Hearing on "Bringing More Unbanked Americans Into the Financial Mainstream."

Good morning Chairman Sarbanes, Senator Gramm, and members of the Committee. I am honored to appear before you this morning to present testimony on the plight of the "unbanked" and "underserved." I am Rufino Carbajal, Jr., manager of the West Texas Credit Union, a $34 million credit union serving over 11,000 members in El Paso, Texas. I appear before you today on behalf of the Credit Union National Association (CUNA), which represents over 90% of the nation’s approximately 10,400 state and federally chartered credit unions and their 82 million members.

In announcing this hearing, Chairman Sarbanes indicated that approximately 10% of households in the United States are "unbanked," and that most of these individuals "predominantly come from low-income households and often must utilize high-cost services offered by fringe financial service providers in order to conduct routine transactions such as check cashing and bill payment. In addition, the "unbanked" have had a difficult time establishing traditional forms of credit, receiving bank loans, acquiring financial assets and saving for the future."

I am uniquely positioned to address these concerns. As manager of my credit union for 26 years, I have been a pioneer in and become an authority in serving the underserved. Even when I was the only employee of the credit union, I realized that there was a need to serve the underserved community of El Paso, which is one of the poorest Metropolitan Statistical Areas in the nation. I originally served the membership of the Tri-State Wholesale Associated Grocers, but after the association ceased operations, Tri-State merged with West Texas Credit Union. Our field of membership now serves many blue- collar workers, such as those in the garment industry and the Ysleta Del Sur Pueblo reservation. Over the years I have served as mentor for many credit unions even smaller than ours, and I have been a consultant for credit unions in Guatemala and for the World Council of Credit Unions (WOCCU).

My testimony this morning will focus not only on the efforts of West Texas Credit Union to serve the underserved, but on those of credit unions across the nation as well. I will describe several programs designed to attract and retain the unbanked, including efforts to help credit unions get involved in the First Accounts Program.

I am pleased that a major focus of this morning’s hearing is the implementation of the First Accounts Program.

CUNA is strongly committed to the principle of access to financial services by consumers, including those of modest means, and supports the First Accounts Program, which is designed to make basic financial institution accounts available to low- and moderate- income consumers.

According to the Federal Reserve Board’s 1998 Survey of Consumer Finances and the Treasury Department’s Notice of Funds Availability regarding First Accounts, almost one family in ten in this country does not have a share draft/checking account or a savings account. These families generally have annual incomes of less than $25,000.

There are many reasons why an individual may not have an account with a financial institution. These include lack of awareness about the importance of efficient management of their financial resources – however meager – and how institutions, like credit unions, will provide financial counseling, education and guidance to help individuals develop financial plans to maximize their funds and plan for the future. Financial education is a hallmark of the credit union system and credit unions offer such education through a variety of programs that are described throughout my testimony.

Individuals, such as immigrants, may also be reluctant to approach a financial institution because they fear they lack proper documentation. This may become even more problematic as the Treasury Department implements the "Know Your Customer (Member)" rules under the USA PATRIOT Act. We urge Congress and Treasury to ensure these rules will not have a chilling effect on the ability of immigrants to fully participate in our society, including through the use of financial institutions. We further urge Congress and Treasury to allow institutions to rely on documents such as matricula issued by the Mexican Embassy’s local offices in this country to verify an individual's identity.

Without access to these very basic services, such individuals are severely limited in the choices they have to conduct the business of their daily lives. They are likewise disadvantaged in preparing for the future. Recognizing there is a role for the federