousands of dollars 
more than their predecessors. This growing student loan market needs 
sustained attention and monitoring from the Government. Parents and 
children need financial education on these products and their 
consequences, and innovative in this market needs monitoring to protect 
against unfair or deceptive practices.
    Another example of ongoing consumer protection issues is changes in 
retail banking and payment systems. Well before the effective date of 
the CARD Act in 2010, \27\ younger people were more likely to prefer 
debit cards to credit cards. \28\ The industry is rolling out new fees 
for debit cards, and mobile payments are growing in popularity. These 
changes mean consumers will have new choices and questions.
---------------------------------------------------------------------------
     \27\ Credit Card Accountability Responsibility and Disclosure Act 
of 2009, Pub. L. No. 111-24, 123 Stat. 1734 (2010).
     \28\ Ronald J. Mann, ``Adopting, Using, and Discarding Paper and 
Electronic Payment Instruments: Variation by Age and Race'', May 2011. 
Fig. 7.14 (finding that consumers over the age of 45 appear 
significantly less likely to use debit cards, controlling for race, 
household status, income, and education).
---------------------------------------------------------------------------
    Similarly, the growth in debt among older Americans, combined with 
longer lifespans, mean that retirement is no longer synonymous with 
economic stability. Millions of seniors owe money on their mortgages, 
and this group is particularly likely to make use of credit cards. They 
are also targeted repeatedly in financial scams. As the baby boomers 
age and they enter retirement in financial positions quite different 
from the Greatest Generation, their behaviors and needs will change the 
financial profile of the middle class. These older Americans will look 
to the Government for education about consumer credit and will count on 
consumer protection laws to shield them from abusive practices that 
prey on older Americans.
    In 2010, Congress created the Consumer Financial Protection Bureau 
(the ``Bureau''). \29\ It is specifically charged with monitoring the 
functioning of the consumer credit markets. Already, the Bureau has 
developed outreach and education initiatives, perhaps most notably its 
work on servicemembers and their families. These efforts need to 
continue and accelerate to help families rebuild after the financial 
crisis. The Bureau may well have been effective in guarding against the 
harms of subprime lending but the bankruptcy of subprime lenders and 
the atrophy of the mortgage market does not eliminate the need for the 
Bureau. To the contrary, it is precisely in today's uncertain climate 
that families need a single, visible place to look for financial 
education.
---------------------------------------------------------------------------
     \29\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. No. 111-203, 124 Stat. 1376, 1001 (2010).
---------------------------------------------------------------------------
    In its lawmaking functions, the need is similar. Dozens of 
financial products, including credit cards, debit cards, and student 
loans are in transition in the wake of the recession and its aftermath. 
While Congress in Dodd-Frank and the Federal Reserve in its rulemaking 
have addressed some aspects of the mortgage market, the future of home 
ownership remains unsettled. We do not know if the 30-year fixed loan 
will emerge as the sole mortgage product or if a variety of products 
will proliferate; the market and the regulation of the market will work 
together to determine these answers. The lesson of the subprime loan 
market is that there is a grave danger that the Federal Government will 
pay insufficient attention to consumer credit markets without a 
dedicated regulator, and that families and the entire economy can 
suffer as a result. Families need a powerful voice in these 
conversations that focus on their well-being; the checks and balances 
that Congress built into the Bureau's design ensure that financial 
institutions--and their traditional regulators--will also have a voice 
in determining the future of consumer credit law. That is entirely 
proper in my opinion. We should guard against weakening the Bureau now 
that the worst of the financial crisis may be against us. The 
uncertainty of the future makes the Bureau even more necessary than 
during the height of the financial crisis when policy makers were 
focused on acute problems. Government needs to continue to engage in 
monitoring and regulating consumer credit to help the economy recover 
and rebuild middle-class wealth.
Protecting Middle-Class Prosperity
    Today, millions of middle-class families are experiencing deep 
economic pain. Consumer debt is not the only reason for the increasing 
financial vulnerability of Americans; stagnant wages, increased 
volatility in the labor market, health care and college costs that 
outpace inflation, and longer life spans that strain retirement savings 
all play a role. Consumer debt is a powerful force that affects middle-
class prosperity, however, because in the last two decades debt was the 
crutch of families wounded by other economic harms. Debt smoothes 
consumption over time; for example, it can ease the uneven income that 
characterizes the rising cadre of temporary and contract workers in 
America. Debt substitutes for cost controls in markets gone astray; for 
example, people increasingly must finance medical bills because they 
overwhelm their monthly budgets. Debt fills gaps in making ends meet 
when social programs erode; for example, people may borrow from a 
payday lender to cover utility bills as local governments eliminate 
energy subsidy programs.
    These functions for debt are not inherently bad. To the contrary, 
debt has long been a lynchpin of opportunity in our society. But too 
many Americans have borrowed too much and that they taken on debts that 
worsened, rather than improved, their financial situations. In 
bankruptcies, foreclosures, economic anxiety, and joblessness, we see 
the harms of consumer debt. The cost of debt is not just the annual 
percentage rate charged to a family. It is also the social costs of 
some borrowers becoming hopelessly mired in debt and the macroeconomic 
effect of overleveraged households. Those costs are being paid by 
today's middle-class families during the recession and will likely 
continue to be paid in the upcoming decade. Economic models show that 
lowering the debt-to-income ratios of households in the next decade and 
beyond will have significant changes on the macroeconomy and its 
ability to grow through increased consumption. \30\ The cumulative 
result of households' debt burdens is to create a drag on economic 
growth for the entire Nation.
---------------------------------------------------------------------------
     \30\ Federal Reserve Bank of San Francisco, ``U.S. Household 
Deleveraging'', supra n5, at 3.
---------------------------------------------------------------------------
    America's relationship with borrowing is at a turning point. 
Lenders have tightened underwriting standards, and households are 
reducing their spending and saving more of their incomes. The open 
question is whether this retrenchment will endure or accelerate. Will 
America reverse more than two decades of reliance on consumer borrowing 
and gradually work its way back to debt burdens of the post-War period 
of prosperity? Or will the borrowing habit return in a few years as the 
recession recedes, with another boom in borrowing replacing the last 
few years of bust? The choice between those paths has profound 
consequences for the economic security of America's middle class.
    Congress continues to consider ways to help families with bills 
such as the Foreclosure Fraud and Homeowner Abuse Prevention Act of 
2011, but it should not have to act alone. The executive branch needs 
to contribute expertise and administrative support. The Bureau is a 
crucial part of helping to navigate the future of our economy. Through 
research, rulemaking, and education, the Bureau will provide a roadmap 
for legislative activity and consumer decision making. It can respond 
nimbly to the rapid changes that are common in today's turbulent 
economy and it can help consumers stay informed of changes to markets 
and laws that could aid them in rebuilding and maintaining wealth.
    The Bureau's central mission is to nurture the marketplace for 
consumer credit, and it's time to allow it to begin its work in earnest 
by confirming a permanent director and putting to rest efforts to 
redesign the carefully crafted structure of the Bureau that Congress 
approved only a year ago. The uncertainty about credit markets is 
worsened by efforts to dismantle or defang the Bureau. Institutions and 
industry need a clear path forward, and they need a place to bring 
concerns about the future of consumer protection regulation. A fully 
operational Bureau allows families and institutions to adapt and to 
begin to recover in the wake of the recession and new pressures on 
families' financial well-being.
Conclusion
    Going forward, our Nation cannot afford to adopt a blind belief 
that consumer credit markets require little attention. The unmanageable 
debt burdens that pushed us into a recession and are hampering our 
recovery powerfully demonstrate that more debt does not equal more 
prosperity. We cannot sustain national economic prosperity while 
unmanageable borrowing undermines the prosperity of American families. 
But neither can we afford to limit opportunity and shunt upward 
mobility for the middle class by buying into fear that all borrowing is 
bad or accepting an endless downward spiral of consumer credit. The 
challenge is to figure out how to calibrate consumer credit markets to 
balance the harms of borrowing against its benefits. The Consumer 
Financial Protection Bureau is a critical aspect of meeting that 
challenge. Its vitality will help our economy recover and flourish, and 
its vigilance in the future will safeguard the well-being of American 
families as consumer debt markets change.
                                 ______
                                 
                PREPARED STATEMENT OF ROBERT M. LAWLESS
        Professor of Law, University of Illinois College of Law
                            October 4, 2011
    Congress created the Consumer Financial Protection Bureau (CFPB) to 
put an end to lending practices that rely on consumer confusion to 
create profits for the lenders. Although the CFPB has now come into 
existence, partisan politics have hampered the CFPB's ability to fully 
vindicate its statutory mandate. The Senate has yet to act on the 
confirmation of a permanent director, and some members of Congress have 
vowed to scale back the agency's powers. Thank you for inviting me here 
today. In my testimony, I will describe the problems that led Congress 
to create the CFPB in the first place and how these problems continue 
to plague American consumers.
    I am a professor of law and codirector of the Illinois Program on 
Law, Behavior and Social Science at the University of Illinois College 
of Law. In my courses and research, I study the problems that lead both 
consumers and businesses into financial distress and how we as a 
society react to financial distress. Along with seven other scholars, 
including copanelist Professor Katherine Porter, I regularly contribute 
to Credit Slips (http://www.creditslips.org), a blog that discusses 
issues related to credit, finance, and bankruptcy. My testimony today 
draws on what I have learned as a scholar and teacher of lending and 
bankruptcy. The views I am expressing are my own and not necessarily 
the views of my university or any other organization with which I am 
affiliated.
A Middle-of-the-Road Agency
    I am here today as someone who was skeptical about the creation of 
a consumer financial agency. \1\ My skepticism stemmed not from the 
oft-repeated concerns over an agency that has too much authority. 
Rather, my concern was that a consumer financial agency did not go far 
enough. Professor Warren framed her proposal for a consumer financial 
agency largely in terms of informational problems between consumers and 
lenders. \2\ Under this vision, plain English disclosures would 
ameliorate many of the most abusive lending practices. In Professor 
Warren's words, ``the basic premise of a market is full information.'' 
The agency would stand in the middle between consumers and lenders to 
ensure consumers were acting with full information.
---------------------------------------------------------------------------
     \1\ The Limits of Contract as Product, 157 U. Pa. L. Rev. 
PENNumbra 160 (2009) (available at http://www.pennumbra.com/responses/
02-2009/Lawless.pdf).
     \2\ Oren Bar-Gill and Elizabeth Warren, ``Making Credit Safer'', 
157 U. Pa. L. Rev. 1 (2008); Elizabeth Warren, ``Unsafe at Any Rate'', 
Democracy: A Journal of Ideas, Summer 2007, at p. 8.
---------------------------------------------------------------------------
    Although providing consumers with more information is a laudable 
goal, many consumer lending transactions simply transfer wealth away 
from persons living at the economic margins of society and put this 
wealth in the pockets of large financial institutions. If we decide as 
a society that these wealth transfers are intolerable, the answer is 
not to surround these transactions with more information but to ban 
these transactions altogether. Vigorous and effective usury caps would 
put an end to predatory lending at rates approaching a 300 percent or 
400 percent APR. If, for example, consumers systematically make 
mistakes to choose credit cards with low teaser rates but higher long-
term costs, then the answer is to limit the use of teaser rates.
    At the time of Dodd-Frank, people of good judgment and good faith 
differed on what Congress should do to prevent a repeat of the consumer 
lending abuses that played a role in creating the financial crisis. In 
the heated rhetoric that often surrounds any discussion of the CFPB, it 
has been forgotten that the agency in many ways was a compromise 
solution between those who wanted to go further and those who thought 
no little or new regulation was necessary.
    My other reason for skepticism was the problem of regulatory 
capture. In legal and political science scholarship, ``regulatory 
capture'' describes a situation where an administrative agency becomes 
beholden to the interests it regulates. The agency begins to act on 
behalf of those interests instead of the citizenry. Regulatory capture 
can happen for institutional reasons such as the fact that the 
regulated companies often have the greatest incentive to monitor and 
lobby the administrative agency. Cultural forces also play a role as 
agencies often draw their employees from the same labor pool as do the 
companies they regulate or as agency employees come to know their 
counterparts in the regulated industry.
    In financial regulation, regulatory capture has been particularly 
acute. The Office of the Comptroller of the Currency (OCC) draws its 
budgets from the fees of the banks it regulates. Many observers have 
noted the OCC often seems to act in ways that attract regulatory 
business and hence higher fees and bigger budgets. \3\ Commentators 
made similar observations about the Office of Thrift Supervision (OTS), 
an agency eliminated by Dodd-Frank. \4\ In their article proposing a 
consumer financial agency, Professors Bar-Gill and Warren described a 
broad failure across a number of agencies to regulate on the behalf of 
consumers: the Federal Reserve, the OCC, the OTS, the Federal Deposit 
Insurance Corporation, the National Credit Union Administration, and 
the Federal Trade Commission. \5\
---------------------------------------------------------------------------
     \3\ Adam Levitin, ``Why the OCC Can't Be Relied on for Consumer 
Protection'', Credit Slips (Aug. 21, 2008) (http://www.creditslips.org/
creditslips/2008/08/why-the-occ-can.html); Stephanie Mencimer, ``No 
Account: The Nefarious Bureaucrat Who's Helping Banks Rip You Off'', 
The New Republic, Aug. 27, 2007, at 14 (http://www.tnr.com/article/no-
account); Alan White, ``OCC Findings: Illegal Foreclosures, Critical 
Deficiencies'', Credit Slips (Feb. 17, 2011) (http://
www.creditslips.org/creditslips/2011/02/occ-finds-illegal-foreclosures-
critical-deficiencies.html).
     \4\ U.S. Senate Permanent Subcommittee on Investigations, Staff 
Report, ``Wall Street and the Financial Crisis: Anatomy of a Financial 
Collapse'', pp. 161-242 (Apr. 13, 2011) (http://hsgac.senate.gov/
public/_files/Financial_Crisis/FinancialCrisisReport.pdf); Robert 
Cyran, ``The Downfall of a Regulator'', N.Y. Times, Apr. 8, 2009, at B2 
(http://www.nytimes.com/2009/04/09/business/09views.html).
     \5\ Oren Bar-Gill and Elizabeth Warren, ``Making Credit Safer'', 
157 U. Pa. L. Rev. 1, 86-97 (2008).
---------------------------------------------------------------------------
    To minimize the risk of regulatory capture in an area that had 
proven so susceptible to it, Congress tried to insulate the CFPB from 
political influences. As the Subcommittee is undoubtedly aware, there 
have been innumerable proposals to tear down the structures that 
protect the CFPB from interest-group politics. Efforts to replace the 
one-person director of the CFPB with a commission or place the CFPB's 
budget under the immediate control of Congress are steps in the wrong 
direction. Indeed, the very existence of these efforts, largely 
centered in the financial services industry, demonstrates the need for 
vigilance in keeping the CFPB a truly independent agency. In an era of 
permanently indebted private households and complex financial 
instruments that provide opportunities for abuse at the expense of 
everyday Americans, we need an effective CFPB that will not be the hand 
maiden of the industries it needs to regulate.
An Indebted Society
    Congress did not design the CFPB as an ``anti-debt'' agency. Used 
properly, borrowing can be an effective financial strategy for many 
consumers. Many Americans pay for their homes, their cars, and their 
educations through well-considered decisions to borrow money. 
Individually, many of these borrowing decisions undoubtedly made sense. 
In the aggregate, however, these individual decisions have made America 
an indebted society with remarkably high levels of household debt. The 
rush by financial institutions to supply this debt played a role, if 
not the major role, in creating our current financial crisis. An 
effective CFPB not only can minimize the systemic risk that comes from 
high levels of household debt but also act to minimize the harm that 
can befall individual borrowers when they enter into borrowing 
decisions they do not understand or cannot possibly afford.
    Without question, the financial crisis has reduced the amount of 
outstanding consumer debt. According to the Federal Reserve, consumer 
debt has shrunk by 4.2 percent since the beginning of 2008 to July 2011 
(the most recent data available). \6\ This small reduction in consumer 
debt is a drop in the bucket compared to the massive run-up during the 
past several generations. Even after adjusting for inflation and 
population growth, consumer debt has risen 46 percent in the past 25 
years and 106 percent in the past 50 years. When mortgages are 
considered, private household debt has increased 220 percent in the 
past 25 years and a staggering 374 percent in the past 50 years. Many 
Americans now spend most of the adult lives owing debts to some 
financial institution.
---------------------------------------------------------------------------
     \6\ Federal Reserve Statistical Release G.19 (July 2011). The term 
``consumer debt'' does not include mortgages.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Compared to other countries, Americans are a deeply indebted 
people. According to the most recent data from the Organization for 
Economic Co-operation and Development (OECD), Americans had total 
household debt of $44,041 for every man, woman, and child in the 
country, the fifth highest among all OECD countries as illustrated by 
Figure 1. Adjusting for population allows for comparison across 
borders. Using per capita figures, however, understates the true debt 
burden because not every man, woman, or (especially) child has 
outstanding debt. For the average person carrying debt, the burden is 
much higher than $44,041.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    When considering just short-term household debt, the United States 
leads all OECD countries with $9,663 owed per capita. The OECD defines 
short-term debt as any debt loaned for less than 1 year. Long-term debt 
is debt loaned for periods of greater than 1 year with the biggest 
components of long-term debt being home mortgages and automobile loans. 
Short-term debt is typified by credit card debt and payday lending. 
Thus, consumers are much more likely to be using short-term debt for 
immediate consumption. It is exactly these types of borrowing decisions 
where consumers are more likely to act quickly, perhaps under some 
pressure and without careful shopping among different lenders. It is 
exactly these types of borrowing decision where lenders can exploit 
consumer confusion and lack of information. It is exactly these types 
of borrowing decision where the CFPB can be most effective. And, it is 
exactly these types of borrowing decision in which Americans lead the 
world.
Household Debt, Bankruptcy, and the CFPB's Role in Research
    In its invitation, the Subcommittee asked for my views on ``the 
role of consumer financial products in contributing to excessive 
household indebtedness and, in the extreme, bankruptcy.'' Part of that 
question is easy to answer, and part of that question is much more 
difficult to answer. After explaining the easier part of the answer, I 
will turn to how the CFPB would be incredibly helpful in answering the 
more difficult part of the question.
    The easier part of the answer is that excessive household 
indebtedness clearly has a link to bankruptcy filings. \7\ In the short 
run, the link is counterintuitive. As consumer debt increases, 
bankruptcy filings generally decline in the short-term. When consumer 
debt is more readily available, households can stave off the day of 
reckoning by borrowing to pay for rent, medical expenses, groceries, 
and the other necessities of daily life. A tightening of consumer debt 
generally has the opposite effect, driving more people into bankruptcy 
in the short term. When its effects are measured over a long run, 
however, consumer debt does lead to increased bankruptcy rates. Because 
of its relationship to consumer debt, the bankruptcy filing rate can 
rise even during economic boom times such as the 1990s when earlier 
increases in debt created long-term conditions conducive to bankruptcy 
filings that then spiked when credit markets became more difficult for 
consumers to access. Another example is this year, where bankruptcy 
filings will fall about 10 percent even amidst a dire economy. The 
dearth of new consumer debt in the immediate wake of the financial 
crisis in 2007 and 2008 created a situation where there would be less 
long-term need for bankruptcy. As consumers have found it slightly 
easier to borrow this year, the conditions have been created for a 
decline in this year's bankruptcy filing rate. Thus, contrary to 
popular wisdom, it is consumer indebtedness, not the Nation's overall 
economy that plays the major role in driving the Nation's bankruptcy 
filing rate.
---------------------------------------------------------------------------
     \7\ This discussion is based on my findings in Robert M. Lawless, 
``The Paradox of Consumer Credit'', 2007 U. Ill. L. Rev. 347. Further 
discussion appears at Bob Lawless, ``One More Time With Feeling'', 
Credit Slips (Aug. 22, 2011) (http://www.creditslips.org/creditslips/
2011/08/one-more-time-with-feeling.html) and Bob Lawless, ``Debt Causes 
Bankruptcy (But Sometimes in Counter-Intuitive Ways)'', Credit Slips 
(Jan. 7, 2011) (http://www.creditslips.org/creditslips/2011/01/debt-
causes-bankruptcy-but-sometimes-in-counter-intuitive-ways.html).
---------------------------------------------------------------------------
    The more difficult part of the Committee's question is the role 
particular consumer financial products play in creating excessive 
household indebtedness. Once a consumer gets to bankruptcy court, the 
fact of the bankruptcy filing and the consumer's circumstances become a 
matter of public record. Researchers can use this information to 
understand the relationship between indebtedness and bankruptcy, as we 
have done, for example, in documenting how Americans are arriving in 
bankruptcy much further in debt than they did 30 years ago. \8\ As to 
how people become overindebted in the first place, we have a much 
poorer understanding. For example, is overindebtedness often due to 
exogenous shocks like illness or job loss, or are poor purchasing 
decisions and overconsumption the primary driver? To what extent does 
culture or other attitudes drive overindebtedness? Are particular 
consumer financial products more likely to lead to overindebtedness? 
Are some consumer financial products inherently abusive in that they 
cost far more than any conceivable benefit they could be giving the 
borrower? The data that would provide some insight into these questions 
generally is private and beyond the ability of independent researchers 
to investigate.
---------------------------------------------------------------------------
     \8\ Robert M. Lawless, Angela Littwin, Katherine Porter, John 
Pottow, Deborah Thorne, and Elizabeth Warren, ``Did Bankruptcy Reform 
Fail? An Empirical Study of Consumer Debtors'', 82 Am. Bankr. L. J. 349 
(2008).
---------------------------------------------------------------------------
    Often lost in the debates over the CFPB is the research function 
Congress directed it to have. Following the statutory directive given 
by its enabling legislation, the CFPB now has a research unit that 
investigates the following issues:

  A.  Developments in markets for consumer financial products or 
        services, including market areas of alternative consumer 
        financial products or services with high growth rates and areas 
        of risk to consumers;

  B.  Access to fair and affordable credit for traditionally 
        underserved communities;

  C.  Consumer awareness, understanding, and use of disclosures and 
        communications regarding consumer financial products or 
        services;

  D.  Consumer awareness and understanding of costs, risks, and 
        benefits of consumer financial products or services;

  E.  Consumer behavior with respect to consumer financial products or 
        services, including performance on mortgage loans; and

  F.  Experiences of traditionally underserved consumers, including un-
        banked and under-banked consumers. \9\
---------------------------------------------------------------------------
     \9\ 12 U.S.C. 5493(b)(1).

    The CFPB's resources and access to data will make its research 
division a hub for top-flight independent scholars who are trying to 
work together to understand how and why consumers become overindebted. 
Although good consumer finance research is happening in some Federal 
agencies, most notably the Federal Reserve, these research departments 
understandably exist to serve the important regulatory aims of their 
sponsoring unit such as banking regulation. In contrast, the research 
arm of the CFPB works within an organization whose mission it is to 
further consumer protection. Instead of research that focuses on how 
consumer finance might affect other regulated systems, the CFPB will 
produce research that understands how consumer finance affects 
consumers. In a few years, we should have a much better understanding 
of whether particular financial products are most likely to lead to 
overindebtedness.
More Than Just Outstanding Consumer Debt
    It was not just rising consumer debt that led Congress to create 
the CFPB. Committees such as this one had heard Americans complain for 
years about abusive practices in mortgage lending, credit card lending, 
arbitration, debt collection, mortgage servicing, payday loans, and 
many other industries. The financial crisis of 2008 created a climate 
in which the political will finally existed to protect consumers from 
practices where companies profited, not by providing a better product, 
but by deception, confusion, and lack of information. With the collapse 
of the subprime lending market, it is tempting to think that abusive 
practices around consumer financial products have disappeared and that 
the need for an organization like the CFPB has diminished. Since the 
CFPB was created, new problems have appeared, and old problems have 
become salient in new ways. At the risk of creating the misimpression 
that the challenges are limited by mentioning only a few specific 
problems, I will list three current areas of concern in which an 
effective CFPB could play a role.
    Reverse mortgages allow older persons to draw on equity they have 
in their homes and receive a stream of payments to help with expenses 
in their retirement years. To make an informed decision on a reverse 
mortgage, a consumer needs a good understanding of the value of the 
home, life expectancy, and a competitive interest rate. All of these 
pieces of information require estimation. Moreover, we can expect 
consumers to display bias in making these estimates such as 
overestimating the value of the home or life expectancy. In addition, 
persons contemplating a reverse mortgage often have liquidity 
constraints that create pressure to agree to the reverse mortgage. Some 
of the same players in the subprime lending market have moved into 
reverse mortgages, leading to complaints from consumer advocates that 
were similar to the complaints about subprime lending. Reports of high 
fees and financial products inappropriate for the consumer are becoming 
more and more frequent in the reverse mortgage industry, which seems 
poised to become the next big consumer lending problem area.
    Mortgage servicing problems have dominated the news. Borrowers and 
even their attorneys are unable to reach a person at mortgage servicers 
who can negotiate a reasonable solution. Paperwork mailed to servicers 
gets lost or goes unacknowledged. Court affidavits have been mass-
produced and signed by persons with little knowledge over the facts 
alleged in the affidavit, a problem now known as ``robo-signing.'' 
Community-based foreclosure mediation programs founder for want of 
funds and participation by both borrower and lender. Foreclosed 
properties, wanted neither by the bank or the homeowner, sit vacant and 
become a blight on the urban landscape.
    Finally, debt collection abuses appear to be becoming more 
prevalent. Credit card collections may have replicated the robo-signing 
problems in the mortgage servicing industry. Indeed, given that many of 
the same players are involved and that credit card debt is sold in ways 
that is similar to mortgage debt, it would be surprising if the debt 
collection industry did not have robo-signing problems. Other debt 
collectors have left families who have lost relatives with the 
incorrect impression that the family is legally responsible for the 
debts of their deceased loved one. In some areas, reports have surfaced 
that creditors act in concert with local courts to abuse procedures 
known as ``body attachments'' where a debtor can be arrested for 
failure to answer interrogatories related to a debt collection. When 
called into court, the technical nicety of being arrested for failure 
to answer interrogatories, as opposed to nonpayment of the debt, is 
lost on the debtor. Instead, the creditor or the court will tell the 
debtor he or she can go free if the debtor starts making payments on 
the debt.
    Abuses in reverse mortgages, mortgage servicing, and debt 
collection are just a few of the current problems that demonstrate how 
a comprehensive Federal regulator can help protect consumers. 
Responsible companies in these industries should welcome the oversight 
of the CFPB to rid the industries of bad actors. Three years into the 
financial crisis, it can be easy to forget the conditions that led to 
the creation of the CFPB. It is important that short political memories 
not hobble an important tool for American consumers just after it 
starts.
                                 ______
                                 
                   PREPARED STATEMENT OF RAY BOSHARA
           Senior Advisor, Federal Reserve Bank of St. Louis
                            October 4, 2011
    Chairman Brown, Ranking Member Corker, and Members of the 
Subcommittee, thank you for the invitation to appear before you today. 
My name is Ray Boshara, and I am a senior advisor at the Federal 
Reserve Bank of St. Louis. Let me state that the views expressed here 
today are my own views, and not necessarily the views of the Federal 
Reserve Bank of St. Louis or the Board of Governors of the Federal 
Reserve System.
    At the Federal Reserve Bank of St. Louis, I am organizing a new 
effort to study mechanisms that promote household financial stability, 
with a particular emphasis on rebuilding the balance sheets and net 
worth of American households. My work is focused on families hardest 
hit by the financial crisis and the economic downturn, those who have 
experienced significant losses of employment, income, and wealth. We 
know that balance sheets matter because financially healthy families 
spend, save, and invest more, and thereby contribute to economic 
growth.
    My testimony is in two parts. In the first part, I discuss why a 
focus on household balance sheets is necessary. And in the second part, 
I offer some policy recommendations, based on my own work, to help 
rebuild the balance sheets of struggling families.
Why Balance Sheets Are Important
    Balance sheets, by which I mean the savings, assets and debts of 
households, merit attention for three reasons. First, over the past few 
years we have all seen the damage to families, communities, and the 
broader economy derived from balance sheet challenges. For too many 
years, household debt levels rose, eventually to dangerous levels, 
while little was done to build up household savings and to diversify 
family assets beyond housing. When the housing bubble burst, the wealth 
of many households plunged, leaving balance sheets, according to some 
economists, at a historic low. \1\ For instance, Mian and Sufi report 
that both household debt-to-income and household debt-to-assets ratios 
reached their highest points since 1950, with the debt-to-income ratio 
skyrocketing from 2001 to 2007 by more than it had in the prior 45 
years. \2\
---------------------------------------------------------------------------
     \1\ Atif Mian and Amir Sufi, ``Household Leverage and the 
Recession of 2007-09'', IMF Economic Review, vol. 58 (1), pp. 74-117, 
2010. www.palgrave-journals.com/imfer/journal/v58/n1/pdf/
imfer20102a.pdf
     \2\ Mian and Sufi, ``Household Leverage and the Recession of 2007-
2009''.
---------------------------------------------------------------------------
    While balance sheets have improved somewhat in the last couple of 
years, financial instability remains severe among the poor and persons 
of color, and reaches into the middle class. Consider these points:

    Three-fifths or more of families across all income groups, 
        according to the 2009 Survey of Consumer Finances (SCF) of the 
        Federal Reserve, reported a decline in wealth between 2007 and 
        2009, and the typical household lost nearly one-fifth of its 
        wealth, regardless of income group. \3\
---------------------------------------------------------------------------
     \3\ Jesse Bricker, Brian Bucks, Arthur Kennickell, Traci Mach, and 
Kevin Moore, ``Surveying the Aftermath of the Storm: Changes in Family 
Finances from 2007 to 2009'', Finance and Economics Discussion Series 
2011-17 (Washington: Board of Governors of the Federal Reserve System), 
2011. www.federalreserve.gov/pubs/feds/2011/201117/201117abs.html

    The Pew Research Center finds that, in 2009, typical net 
        worth stood at $5,677 for blacks, $6,325 for Hispanics, and 
        $113,149 for whites. About a third of black and Hispanic 
        households had zero or negative net worth that year, compared 
        with 15 percent of white households. \4\
---------------------------------------------------------------------------
     \4\ Rakesh Kochhar, Richard Fry, and Paul Taylor, ``Wealth Gaps 
Rise to Record Highs Between Whites, Blacks, Hispanics'', (Washington, 
DC: Pew Research Center, July), 2011. http://pewsocialtrends.org/files/
2011/07/SDT-Wealth-Report_7-26-11_FINAL.pdf

    Almost half of all households surveyed in the 2009 SCF had 
        less than $3,000 in liquid savings, and 20 percent had less 
        than $3,000 in broader savings. \5\
---------------------------------------------------------------------------
     \5\ Bricker, Bucks, Kennickell, Mach, and Moore, ``Surveying the 
Aftermath of the Storm: Changes in Family Finances from 2007 to 2009''.
---------------------------------------------------------------------------
    Nearly half of all Americans consider themselves 
        financially fragile, meaning that they would ``probably'' (22.2 
        percent) or ``certainly'' (27.9 percent) be unable to come up 
        with $2,000 in 30 days to cope with a financial emergency. \6\ 
        Similarly, almost half of all Americans report having trouble 
        making ends meet. \7\

     \6\ Annamaria Lusardi, Daniel Schneider, and Peter Tufano, 
``Financially Fragile Households: Evidence and Implications'', 
Brookings Papers on Economic Activity (Washington, DC: Brookings 
Institution, Spring), 2011. www.brookings.edu//media/Files/Programs/ES/
BPEA/2011_spring_bpea_papers/2011_spring_bpea_conference_lusardi.pdf
     \7\ Annamaria Lusardi, ``Americans' Financial Capability'', report 
prepared for the Financial Crisis Inquiry Commission, 2011. http://
fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0226-
Lusardi.pdf

    In a survey by Holtz, Van Horn, and Zukin on the effects of 
        unemployment and the recession, 70 percent of workers reported 
        withdrawing funds saved in college and retirement accounts in 
        order to make ends meet, \8\ likely leading to losses of wealth 
        in future years.
---------------------------------------------------------------------------
     \8\ Debbie Borie-Holtz, Carl Van Horn, and Cliff Zukin, No End in 
Sight: The Agony of Prolonged Unemployment, (New Brunswick, NJ: John J. 
Heldrich Center for Workforce Development, Rutgers University, May), 
2010. www.heldrich.rutgers.edu/sites/default/files/content/
Work_Trends_May_2010_0.pdf

    Second, weak balance sheets impact economic growth. Weak balance 
sheets--especially due to lower household wealth--have had negative 
``wealth effects'' on the economy. Case, Quigley, and Shiller state 
that ``the results indicate that increases in housing market wealth 
have had positive effects upon household consumption, but declines in 
housing market wealth have had negative and somewhat larger effects 
upon consumption.'' \9\ In addition, Mian and Sufi show that 
``household leverage as of 2006 is a powerful statistical predictor of 
the severity of the 2007-2009 recession across U.S. counties. Those 
counties that experienced a large increase in household leverage from 
2002 to 2006 showed a sharp relative decline in durable consumption 
starting in the third quarter of 2006--a full year before the official 
beginning of the recession in the fourth quarter of 2007.'' \10\ Many 
others, including the Bank for International Settlements and the 
International Monetary Fund, have recently identified weak household 
balance sheets as one of the key factors inhibiting economic growth.
---------------------------------------------------------------------------
     \9\ Karl E. Case, John M. Quigley, and Robert J. Shiller, ``Wealth 
Effects Revisited 1978-2009'', Cowles Foundation Discussion Paper No. 
1784 (New Haven, CT: Cowles Foundation for Research in Economics, Yale 
University, February), 2011. http://cowles.econ.yale.edu/P/cd/d17b/
d1784.pdf
     \10\ Mian and Sufi, ``Household Leverage and the Recession of 
2007-2009''.
---------------------------------------------------------------------------
    And third, a growing body of evidence indicates that families with 
assets generally do better in life than those without, and generally 
experience better social, behavioral, and educational outcomes. Conley, 
using intergenerational data, showed that ``parental education and 
parental assets are the single best predictor of educational (and other 
socioeconomic) success for blacks and whites. Parental wealth proves so 
powerful, in fact, that when added to statistical models, parental 
income, occupation and race no longer appear to matter. That is, while 
race, income, job status and net worth all tend to vary hand-in-hand, 
careful statistical parsing shows that it is really net worth that 
drives opportunity for the next generation.'' \11\ Moreover, Cooper and 
Luengo-Prado found that among adults who were in the bottom income 
quartile from 1984-1989, 34 percent left the bottom by 2003-2005 if 
their initial savings were low, compared with 55 percent who left the 
bottom if their initial savings were high--that is, 21 percent more 
adults moved out of the bottom quartile because they had higher 
savings. \12\ And Butler, Beach, and Winfree found that financial 
capital, along with family structure and educational attainment, are 
the three strongest predictors of economic mobility in America. \13\
---------------------------------------------------------------------------
     \11\ Dalton Conley, ``Savings, Responsibility, and Opportunity in 
America'', Policy Paper (Washington: New America Foundation, April), 
2009. http://newamerica.net/publications/policy/
savings_responsibility_and_opportunity_america
     \12\ Daniel Cooper and Maria Luengo-Prado, ``Savings and Economic 
Mobility'', in Reid Cramer, Rourke O'Brien, Daniel Cooper, and Maria 
Luengo-Prado, eds., A Penny Saved Is Mobility Earned: Advancing 
Economic Mobility Through Savings (Washington: Pew Charitable Trusts, 
Economic Mobility Project, November), 2009. www.economicmobility.org/
assets/pdfs/EMP_Savings_Report.pdf
     \13\ Stuart M. Butler, William W. Beach, and Paul L. Winfree, 
Pathways to Economic Mobility: Key Indicators (Washington: Pew 
Charitable Trusts, Economic Mobility Project), 2008. www.pewtrusts.org/
uploadedFiles/wwwpewtrustsorg/Reports/Economic_Mobility/
PEW_EMP_Chartbook_12.pdf
---------------------------------------------------------------------------
    Further evidence suggests that the earlier in life one has assets, 
the better that person will do. For example, Cooper and Luengo-Prado 
found that children of low-saving, low-income parents are significantly 
less likely to be upwardly mobile than children of high-saving, low-
income parents. Specifically, they found that 71 percent of children 
born to high-saving, low-income parents move up from the bottom income 
quartile over a generation, compared to only 50 percent of children of 
low-saving, low-income parents. \14\ Elliot and Beverly discovered 
that, remarkably, youth with any kind of a bank account, as long as the 
account was in the youth's name, are seven times more likely to attend 
college than those lacking accounts. \15\ Similarly, Zhan and Sherraden 
found that, after controlling for family income and other parent and 
child characteristics, financial and nonfinancial assets are positively 
related to, and unsecured debt is negatively related to, children's 
college completion. \16\ And Shapiro, combining data analysis and in-
person interviews with a demographically wide range of families, found 
that the presence of even small amounts of wealth at the right times 
can have a ``transformative'' effect on the life course. \17\
---------------------------------------------------------------------------
     \14\ Cooper and Luengo-Prado, ``Savings and Economic Mobility''.
     \15\ William Elliot III and Sondra Beverly, ``The Role of Savings 
and Wealth in Reducing `Wilt' between Expectations and College 
Attendance'', Research Brief (St. Louis: Center for Social Development, 
Washington University, January), 2010. http://csd.wustl.edu/
Publications/Documents/RB10-04.pdf
     \16\ Min Zhan and Michael Sherraden, ``Assets and Liabilities, 
Race/Ethnicity, and Children's College Education'', Research Brief (St. 
Louis: Center for Social Development, Washington University, February), 
2009. http://csd.wustl.edu/Publications/Documents/RB10-09.pdf
     \17\ Thomas M. Shapiro, The Hidden Cost of Being African American: 
How Wealth Perpetuates Inequality (New York: Oxford University Press), 
2004.
---------------------------------------------------------------------------
Policy Ideas for Rebuilding Balance Sheets
    For families, reducing their debts and rebuilding their savings--or 
deleveraging--is already, painfully and slowly, underway. The household 
savings rate has now reached around 5 percent, which is significantly 
down from the 9 percent average in the 1980s, on course with the 5 
percent average in the 1990s, but well above the nearly zero rates the 
U.S. fell to in the first part of this century. \18\
---------------------------------------------------------------------------
     \18\ Bureau of Economic Analysis, www.bea.gov/newsreleases/
national/pi/pinewsrelease.htm; Federal Reserve Bank of St. Louis, 
http://research.stlouisfed.org/fred2/series/PSAVERT; and Massimo 
Guidolin and Elizabeth A. La Jeunesse, ``The Decline in the U.S. 
Personal Saving Rate: Is It Real and Is It a Puzzle?'' Federal Reserve 
Bank of St. Louis Review, vol. 89(6), pp. 491-514, 2007.
---------------------------------------------------------------------------
    Yet millions of families need to delever even more, although, not 
surprisingly, economists do not agree on ideal or sustainable levels of 
household savings and debt. Most agree, however, that rebuilding 
balance sheets and igniting the economy require continuing measures to 
resolve the housing and foreclosure crisis. Roughly three-quarters of 
total household debt is mortgage debt, and nearly one-quarter of 
homeowners nationwide have negative equity. \19\ Specific 
recommendations to resolve the housing crisis are beyond the scope of 
my expertise and testimony, so I will focus on other ideas to help 
families build savings and wealth. However, before doing so, I would 
like to observe that, historically, home ownership has been an 
effective route to wealth accumulation for generations of families, 
including for low- and moderate-income families; accordingly, going 
forward, policy makers and researchers should continue to study 
responsible paths to home ownership for those who are ready and 
qualified, with all stakeholders balancing both risks and the rewards.
---------------------------------------------------------------------------
     \19\ Board of Governors of the Federal Reserve System, Statistical 
Release Z.1, ``Flow of Funds Accounts of the United States'' (September 
16), 2011. www.federalreserve.gov/releases/z1/current/z1.pdf; and 
CoreLogic, ``New CoreLogic Data Shows Slight Decrease in Negative 
Equity'', news release, June 7, 2011. www.corelogic.com/about-us/news/
new-corelogic-data-shows-slight-decrease-in-negative-equity.aspx
---------------------------------------------------------------------------
    While several ideas could be offered, let me suggest five savings-
based recommendations to rebuild balance sheets that I think hold 
particular promise. \20\ I would like to note that these 
recommendations are informed by a key insight gleaned from savings 
experiments in the U.S. and around the world. The most interesting 
question among researchers is no longer whether low-income families can 
save, but how they save and what difference it makes. That is, income 
is not the most important predictor of who saves. Instead, what matters 
more is who has access to structured savings mechanisms--whether 
through the workplace, schools, financial institutions, tax returns, 
community-based organizations, and others. A well-funded asset-building 
policy, one that includes several billion dollars in tax incentives, is 
already reaching middle- and upper-income households in the United 
States, \21\ making it easier for them to accumulate savings and 
wealth; the core policy challenge, then, is to extend those savings 
mechanisms and incentives to families whose earnings fall below median 
income.
---------------------------------------------------------------------------
     \20\ For this testimony, I will focus on savings-based approaches 
to building balance sheets, which have many advantages, although I well 
recognize that other important approaches exist to help low-resource 
families build assets, including Pell Grants, microenterprise programs, 
defined-benefit pension programs, various home ownership and rental 
assistance programs, public safety net programs, and many others.
     \21\ Butler, Beach, and Winfree, ``Pathways to Economic Mobility: 
Key Indicators''; Reid Cramer and Rachel Black, ``The Assets Report 
2011: An Assessment of Federal Policies and Proposals To Promote Asset-
Building Opportunities'' (Washington: New America Foundation, June), 
2011.http://assets.newamerica.net/sites/newamerica.net/files/
policydocs/AssetsReport2011.pdf; and ``Corporation for Enterprise 
Development'', ``Upside Down: The $400 Billion Federal Asset-Building 
Budget'' (Washington: CFED), 2010. http://cfed.org/assets/pdfs/
UpsideDown_final.pdf
---------------------------------------------------------------------------
    First, build assets as early in life as possible. As discussed 
earlier, the evidence thus far suggests that children in homes with 
assets, or children with assets, do better in life than those lacking 
assets. Policies that automatically create a savings account at birth 
for every child born in America, with greater resources available for 
lower-wealth families, hold promise to expand opportunity and build a 
stronger middle class over time. Such a policy would, if schools 
structured financial education classes around the accounts, likely have 
a significant effect on building financial skills for children and 
youth--some studies show that financial know-how is the result of 
regular saving, not the source. If such an ambitious policy cannot be 
achieved in the near term, then I would suggest the creation of a 
``Kids Roth'' or ``Roth at Birth'' or ``Young Savers Account''--a 
slightly modified Roth Individual Retirement Account (IRA) that, 
voluntarily, permits children to open and make contributions to a life-
long, tax-benefited account that can also be used for post-secondary 
education and home ownership (as current Roth IRAs allow). The creation 
of such a nationally sanctioned product directed at kids would likely 
spur further experimentation around child savings accounts, which has 
been hampered by product-related challenges over the last several 
years.
    Second, build assets and reduce debts at tax time. Income tax 
refunds averaged $2,700 in 2008, while about 24 million Earned Income 
Tax Credit (EITC) recipients received refunds as large as $4,824. \22\ 
These refunds, and the broad reach of the tax system, offer good 
opportunities to repair or rebuild balance sheets. The IRS's form 8888, 
which enables all taxpayers to deposit their refunds automatically in 
up to three separate accounts, holds great promise in leveraging tax 
refunds into savings and debt reduction. For example, savings bonds, in 
many ways an ideal product for small savers, can now be purchased 
directly at tax time. Other interesting pilots, including the ``Refund 
to Savings'' Initiative, are under way. To further facilitate savings 
at tax time, the Savers Credit, which encourages retirement savings 
among low-income taxpayers, could be improved and made available for 
contributions to college savings accounts, the purchase of savings 
bonds, and other preretirement assets. Third, build assets at the 
workplace. The workplace has always been and remains a fulcrum for 
building savings and assets. In fact, the vast majority of pension 
wealth in the U.S. is structured through employers. Experiments, such 
as those testing ``Auto401(k)s'' and the ``Save More Tomorrow'' 
concept, have generated encouraging results, including for low-income 
workers, and the Pension Protection Act of 1996 has removed many of the 
barriers to further expansion of those efforts. To generate more 
employer-based savings, policy makers could consider proposals to set 
up automatic payroll deductions into retirement and unrestricted 
savings accounts outside the workplace, informed by the ``AutoIRA'' and 
``AutoSave'' concepts currently under discussion. Employers could also 
encourage direct deposit of paychecks, which appears to lead to better 
financial inclusion outcomes. Finally, one could also imagine automatic 
payroll deductions for other assets, such as savings for college or 
home ownership, with possible incentives to encourage further saving by 
lower-income workers.
---------------------------------------------------------------------------
     \22\ David Newville, ``The Saver's Bonus: Encouraging and 
Facilitating Savings by Families at Tax Time'', Policy Paper 
(Washington: New America Foundation, June), 2009.www.newamerica.net/
files/nafmigration/Savers_Bonus_Two_Pager_FINAL_070209.pdf
---------------------------------------------------------------------------
    Fourth, build unrestricted savings, which are savings that can be 
used for emergencies or precautionary purposes and which remain in very 
high demand by low- and moderate-income consumers. \23\ Those with 
sufficient levels of unrestricted savings are more likely to be banked, 
more likely to pay down and secure better loans, and more likely to 
acquire a longer-term asset such as higher education, a small business, 
or a home. And they do better: The Consumer Federation of America found 
that low-income families with $500 in emergency savings had better 
financial outcomes than moderate-income families with lower savings. In 
addition, McKernan, Ratcliffe, and Vinopal found that households that 
are ``liquid-asset poor'' are two to three times more likely than those 
with liquid assets to experience ``material hardship'' after a job 
loss, health emergency, death in the family, or other adverse event. 
\24\ Policy makers could consider several measures to boost 
unrestricted savings, including (1) expanding the EITC; (2) further 
studying and testing prepaid cards, which often include a savings 
``bucket" in addition to transaction services; and (3) promoting 
reasonably priced small-dollar lending and small-dollar savings 
programs among financial institutions, nonprofits, and others.
---------------------------------------------------------------------------
     \23\ Stephanie Chase, Leah Gjertson, and J. Michael Collins, 
``Coming Up with Cash in a Pinch: Emergency Savings and Its 
Alternatives'', CFS Issue Brief 6.1 (Madison, WI: Center for Financial 
Security, University of Wisconsin), 2011. www.cfs.wisc.edu/
Publications-Briefs/
Coming_Up_with_Cash_in_a_Pinch_Emergency_Savings_and_Its_Alternatives.pd
f
     \24\ Signe-Mary McKernan, Caroline Ratcliffe, and Katie Vinopal, 
``Do Assets Help Families Cope with Adverse Events?'' Brief 10 
(Washington: The Urban Institute, November), 2009. www.urban.org/
UploadedPDF/411994_help_family_cope.pdf
---------------------------------------------------------------------------
    And finally, consider supporting innovations to State-based 529 
college savings plans and other ways to generate savings earmarked for 
college. Many studies have documented the role that a good education, 
especially completion of a post-secondary degree, has on one's future 
earning and wealth, and how the lack of an education and skills are 
among the strongest predictors of downward mobility. Promising 
innovations to learn from include (1) the ``SEED for Oklahoma Kids'' 
experiment, which is testing 529s established at birth; (2) the 
``Kindergarten to College'' initiative in San Francisco, which is 
setting up college saving accounts for all of the city's 
kindergartners; and (3) the ``Early Pells'' proposal by the College 
Board, which would enable a Pell-eligible family to receive a child's 
Pell Grant earlier in life as a deposit to a 529 account.
    As implied in the recommendations above, there is a great need to 
diversify the savings and assets of families, especially those below 
median income. The wealth of these families has been concentrated in 
home ownership, which has contributed to the stability and upward 
mobility of millions of families over time--but which, especially when 
not acquired responsibly, or because of price fluctuations, ended up 
being a risky asset for too many families. Home ownership, as mentioned 
earlier, clearly carries both potential risks and rewards that must be 
carefully weighed. It is wise, therefore, for families to have access 
to a range of savings products--short- and longer-term, restricted and 
unrestricted--that lead to as broad a range of financial assets (such 
as investments and retirement accounts) and productive assets (such as 
a home, land, post-secondary education, reliable car, or small 
business) as possible. As Federal Reserve Board Vice Chair Janet Yellen 
has said, ``In light of this experience [with collapsing housing 
prices], it makes sense to think about the development of wealth-
building vehicles for low- and moderate-income households that have 
some of the desirable qualities of home ownership as an investment, but 
perhaps have less of the risk. Such instruments should be simple and 
transparent and might include a savings commitment component. Although 
households will likely need to take on some risk in order to accumulate 
wealth, the risk should not have the potential to destroy a household's 
financial security. Continued research in this area is badly needed.'' 
\25\
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     \25\ Janet Yellen, ``Housing Market Developments and Their Effects 
on Low- and Moderate-Income Neighborhoods'', speech delivered the 2011 
Federal Reserve Bank of Cleveland Policy Summit, June 9, 
2011.www.federalreserve.gov/newsevents/speech/yellen20110609a.htm
---------------------------------------------------------------------------
Conclusion
    Mr. Chairman, I commend you for convening this hearing today to 
look at high levels of household debt, consumer protection, and 
rebuilding the middle class. We know that household debt is both 
weighing down millions of families and stifling economic growth. 
Thankfully, we have compelling evidence, some of it presented here, 
suggesting that rebuilding balance sheets and net worth will help hard-
hit families and the broader economy move forward. I hope to make a 
modest contribution to this critical challenge, and I would be pleased 
to answer any questions that you might have.
                                 ______
                                 
                PREPARED STATEMENT OF G. MICHAEL FLORES
              Chief Executive Officer, Bretton Woods, Inc.
                            October 4, 2011
Overview
    Chairman Brown and Members of the Committee, my name is Michael 
Flores and I am CEO of Bretton Woods, Inc., an advisory firm in the 
financial services industry.
    My firm is in the initial stages of a new study on the impact to 
the middle class's access to bank payments and credit facilities. We 
have completed studies over the last 10 years on overdraft issues as 
well as the emergence of prepaid cards.
    We demonstrated in the early 2000s that the cost of an overdraft 
was significantly higher that other sources of low dollar, short term 
credit. We have also shown that the prepaid card issuers with the most 
significant market share were on a par with basic checking accounts but 
are now a less expensive option available to the consumer.
    Almost every day there is a news release of banks increasing their 
fees to consumers. At the same time we are hearing that banks have 
plenty of money to lend but are refraining from doing so.
    The results of many studies over the last 10 years, including our 
own studies, \1\ indicate that the majority of overdrafts were incurred 
by the segment of the consumer base that used free checking. Now that 
free checking is going away, consumers are closing their checking 
accounts and, as a result, losing access to this form of short term 
credit.
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     \1\ http://bretton-woods.com/71501/index.html
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    Our contention is that most banks are operating under a 20th 
century business model and have yet to adequately devise a 21st century 
model. Some of the issues involve the net interest margin squeeze banks 
have endured for the past 15 years as well as recent regulatory changes 
that have significantly impacted banks' fee income sources. Those 
primary sources are overdraft fees and interchange fees. Other issues 
include the quickening pace of technology, the need to meet the 
expectations of the young consumers while still providing a service 
model with which the older customers are comfortable.
    This is what we refer to as the banks' legacy cost structure of 
delivering services in an analog world while building the 
infrastructure for a digital world.
    Banks cannot profitably originate and underwrite individual small 
dollar loans. Our analysis indicates that $1,500 in the break-even 
point using data from the FDIC Small Dollar Loan Program.
    I have included a model in my written testimony for the Committee's 
review.
    Market driven entrants are able to leap frog the old model and 
build a cost structure to effectively deliver these services at 
competitive prices. We support the ability of banks and alternative 
service providers to have the ability to develop strategic partnerships 
or acquisitions to allow legacy banks be more competitive with 
entrepreneurial and market driven solutions
    A key premise of this hearing is Consumer Protection. I am a true 
supporter of clear and concise disclosures so the consumer can make an 
informed decision. However, it is becoming apparent that the law of 
unintended consequences is alive and well. For example, the reduction 
in interchange fees to benefit the consumer, which was basically a 
business to business financial issue between the banks and the 
merchants, has inadvertently created a significant income 
redistribution from the consumers to the merchants in the form of 
higher bank fees to the consumer to lower costs/higher margins for the 
merchant.
    Given this observation, the following are my concerns with the 
CFPB:

    Concentration of authority with, in my opinion, limited 
        accountability. I believe that the bureau should be accountable 
        to Congress as a check and balance, similar to other agencies.

    I see inherent problems in separating safety and soundness 
        with consumer protection. Limitations on products or pricing 
        beyond market constraints can potentially produce limitations 
        of credit and access to mainstream banking that we are now 
        starting to see. Further reductions in income sources to banks 
        can have a significant impact to safety and soundness.

    Furthermore, the cost of compliance is increasing to a 
        point where many small banks (under $1 billion assets) are 
        limited in their ability to hire the professionals required.

    Finally, I believe the director should report to a board 
        with a broad representation of the interested parties.

    Thank you and I look forward to answering your questions.
Supplemental Data
History of Banking Overdraft Fees
    In the 1980s, we advised banks to pay all checks from low dollar to 
high dollar so the bookkeepers would have fewer items to process. Fee 
income was not the factor it became in the late 1990s. During this 
time, banks were experiencing interest margin compression, traditional 
finance companies were exiting the business of offering small dollar, 
short term credits products (for which the demand did not subside) and 
technology became available to process checks presented against 
insufficient funds in an automated process. The result was the 
development of Courtesy Overdraft Programs that automated the decision 
process bank bookkeepers and branch managers have manually made for 
decades.
    Given this new technology, banks started offering free checking. 
The amount of NSF and Overdraft items increased due to the limited 
options available for short-term/low dollar credit but the costs to 
handle these items were significantly less. Accounts that banks would 
not open in the past, they could now do so profitably.
    We also changed the presentment order to pay large dollar checks 
first before the small dollar items. This was established was as a 
customer service. Paying the mortgage payment or rent or car payment 
first saved charges and embarrassment of ``bouncing'' those items. 
Secondly, when deciding to pay a check into overdraft was limited to 
checks (before debit cards and ACH became as prominent as they are 
today), this actually saved the customer money. When a bank returns a 
check unpaid, it charges the same fee as paying the check into 
overdraft. The depositing customer typically redeposits that check that 
may result in another NSF fee plus any merchant fees or late fees or 
utility reconnect charges. In essence, paying a check into overdraft 
can be one-third the ultimate cost of returning the check.
    When banks extended the Courtesy Overdraft Program to low dollar 
debit card transactions, the customer ceased to receive value.
The Case for Short-Term Credit Advance Loans
    The point with the brief history of overdrafts is that when a 
customer opens a basic checking account, the bank will still make the 
pay or return decision on checks presented against insufficient funds 
(even if the customer ``opts-out'' of debit card and ATM overdrafts) 
and charge the fee, regardless of the decision. The result of many 
studies over the last 10 years, including our own studies, \2\ 
indicates that the majority of NSF/OD charges were incurred by the 
segment of the consumer base that used free checking.
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     \2\ http://bretton-woods.com/71501/index.html
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    With the changing landscape of increasing checking account fees, 
many consumers of free checking are leaving banking for alternatives, 
including prepaid cards. The fact that some these consumers are out of 
mainstream banking while others are now paying more for checking 
accounts does not diminish the demand for low dollar short term credit.
    Additionally with several State initiatives and the imposition of 
Regulation E (opt in requirement) to inhibit access to short term 
credit, consumers are still in need for this credit facility. The 
reason banks have started offering deposit advance loans is that 
individually underwriting small dollar loans is not economically 
feasible. As a practice, our firm has advised banks since the early 
1990s to not originate loans under certain solar limits. The minimum 
limit found at many banks is now $1,000 for a consumer loan.
    Bretton Woods conducted a cost analysis to originate a small dollar 
loan based on the FDIC Small Dollar Loan Program. Our finding, as 
indicated in the following chart, show that the minimum loan amount is 
approximately $1,500 to breakeven.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Interviews with participants of the SDL program indicate that these 
loans are unprofitable. An excerpt from the FDIC report \3\ shows:
---------------------------------------------------------------------------
     \3\ http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/
FDIC_Quarterly_Vol4No2_SmallDollar.pdf

    ``Nevertheless, as a general guideline, pilot bankers 
        indicated that costs related to launching and marketing small-
        dollar loan programs and originating and servicing small-dollar 
        loans are similar to other loans. However, given the small size 
        of SDLs and to a lesser extent NSDLs, the interest and fees 
        generated are not always sufficient to achieve robust short-
        term profitability (emphasis added). Rather, most pilot bankers 
        sought to generate long-term profitability through volume and 
        by using small-dollar loans to cross-sell additional 
---------------------------------------------------------------------------
        products.''

    The average loan amount for short term credit is approximately $300 
\4\ according the Center for Responsible Lending.
---------------------------------------------------------------------------
     \4\ http://www.responsiblelending.org/payday-lending/research-
analysis/payday-loan-inc.pdf
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    Given the average FDIC Small Dollar Loan program loan amount is 
$724 and our estimate that it takes a minimum $1,500 for a bank to 
break even on a consumer loan and the demand for a short term loan is 
$300, what are the options available to this consumer?
    The market currently has options for unanticipated short-term 
credit needs in the form of Overdrafts. There are also banks, credit 
unions and Alternative Financial Services providers that have product 
for anticipated short term credit needs.
    As with all products, features need to be weighed against price. 
The typical bank or credit union product has a slightly lower price 
point for a low dollar loan but require the applicant be a customer for 
a period from 1 month to 4 months and have no other delinquencies with 
existing credit products. Many consumers who have a need for this 
credit may not qualify for a checking account because of previous 
issues and reporting to Chex Systems. Others with existing accounts 
have or are considering closing their checking account due to higher 
fees being assessed.
    A recent article from Money Magazine, ``Get a Fair Shake, Not a 
Shake-down'', dated September, 2011, depicts the reasons for this trend 
in bank fees:

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Our own analyses of the cost of checking accounts compared to 
prepaid cards and check cashing using the Consumers Union standard 
transaction profile \5\ in August of this year shows:
---------------------------------------------------------------------------
     \5\ http://www.consumersunion.org/pub/core_financial_services/
014300.html

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The bank costs are now understated given the recent news from Bank 
of America and Citibank.
                                 ______
                                 
                  PREPARED STATEMENT OF DOUGLAS FECHER
President and Chief Executive Officer, Wright-Patterson Federal Credit 
                         Union, Fairborn, Ohio
                            October 4, 2011
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to speak to you about responsible consumer lending 
practices.
    My name is Doug Fecher, and I am President and CEO of Wright-Patt 
Credit Union, a $2.1 billion financial cooperative serving more than 
210,000 members in Dayton, Ohio, a community hit hard by a challenging 
economy. In the last 3 years, Dayton has lost thousands of jobs, 
leaving many of our credit union members to face an uncertain financial 
future.
    Attached to my testimony are several alarming statistics that put 
the struggles of the typical consumer into perspective.

    A decade ago, the ratio of household debt to disposable 
        income was roughly 80 percent, which, proportionally, allowed 
        people to effectively manage their debt. Today, that ratio is 
        closer to 120 percent, leaving the typical consumer with little 
        safety margin to help them cope in difficult times.

    Consumer savings rates have plummeted. Two decades ago, 
        consumers saved nearly 12 percent of their disposable income; 
        today they save less than 5 percent.

    Home prices have dropped dramatically in the last 5 years, 
        decreasing in value more than 13 percent in 2008 and 5 percent 
        so far this year.

    Clearly, the need for affordable financial services has never been 
greater.
    This is precisely where credit unions like Wright-Patt excel. To 
some, our Nation's credit unions, as not-for-profit, democratically 
controlled cooperatives--are anachronisms in our modern financial 
system. But credit unions are different by design with an intensely 
local focus that has paid enormous dividends during this time of 
financial crisis and slow economic growth. The numbers speak for 
themselves:

    Every year of the past four (2007-2010) our Nation's 7,300-
        plus credit unions have granted over $250 billion in loans;

    Credit union members have over 45 million loans 
        outstanding;

    Credit union loan quality is the strongest of all insured 
        financial institutions, with 60-day delinquency of just 1.6 
        percent, compared to bank 90-day delinquency of 4.4 percent;

    Credit union net charge-offs peaked in 2009 at 1.22 percent 
        of all loans and are now below 1.0 percent;

    Credit union auto loan market share reached its peak of 
        22.7 percent when the auto market was at its most difficult 
        point ever during the Great Recession (and in many cases credit 
        unions were the only active lenders in their communities);

    When home prices were failing at the greatest rate, credit 
        unions achieved 5.8 percent market share in mortgage 
        originations, its highest ever; and

    Credit union real estate loan modifications total over $10 
        billion helping nearly 60,000 members stay in their homes.

    Indeed, credit unions in the United States support over 900,000 
jobs. We have tripled our mortgage-lending market share in 3 years and 
become the Nation's #1 manufactured housing lender. And we've restarted 
a moribund private student market--at affordable rates--so far making 
more than $1 billion in student loans that have enabled more than 
220,000 students advance their education.
    And we've done these things by being true to our core values of 
helping America's consumers make smart money choices with organizations 
they can trust to help them gain a sense of financial stability in an 
otherwise difficult environment.
    Here's how this plays out at Wright-Patt Credit Union. Our mission 
is to help folks achieve financial freedom for themselves and their 
families. Specific to members' use of debt we follow four commonsense 
principles:

  1.  Wright-Patt only makes affordable loans members will be able to 
        repay;

  2.  We tell members exactly what their loans will cost without hidden 
        fees or penalties;

  3.  We take every opportunity to advise members on how to increase 
        their savings even when they are taking out a loan; and

  4.  We treat those who fall behind with dignity and respect, and we 
        work closely with members to develop reasonable plans--
        including modification when appropriate--to return them to 
        sound financial health.

    These principles are the foundation of the way we lend. They create 
an environment where we get to help people change their lives. Here are 
just a few examples.
    Mortgage Modification: Wright-Patt Credit Union makes mortgage 
loans to help members enjoy affordable long-term home ownership. One 
member--typical of many--recently found herself in a predatory mortgage 
loan with a rate and payment she couldn't afford. She was faced with 
losing her home. Thanks to WPCU's partnership with Miami Valley Fair 
Housing, she came to Wright-Patt Credit Union. After a lot of hard work 
by our staff and by the borrower herself, we were able to find a 
mortgage that lowered her payment and reduced the loan term to 15 
years. Had it not been for her credit union, our member would have lost 
her home through sheriff's sale. Now she gets to keep her house with a 
payment she can afford and a loan that will help her build equity.
    Credit Cards: We also lend for credit cards differently than most. 
The Nation's largest banks offer credit cards that are designed to get 
consumers to spend more in the hopes of receiving rewards or cash-back 
on their purchases. Interest rates on these cards routinely exceed 20 
percent. At Wright-Patt, we think credit cards are a convenient payment 
mechanism, and not a temptation to run up debt. Our credit card does 
not feature rewards that entice more spending, and we charge a rate 
starting at just 6.25 percent so members have a reasonable chance of 
paying their card in full in a manageable period of time.
    Emergency ``Payday'' Loans: Wright-Patt Credit Union also offers a 
small-dollar loan product called StretchPay so members aren't tempted 
to visit payday lenders when they run low on cash. StretchPay is now 
being offered by 51 other credit unions in Ohio, eight other States, 
and the District of Columbia. StretchPay is a ``payday loan 
alternative,'' and does three things for members:

  1.  It offers an emergency line of credit up of $250 at an interest 
        rate of 18 percent and an annual fee of $35. With no new 
        advances until paid in full, we help members avoid a ``circle 
        of debt'';

  2.  It improves credit ratings since, unlike payday lenders, we 
        report payments to credit bureaus with the ultimate goal of 
        qualifying members for even lower-cost loans on the strength of 
        a new repayment history; and

  3.  It helps members start a savings account and provide free 
        financial education to teach them how to build savings rather 
        than use high cost loans to deal with cash emergencies.

    First-Time Car Buyers: WPCU serves the airmen and airwomen of 
Wright-Patterson Air Force Base. Many of these young service men and 
women come to base straight from high school with little or no 
financial education. To help them gain reliable transportation without 
visiting ``buy-here, pay-here'' lots, we help them locate an affordable 
car, have it examined by a certified mechanic, and offer a loan rate 
and payment that fits their financial profile.
    Savings Rates: Our credit union's responsibilities to members don't 
end with lending products. We also incorporate savings programs that 
encourage members to become financially stronger by building up safety 
reserves. Every member receives a 5 percent dividend rate on the first 
$500 they are able to save in their WPCU primary membership account. We 
use the 5 percent dividend in a time when average rates are less than 
0.5 percent as incentive to save. We pay this rate even on accounts 
with balances as low as $5 so that every member has the opportunity to 
earn a decent rate on whatever they're able to save.
    The Savings Race: Wright-Patt Credit Union, in conjunction with a 
local television station, plays ``The Savings Race'' with five local 
families from October through June. The game plays out on local 
newscasts and is a contest to see which of the five families is able to 
improve their net worth the most over the 8 months of the contest. (The 
game is similar to ``The Biggest Loser'' on network television which is 
devoted to losing weight; in our version we improve net worth.) Using 
WPCU employees as coaches, in 3 years our families have improved their 
net worth by a combined $389,623 of savings growth and debt reduction--
that's an improvement in net worth of more than $25,000 per family. The 
next season of ``The Savings Race--Home Edition'' starts October 6.
    Financial Education: Financial education is important at Wright-
Patt Credit Union. Much of this education is around helping members 
know how much their loans actually cost and, if we can help them save 
money, bring their loans to the credit union.
    In March, 2011, we challenged members to save at least $50 on high-
interest loans by refinancing with Wright-Patt. If we couldn't save at 
least $50 on their loans, we'd pay them $50. Part of the deal was 
letting us review their credit report alongside them in detail--an act 
which opens more than a few eyes to just how much more money folks are 
spending than they need to. In just 6 months of the credit review 
program we've helped thousands of members reduce interest payments on 
existing debt by more than $10 million dollars.
    Free Financial Counseling: WPCU provides free budget and debt 
counseling to members at no cost from their credit union. Our 
counselors will help negotiate lower payments and settlements so 
members have a better chance of financial recovery.
    Total Savings: In the last 3 years Wright-Patt Credit Union 
programs have put more than $23 million dollars back in consumers' 
pockets. Across Ohio, credit unions have put direct financial benefits 
of $132 million back into the pockets of Ohio's 2.68 million credit 
union members. Nationwide, credit union members have saved almost $6.5 
billion by using credit unions.
    We are proud of how much we've helped members save. But, like all 
smaller financial institutions, we face challenges that hinder our 
ability to spend time helping consumers.
    Since 2008 we've been given more than 160 new rules and regulations 
from some 27 different Federal agencies. While credit unions would 
rather hire loan advisors and financial counselors to help consumers 
improve their financial situation, we're instead hiring compliance 
offers to deal with the new rules. The largest banks have armies of 
attorneys to deal with these regulations--we don't. It is not an 
exaggeration to say our Nation's small, community-based financial 
institutions are exposed to a situation where they ultimately may be 
regulated out of business. This should concern us all.
    I'd also like to comment briefly on the new Consumer Financial 
Protection Bureau. Credit unions are generally in support of the 
bureau's goals; to us, the greater transparency and consumer disclosure 
required by the new agency simply highlights the way credit unions have 
always done business. Richard Cordray, a fellow-Ohioan who has been 
nominated as the agency's director, has outstanding qualifications and 
understands the unique role credit unions play in the lives of 
consumers. We hope the agency empowers credit unions to do their jobs 
of helping consumers make smart use of credit without creating even 
higher regulatory costs.
    Let me close with an email I received just last week from a member 
who personifies the typical financial conundrum faced by our 
membership:

        I'm writing you today to inform you of the difference your 
        company has made in my life. My previous car payment was $348 
        and with my rent being $699 a month including my other 
        household bills I could barely make ends meet. Some weeks I 
        could not feed myself due to the strain of having this enormous 
        car payment. Just two weeks ago your credit union approved me 
        for a car payment of $192. You guys saved me $156 dollars each 
        month. My interest rate went from 23.9 percent down to 8.9 
        percent. You guys helped me keep food on the table.

    This email is one of many I regularly receive, and affirms to me 
that we are doing what you want us to do--we are taking care of 
consumers, helping them improve their financial situation, and putting 
money back in their pockets to use in supporting their families. I 
believe we need to strengthen America's cooperative credit unions as an 
essential resource for the current fiscal crisis plaguing this country.
    To conclude, I frequently tell my staff that we are not doing our 
job if our members are not in better financial health today than when 
they first sought our services. I hope this testimony gives you a 
glimpse into the benefit we bring to our Nation's financial table.
    Thank you for the opportunity to present to you today. I will be 
glad to answer any questions.
                                 ______
                                 
                  PREPARED STATEMENT OF IDA RADEMACHER
  Vice President for Policy and Research, Corporation for Enterprise 
                              Development
                            October 4, 2011
    Good afternoon, and a special thank you to the Subcommittee on 
Consumer Protection and Financial Institutions--especially Chairman 
Brown and Ranking Member Corker--for convening a hearing focused 
explicitly on exploring ways to help everyday Americans build (or 
rebuild) their wealth at a time when our collective and individual 
balance sheets are very much in the red. For over 30 years my 
organization has been deeply engaged in researching and advancing 
promising strategies that help low, moderate and middle income (LMI) 
families and communities build wealth and financial resiliency. At no 
time has our work and the work of our many partners been more needed--
or more difficult--than right now. And at no time has the leadership of 
Congress on issues of consumer financial protection and helping 
families save and build assets been more important than right now.
    It is my goal with this testimony to achieve three objectives:

    First, I will provide you with a concise (but bleak) 
        picture of the current state of financial security among 
        middle- and low-income households in America, and describe how 
        the set of policies we currently have on the books to protect 
        LMI consumers and help them build wealth have missed their 
        mark.

    Second, I will present a framework that illustrates--from a 
        household's perspective--what it really takes to build 
        financial security and economic mobility over time.

    Third, I will describe a range of actions that members of 
        Congress--and of this Subcommittee in particular--could take in 
        the near future that would help millions of Americans 
        successfully navigate the financial marketplace and begin to 
        save, invest and build assets that will help us to rebuild our 
        middle class and our economy.
Financial Security and Stability Among LMI Households
    The middle-class squeeze in America is more pronounced and more 
consequential than at any time in modern history. New research in the 
last few years has really helped us get a better handle on some 
additional the dimensions of financial security that go beyond income 
poverty and unemployment statistics. For example:

    Over half of the population in the U.S. with a credit score 
        has what can be considered subprime credit. In some areas, that 
        number closes in on 70 percent.

    One in four Americans either have no bank account, or are 
        considered ``underbanked'' meaning they use alternative and 
        largely unregulated financial products and services that are 
        often very high cost and abusive. In the African American 
        community, the number of un- and underbanked households rises 
        to one in two, or 50 percent.

    Over half the population doesn't have enough liquid savings 
        and assets to help them survive at the poverty level for 3 
        months if they lost their source of income (that's only about 
        $4,000 for a family of three).

    Another recent survey found that over half the population 
        isn't confident they could find a way to scrape together $2000K 
        if they had an emergency.

    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--a 66 
        percent increase over the same quarter in 2010, and a 368 
        percent increase over the same period in 2009.

    Middle-income household debt-to-income ratios have risen 
        from 67 percent in 1983 to 100 percent in 2001 and 157 percent 
        in 2007. And the evidence indicates that the debt pile-on was 
        directed at maintaining normal consumption not enhanced 
        consumption.

    None of this bodes well for the future of America's middle class. 
Make no mistake, ``middle income'' and ``middle class,'' are not 
synonymous. To illustrate this point, consider the 2009 research study 
from the Pew Economic Mobility Project that found that almost half (45 
percent) of black children whose parents were solidly middle income 
ended up falling into the bottom of the income distribution as adults, 
compared to only 16 percent of whites.
    Clearly there is something besides income that has historically 
helped to make middle-class status more ``sticky'' and 
multigenerational. One of the key ``somethings'' has been asset 
development--home ownership, higher education, savings, inheritance--
these are all part of the explanation. Historically white families have 
more of these. A lot more. Professor Thomas Shapiro of Brandeis 
University and renowned expert on racial wealth disparities finds that 
white families are four times more likely than blacks to inherit, and 
when they do the median inheritance is 10 times greater. Another recent 
Pew report found that between 2005 and 2009 median household wealth 
plunged 66 percent among Hispanics and 53 percent for blacks, while 
dropping just 16 percent for white households. The result is that the 
net worth of white families is now 20 times greater than that of black 
families and 18 times more than Hispanic households--the largest gap in 
25 years. The middle class is shrinking across the board. But for 
communities of color, the middle is being decimated.
The Role of Tax Policy in Asset Building
    The shrinking ranks of the middle class and the growing wealth gap 
are phenomena that are as predictable as they were preventable. The 
recession has clearly exacerbated the problem, but at its core the 
widening wealth gap reflects years of Government policy decisions that 
disproportionately help high-income households build assets while 
virtually ignoring the needs of the middle class and explicitly 
penalizing efforts by low-income households to save and invest.
    Last year CFED and the Annie E. Casey Foundation published the 
report ``Upside Down'', which showed that the Federal Government spends 
upwards of $400 billion a year to encourage Americans to save for 
retirement, go to college, start businesses, and purchase homes. But 
here's the catch: These ``asset-building'' policies are primarily 
administered through the tax code as special deductions and deferrals. 
As a result these subsidies are overwhelmingly accessible primarily to 
Americans in the very highest income brackets, with little evidence 
that the incentives generate much in the way of net new savings. 
Meanwhile, the majority of the population in middle- and lower-income 
brackets who do not have enough of a tax liability to warrant 
itemizing--those most in need of building a financial cushion to deal 
with short term income shocks and long term economic uncertainty--
receive miniscule levels support.
    In 2009 more than half of the $400 billion in asset-building 
benefits went to the top 5 percent of tax-payers. The bottom 60 percent 
of households received less than 4 percent of those subsidies. Another 
cut of the data shows that households making a million dollars or more 
received a $95,000 subsidy to help them build assets--enough to finance 
a pretty good college education for their kids. Households making less 
than $20,000 got about five dollars--enough to finance 2 days of school 
lunch.
    This ineffective and skewed allocation of expensive tax subsidies 
has added to both the Federal deficit and the growing wealth gap 
between Americans with means and those working to make ends meet.
A Framework for Household Financial Security
    The thing is we do know what it really takes for a household in 
America to build financial security over time. But at present we don't 
do a lot to help average families succeed in this endeavor. CFED has 
created the Household Financial Security Framework to describe the 
basic elements of building household financial security, which, on the 
face of it, looks relatively straightforward. Individuals must first 
learn the knowledge and skills that enable them to earn an income and 
manage their financial lives. They then use their income to take care 
of basic living expenses and service debt payments, and then--if income 
has exceeded expenses--they can save some for future purposes. When 
they have accumulated enough liquid savings, they can leverage those 
savings and invest in assets that will appreciate over time and 
generate increasing levels of income, equity and net worth. Throughout 
the cycle, access to safe, affordable financial products, insurance and 
consumer protections help households protect the gains they make.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In reality, there is nothing particularly straightforward about 
getting a household balance sheet to balance, much less tip toward 
asset accumulation. As the data I reviewed earlier makes abundantly 
clear, financial security is the exception rather than the rule for the 
majority of Americans. Every day, as people try to navigate the 
increasingly complex financial marketplace, they need to make choices 
without full information, clear guidance or adequate protection. It's 
not that people don't understand the downsides, inconveniences and 
long-term implications of being unbanked, using costly credit, skipping 
their mortgage payment or failing to save for college or retirement. 
But without adequate income, savings or products options, their choices 
are limited. A big part of the problem has very little to do with 
individual knowledge and skills and instead has to do with the systems, 
structures and protections that exist--or don't--in the financial 
marketplace.
    The primary goal of policy change aimed at strengthening the 
financial security of households should be to ensure that the market 
provides a range of safe, affordable, and accessible financial products 
that meet the transactional, savings and credit needs of low- and 
moderate-income households and to establish consumer protections that 
enable all households to participate fully in the consumer financial 
markets with confidence and trust.
    Which brings me to my final objective: Outlining a range of 
specific policies and actions I would urge Members of the Subcommittee 
to take with your colleagues to improve the asset building 
opportunities of all Americans.
Federal Policies To Encourage Asset Building and Consumer Protection
    Some would argue that in the current economic climate, with so many 
people struggling just to make ends meet, it isn't realistic to focus 
on saving and wealth building. But this view is unnecessarily limited; 
earning and saving is not an either/or scenario, and it is incumbent on 
us to help households find a way to do both. Saving is critical for 
low-, moderate- and middle-income households precisely because these 
families are the most vulnerable to income shocks from job loss, 
medical emergencies, and even car repairs. Such emergencies can knock 
them totally off course financially. Research from the Urban Institute 
shows that owning a small amount of assets--even just the $4,000 or so 
that it takes to move out of asset poverty--provides as much protection 
against material hardship in the face of an economic shock as being in 
the next highest tier of the income distribution. As a starting point, 
we must at the very least commit to getting people on the path toward 
financial stability by giving them the tools and assistance required to 
reduce debt, repair credit, get banked and build savings, and by 
protecting them from scams and from abusive and deceptive products. 
Households need access to safe, affordable consumer financial products 
and services. Individuals and families need to have information in 
order to effectively compare the costs and benefits of different 
financial products and make the best choices for themselves.
CFPB Recommendations
    A significant portion of this work now falls under the purview of 
the Consumer Financial Protection Bureau. This institution can provide 
vital support to consumers in the financial markets, and do so without 
massive new Government spending or onerous mandates. Rather, CFPB can 
do a great deal to facilitate savings and asset building by LMI 
households through ensuring that consumers' interests are considered 
and valued in the context of Federal financial regulation processes 
that already exist. Congress, of course, has a critical role to fulfill 
with regard to CFPB; you can ensure that the Bureau is fully capable of 
meeting its mission and establish accountability for achieving its 
goals.

    The first step that the Senate should take is to confirm a 
        director to lead CFPB. One of the overarching goals of the 
        Dodd-Frank Act was to unify the oversight and regulation of the 
        entire financial services marketplace under one set of clear, 
        transparent rules with consumer well-being in mind. Without a 
        director, the Consumer Financial Protection Bureau doesn't have 
        the authority to regulate many types of nonbank financial 
        businesses, leading to an uneven playing field in which some 
        firms are required to play by the rules while others are not. 
        The Bureau is significantly restricted in its ability to 
        regulate in many areas, including nonbank financial 
        institutions, payday lenders, private education lenders, 
        consumer credit rating agencies, and mortgage servicers.

    CFPB must have a confirmed director not just for administrative 
        reasons or to expand its authority, but also to actually 
        achieve its primary objective: to protect consumers from 
        financial products that exacerbate financial distress. Rather 
        than banning ``bad'' products, the Bureau's leadership has 
        indicated that it plans to pursue this mission through 
        incenting the delivery of products and services that provide 
        measurable benefits to consumers and by ensuring the consumers 
        have the information they need to make informed choices about 
        what products and services are best for them. The alternative 
        credit industry thrives for three reasons all too familiar to 
        consumer protection experts: first, the intense demand for 
        emergency credit; second, a captive, vulnerable, and often 
        unsophisticated population; and third, the lack of a single, 
        clear, trustworthy, and enforceable regulations for the product 
        landscape. CFED commends the Bureau for its intention to focus 
        on improving consumers' ability to access and understand 
        information about these credit products through disclosures, 
        financial education, and supervision of lenders.

    Congress should encourage the CFPB to focus on improving 
        disclosures for all consumer financial products. Both 
        transaction products and credit products can and often do build 
        hidden fees and penalties into their products that create 
        conditions of financial uncertainty for LMI consumers that they 
        can ill-afford. With transaction products, issues include 
        overdraft charges, insufficient funds fees or point of sale 
        charges. For example, research by former Assistant Secretary of 
        the Treasury Michael Barr shows that the most important 
        features of transaction products for LMI consumers are 
        transparent monthly costs and Federal consumer protection.

    The CFPB should examine the impact that expanding the 
        amount of information reported to consumer credit rating 
        agencies would have in helping thin- and no-file consumers 
        build their credit records. The CFPB should study and supervise 
        the credit information markets with an eye toward increasing 
        their transparency and fairness.

    Consumer credit reports are now sought not just by prospective 
        lenders evaluating specific consumers' loan applications, but 
        also by landlords, employers, banks and others. Credit reports 
        have never been more critical to a person's ability to 
        participate in the financial mainstream, but they are opaque, 
        lightly regulated, and difficult for consumers to work with. 
        Moreover, as many as 70 million Americans have no credit files 
        or no payment histories in their credit files, and consequently 
        have no credit score. Tens of millions more have too few 
        payment histories in their credit files to be scored with 
        precision. A straightforward solution is to simply add more 
        information to credit files. Utility and telecommunications 
        bills are nearly universal; including all payment information 
        for these transactions would enhance credit access for millions 
        of households. This market-driven policy response will help 
        lenders better assess credit applicants and decrease the 
        Nation's persistent--and widening--wealth gap.

    Congress, however, has an important role here, that the Bureau 
alone cannot accomplish. Despite compelling evidence that alternative 
data credit reporting is a win-win scenario for borrowers and lenders, 
utility and telecom firms are reluctant to report full payment 
histories to the credit bureaus due to regulatory uncertainty; 
currently most firms only report late payments. Some States have 
introduced legislation to promote alternative data credit reporting 
while others have moved to prohibit the practice. At the Federal level, 
some companies that previously reported full payment histories to the 
credit bureaus have stopped due to uncertainty about privacy 
requirements. Congress can resolve the uncertainty through legislation 
that provides affirmative permission to utilities and telecom firms to 
report all payment history to the consumer credit bureaus.
Beyond the CFPB
    Looking beyond the CFPB, Congress can support many equally 
important policy reforms and new opportunities to enhance the ability 
of LMI families to save money and build assets. Our research shows that 
current U.S. policies--or at least the 90 percent that operate as tax 
expenditures--are regressive, invisible and unregulated. They are of 
little help to the majority of households that are trying and become 
more financially secure. Significant improvements could be made with 
the following proposals:
Remove Disincentives To Save
    One way to do this would be to eliminate asset tests as this would 
primarily benefit working poor households. Asset limits, or caps on the 
maximum value of assets a household may have to be eligible for certain 
benefits programs, deter people from seeking work, opening bank 
accounts and saving money. CFED supports reforms that encourage 
economic self-reliance. Congress should consider removing the penalties 
in our safety net programs for developing savings that can eventually 
help families become financially independent. Congress could follow the 
lead of Ohio, Virginia, Alabama, Louisiana, and Maryland--all States 
that have eliminated asset tests in their TANF program. They realized 
that families applying for TANF had no real financial assets. The cost 
of staff time to find nonexistent assets was exorbitant--Virginia 
reported that it was spending about $330,000 a year to weed out just 
one-half-of-one percent of participants. We commend Congress for making 
progress: Senator Chambliss led efforts to exempt IRAs, 529 and 
Coverdells from asset limit tests in SNAP. But further action is 
needed.
    Congress should raise asset limits in SSI. The current rates, set 
at $2,000 in the 1980s and never raised for inflation, dampen 
initiative and discouraged people from banking and saving, working 
toward some amount of financial self reliance. The Senate could follow 
the lead of the bipartisan SSI Saver's Act (H.R. 2103).
Improve the Existing System for Savings
    Expand the Saver's Credit. The Saver's Credit should be 
strengthened and reformed to enable millions of Americans to receive an 
additional incentive to build their savings and enhance their financial 
security. The original Saver's Credit passed in 2001. The IRS recently 
released data showing that 6.4 million tax filers claimed the credit in 
2009, the largest number of claimants ever. The average credit was only 
$167 though, largely because tax filers with income low enough to claim 
the credit have limited tax liabilities. This speaks to the need to 
improve the credit, so it can serve the purpose it was designed for: 
make saving for retirement rewarding and straightforward for low- and 
moderate-income workers. CFED proposes expanding the Saver's Credit to 
provide a 50 percent match on retirement savings up to $500 ($1,000 for 
joint filers), making the credit refundable, and depositing the match 
directly into the filer's retirement savings account. With these 
changes, the Saver's Credit would reach as many as 50 million tax 
filers. This would provide powerful incentive to lower-income people 
who desperately need to build wealth and provide an easy, safe way for 
them to save and invest.
    Enact Automatic IRA. Seventy-eight million people, half of the U.S. 
workforce, lack access to employer-sponsored retirement plans. 
Automatic IRA is a legislation that will enable workers without a 
retirement plan at work to use payroll deductions to open and fund IRAs 
with a minimum of effort. Increasing personal retirement savings is a 
critical challenge that policy makers should address. Social Security 
has been the most effective solution to elderly poverty, but it will be 
increasingly important for workers to supplement Social Security with 
personal savings. Automatic IRA is an inexpensive, market-friendly way 
to ensure that 78 million workers have the opportunity to save.
    Reauthorize the Assets for Independence Act. The Senate should 
reauthorize and improve the Assets for Independence Act (AFIA, P.L. 
105-285). Individual Development Accounts (IDAs) are a proven tool to 
help low-income families achieve financial security through savings and 
asset building, and AFIA is the primary source of Federal support for 
IDAs. The Assets for Independence program is one of the few programs 
that reaches low-income households that focuses on wealth-building and 
financial education to help these households get ahead. As a result, 
AFIA has been critical to the success and widespread adoption of IDAs 
from few accounts in the 1990s to more than 120,000 accounts today.
    Unfortunately, current economic realities such as State budget 
crises and reduced availability of philanthropic grants pose challenges 
to a program that has successfully helped low-income families lift 
themselves out of poverty. Strong interest and limited local funds have 
resulted in nearly every IDA program in the country placing potential 
savers on waiting lists. The reauthorization of AFIA presents an 
important opportunity to make small, but critical modifications to 
increase AFIA's utilization and ensure its continued success. 
Recommendations include improving and streamlining requirements and 
opportunities for grantees, expanding participant eligibility 
qualifications and savings goals, and developing new partnerships, 
promoting research, and encouraging innovation.
Build a New System of Child Savings Accounts
    Children's savings accounts (CSAs), tax-preferred investment 
accounts opened for each child at birth, are powerful financial 
products that could expand economic and educational opportunities for 
children by encouraging long-term planning, building family wealth and 
promoting financial literacy. CFED supports the efforts of our 
colleagues at the New America Foundation to establish a lifetime 
savings account for every newborn child in America. The America Saving 
for Personal Investment, Retirement, and Education Act (The ASPIRE Act) 
would set up a special account at birth for every child that could 
later be used to pursue post-secondary education, buy a first home, or 
build up a nest egg for retirement. The ASPIRE Act calls for each 
child's LSA to be endowed with a one-time $500 contribution at birth. 
Children living in households with incomes below national median income 
will be eligible for both a supplemental contribution of up to $500 at 
birth as well as the opportunity to earn up to $500 per year in 
matching funds for amounts saved in the account. Financial education 
would be offered in conjunction with the accounts.'' \1\
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     \1\ http://assets.newamerica.net/the_aspire_act
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    States and cities are starting to recognize the value and potential 
of offering children's savings accounts. In Maine, every child is 
eligible for $500 in a college savings 529 account, and 12 other States 
now match contributions to 529s. In San Francisco, every public 
Kindergarten student is given a savings account upon enrollment that is 
seeded with $50 ($100 if they receive free and reduced cost lunch), and 
provided with matching incentives and financial education over time. 
Singapore, Canada, and even the United Kingdom have used state funds to 
open bank accounts for kids realizing that kids with college funds are 
more likely to achieve financially.
    Taken together, all of these policy proposals would cost a small 
fraction of what the Federal Government currently spends to subsidize 
asset building for taxpayers in the highest income brackets, and could 
easily be funded by capping some of those expensive unfair and 
ineffective subsidies currently in place. Most importantly, they would 
begin to address some of the long-term inequities that contribute to 
the wealth gap, and they would help millions of families build a more 
secure economic future.
    Mr. Chairman, thank you very much for this opportunity to testify 
before the Subcommittee. I would be pleased to answer any questions you 
and the other Members of the Subcommittee may have.
                                 ______
                                 
                PREPARED STATEMENT OF SUSAN K. WEINSTOCK
 Director, Safe Checking Project, Pew Health Group, The Pew Charitable 
                                 Trusts
                            October 4, 2011
    Thank you Chairman Brown, Ranking Member Corker, and Members of the 
Subcommittee for the opportunity to submit testimony about the 
importance of transparent and fair financial products and services as a 
means to sustain and build wealth. The Pew Charitable Trusts is driven 
by the power of knowledge to solve today's most challenging problems. 
Pew applies a rigorous, analytical approach to improve public policy, 
inform the public, and stimulate civic life. Based on research and 
critical analysis, the Pew Health Group seeks to improve the health and 
well-being of all Americans. One important component of which is 
consumer financial product safety, as research by the Federal Reserve 
has documented the link between socioeconomic status and health. \1\
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     \1\ Daly, Mary, Greg Duncan, Peggy McDonough, and David Williams, 
``Optimal Indicators of Socioeconomic Status for Health Research'', 
American Journal of Public Health, 2002 Jul; 92(7): 1151-1157. http://
www.ncbi.nlm.nih.gov/pubmed/12084700
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    Pew's Safe Checking in the Electronic Age Project aims to restore 
transparency, fairness, responsibility and free market principles to 
one of the most common consumer financial products--the checking 
account. We appreciate this opportunity to provide further details on 
our consumer financial products and services research. Our findings 
demonstrate the importance of consumer financial protections, which 
allow families to manage their money responsibly and build savings and 
assets. Based on our research, Pew developed policy recommendations 
that would bring needed transparency, fairness, and free market 
principles to checking accounts.
    Nine out of 10 Americans have a checking account, making it the 
most widely utilized financial services product. These accounts provide 
a secure way for Americans to collect earnings and make payments, and 
for many, they serve as the entry to the financial mainstream, where 
savings and credit products are available. As vehicles for millions of 
transactions each day, checking accounts are essential to the national 
economy.
    In October 2010, the Pew Health Group's Safe Checking in the 
Electronic Age Project began a study of checking account terms and 
conditions to examine both the state of the marketplace and the effect 
of current regulations covering checking accounts. \2\ We analyzed more 
than 250 types of checking accounts offered online by the 10 largest 
banks in the United States, which held nearly 60 percent of deposit 
volume nationwide. Through this research, we identified a number of 
practices that put consumers at financial risk, potentially exposing 
them to high costs for little benefit. I would like to highlight three 
of these concerns: (1) the need for a disclosure box laying out account 
terms, conditions, and fees; (2) complete disclosure of all overdraft 
options; and (3) prohibition of transaction reordering that maximizes 
overdraft fees.
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     \2\ Pew Health Group, ``Hidden Risks: The Case for Safe and 
Transparent Checking Accounts'', April 2011. http://www.pewtrusts.org/
uploadedFiles/wwwpewtrustsorg/Reports/
Safe_Checking_in_the_Electronic_Age/Pew_Report_HiddenRisks.pdf
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Clear Disclosure Makes the Market More Efficient by Allowing Comparison 
        Shopping
    Consumers need a clear, concise, and easy-to-understand disclosure 
of their checking account terms and conditions.
    Disclosures are critical for consumers to make informed decisions, 
but the information needs to be presented in a format that is clear and 
understandable. They should convey key terms and conditions with 
clarity so that consumers can compare products and make purchasing 
decisions that best meet their needs. Clear disclosures will foster a 
transparent, fair, and competitive marketplace for all financial 
institutions by allowing them to compete for customers on a more level 
playing field.
    Unfortunately, the checking accounts in our study did not meet this 
standard. We found a median of 111 pages of disclosure documents, 
consisting of account agreements, addenda to account agreements, fee 
schedules, and pages on the bank's Web site. The banks often used 
different names for the same fee or service; put the information in 
different documents, different media (Web or hard copy), or different 
locations in a document; and did not summarize or collect key 
information anywhere. Many of these documents are not user-friendly, 
with much of the text densely printed, difficult to decipher, and 
highly technical and legalistic. In response, we have developed a model 
disclosure box that could be used by financial institutions to provide 
relevant information to checking account customers (see below).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In developing the disclosure box, we tested different versions with 
consumers. In Philadelphia, Minneapolis, and Los Angeles, we heard from 
two groups of consumers who had opened a checking account within the 
past 2 years: one with parents who had assisted a young adult child and 
one with adults ages 21 to 35. Across all groups, participants were 
quite positive about the disclosure box. They described the information 
in the box as ``comprehensive'' and ``clear,'' and felt that a concise, 
easy-to-understand disclosure document would be useful and valuable 
when opening a checking account. Across groups, the box was seen as 
providing information that might help individuals avoid fees, 
penalties, and personal financial errors. One participant said, ``It's 
knowledge first of what you are doing so you don't mess your account 
up.'' Many thought the disclosure box would be useful if they wanted to 
investigate a bank and/or compare banks on the basis of fees.
    As a follow-up, in July 2011, Pew commissioned a national survey of 
U.S. checking account holders. We found that 78 percent of account 
holders find that requiring banks to provide a one-page summary of 
information about checking accounts' terms, conditions, and fees would 
be a positive change, while only 4 percent say this would be a negative 
change. Eight-six percent of Democrats, 74 percent of those who 
identify as independents, 73 percent of Republicans, and 69 percent of 
those who identify with the Tea Party say this would be a positive 
change.
    The Truth in Savings Act (TISA) requires banks to offer a schedule 
of specified terms and conditions for all deposit accounts prior to 
account opening. Such disclosures must be available on demand to 
consumers so that they can ``understand and compare accounts.'' 
Similarly, the Electronic Fund Transfer Act (EFTA) requires financial 
institutions to disclose the terms and conditions when a consumer 
enrolls in electronic fund transfer services, such as an ATM or debit 
card.
    Under the Dodd-Frank Act, the rulemaking authority of TISA and EFTA 
passed over to the Consumer Financial Protection Bureau (CFPB) on July 
21, 2011. The CFPB has the authority and should require a one-page form 
that would provide account holders with important fees and terms. This 
regulatory change would strengthen disclosure requirements so customers 
are given all important information about their accounts up front and 
would enable them to shop around for the products most suitable to 
their needs.
All Overdraft Options and Their Costs Should Be Disclosed
    Consumers should receive comprehensive information about all 
available overdraft options including fee amount.
    Currently, there are two main categories of overdraft products. 
Because banks use different terms for these products, Pew defines 
``overdraft penalty plans'' as short-term advances made for a fee by 
the bank to cover an overdraft, the median cost of which is $35. 
``Overdraft transfer plans'' involve a transfer from another account or 
plan--a savings account, credit card, or overdraft line of credit--with 
a median cost of $10. The vast majority of accounts provided by the 
banks in our study offered both types of overdraft plans.
    As of August 15, 2010, new Federal Reserve rules require that 
financial institutions obtain customers' affirmative consent (known as 
opt-in) before enrolling them in an overdraft penalty plan that covers 
debit card transactions at points-of-sale and ATMs. If a customer does 
not opt-in, any debit card transactions that overdraw the account will 
be denied with no fee charged.
    Although Pew supports this rule, we would have preferred the 
Federal Reserve include a requirement that comprehensive information 
about all available overdraft options (including fee amount) be 
provided when the account holder seeks overdraft coverage. Now that 
these rules have transferred to the CFPB, we believe that it should 
amend the Federal Reserve's rules to ensure that overdraft policy 
disclosures are clear and comprehensive. Consumers need to understand 
that they have three overdraft options and what each costs: not opting 
in, which is free; overdraft transfer plans, and overdraft penalty 
plans. They should require full disclosure of consumers' overdraft 
options prior to opt-in and as part of the disclosure box. We would 
like to see the CFPB issue a model form that would achieve more 
effective disclosure of overdraft options.
    In Pew's focus groups we learned that of those participants who 
were familiar with overdraft options, some were generally well-informed 
about banking. However, several others had learned about overdraft 
options ``the hard way,'' when they or their child had overdrawn an 
account and accrued one or more fees. Participants also expressed 
concern that banks depict overdraft policies as ``protection'' and as a 
benefit. They tended to see overdraft protection instead as a way for 
banks to collect a fee, usually multiple fees.
    Our July survey showed support for better disclosure of overdraft 
options, with 83 percent of account holders saying they wanted banks to 
be required to provide a summary of information about the overdraft 
options they offer, how the options work and a description of the fees, 
while only 2 percent said this would be a negative change. Ninety 
percent of Democrats, 78 percent of those who identify as independents, 
81 percent of Republicans and 79 percent of those who identify with the 
Tea Party said this would be a positive change, while only 1 percent of 
Democrats, 2 percent of independents, 2 percent of Republicans and 2 
percent of Tea Partiers said this would be a negative change. Eighty-
two percent of those who said they have a very good understanding of 
the terms, conditions, and fees associated with their checking account 
indicated this would be a positive change, while only 2 percent said 
this would be a negative change.
Transaction Reordering Maximizes Overdraft Fees
    Policy makers should require depository institutions to post 
deposits and withdrawals in a fully disclosed, objective, and neutral 
manner that does not maximize overdraft fees, such as chronological 
order.
    Transactions (debits, deposits, and checks) presented on a given 
day for posting are frequently processed in an order different from 
that in which the activity occurred. Such reordering can greatly impact 
the overdraft fees incurred by consumers. Our research shows that as of 
October 2010, only one of the 10 banks studied, representing less than 
5 percent of accounts, informed account holders of the order in which 
all debits and credits are posted.
    Yet at the time of the study, all banks and all accounts reserved 
the right to process debits presented in a given day from highest 
dollar amount to lowest dollar amount. By reordering transactions to 
pay the largest items first, the money in a checking account is more 
quickly depleted so that if a customer overdrafts each small 
transaction will result in a fee. Since that time, some banks have 
begun disclosing changes to their practices. Wells Fargo, Chase, and 
Citibank announced that they would no longer reorder certain types of 
transactions for at least a portion of their accounts.
    Currently, there are no Federal regulations that govern the order 
of posting among transactions processed on the same day. There is no 
legal requirement that banks post deposits before withdrawals, nor any 
law or regulation governing the order in which they post debits or 
credits. The Federal Deposit Insurance Corporation's overdraft guidance 
issued in November, 2010, states that its member banks should review 
their checking procedures to ``ensure they operate in a manner that 
avoids maximizing customer overdrafts and related fees through the 
clearing order.'' The Office of the Comptroller of the Currency (OCC) 
released a draft guidance for comment in June also inquiring about this 
practice.
    In addition, posting orders that maximize overdraft fees, 
especially those that post withdrawals from largest to smallest, 
continue to be the subject of court challenges as an unfair and 
deceptive practice under State law. A Federal judge in California ruled 
against Wells Fargo on this practice and stated in his summary of the 
case, ``[T]he essence of this case is that Wells Fargo has devised a 
bookkeeping device to turn what would ordinarily be one overdraft into 
as many as 10 overdrafts, thereby dramatically multiplying the number 
of fees the bank can extract from a single mistake.'' \3\
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     \3\ Gutierrez v. Wells Fargo Bank, N.A., 730 F. Supp. 2d 1080, 
1082 (N.D. Cal. 2010).
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    Opponents of this practice say it enriches the bank at the expense 
of consumers who receive no benefit from the reordering of their daily 
debits or credits. In response, banks have contended that customers 
prefer the largest withdrawals to be posted first because these are the 
most important (such as rent or mortgage payments), and therefore are 
the transactions that one wants to have paid first. However, by opting 
in to overdraft coverage, the customer has expressed the desire to have 
all overdrafts covered, regardless of size.
    We maintain that policy makers should require depository 
institutions to post deposits and withdrawals in a fully disclosed, 
objective, and neutral manner that does not maximize overdraft fees, 
such as chronological order. Our July survey shows that the majority of 
the checking account holders agree. Seventy percent of respondents said 
it would be a positive change to require banks to process transactions 
in the order in which they occur, as opposed to processing them from 
highest dollar amount to lowest dollar amount, which can lead to more 
overdraft fees.
Hidden Bank Fees Can Drive Consumers Out of the Banking System
    To encourage the working poor to build savings and credit, banks, 
community organizations, local leaders, and policy makers can promote 
policies that allow households to use their bank accounts effectively 
and beneficially.
    This month, Pew will release a longitudinal study of 2,000 low-
income Los Angeles area households, 1,000 with and 1,000 without a bank 
account, which explores the connections between financial services, the 
populations they serve or are failing to serve, and the financial 
stability of those populations. We found, not surprisingly, that 
between 2009 and 2010, a time of great economic turmoil throughout the 
country, the ranks of the unbanked (those without a bank account) 
increased, with more families leaving banking than opening bank 
accounts. But what was surprising was that the most common reason these 
households cited for leaving banking was unexpected or unexplained 
fees. Nearly one in three listed these fees as the reason for leaving 
banking. This is particularly relevant given that even in difficult 
economic times only 27 percent attributed their departure from banking 
to job loss or lack of funds.
    Our study also found that banks hold significant service and 
location advantages over alternative financial service (AFS) providers: 
79 percent of crossover respondents (those with at least one bank 
account that regularly use AFS) report that banks have better customer 
service than check cashers and 59 percent prefer the location of banks 
to that of check cashers. However, these customers continue to 
supplement their depository accounts with services from AFS providers, 
citing the need to access cash quickly (30 percent) and the ability to 
purchase multiple services, such as money orders and remittances, at 
one time (38 percent).
    Finally, we found that the banked could better sustain their 
savings behaviors, including those associated with long-term goals such 
as paying for college, even during economic turmoil and when faced with 
high rates of job loss and declining household income.
    To encourage the working poor to build savings and credit, banks, 
community organizations, local leaders, and policy makers can promote 
policies that allow households to use their bank accounts effectively 
and beneficially. Additionally, the continued use of AFS by banked 
households presents an opportunity for banks to utilize their 
competitive advantage and capture this market for revenue-generating 
financial services. For example, banks can provide a comprehensive 
suite of products including money orders, remittances, check-cashing, 
bill pay services, and personal loans. Community organizations, local 
governments, depository institutions, along with efforts to reach the 
unbanked, such as the Bank On programs, can provide financial education 
to help new customers manage costs and build up assets. Banks, policy 
makers, and community organizations can capitalize on household 
aspirations to build family financial security by providing low-cost, 
easy-to-understand opportunities for savings and asset building.
    Pew's research demonstrates that bank policies and practices have a 
central role in allowing consumers to use and manage their money 
responsibly. Yet unexpected fees continue to plague consumers. For 
vulnerable populations, these fees can mean the difference between 
having a checking account and forgoing these services altogether. 
Providing information in a clear, concise disclosure box so that 
consumers can comparison shop for an account that best meets their 
needs will enhance competition and make the market more efficient. 
Practices that maximize fees, like transaction reordering, should be 
prohibited, since this makes it very difficult for consumers to manage 
their money and avoid these charges. Transactions should be processed 
in a predictable manner that responsible consumers can follow. Posting 
order should be objective and neutral rather than designed to maximize 
fees. These changes allow consumers to build and sustain wealth by 
removing much of the hidden risks currently found in checking accounts.
    Thank you.
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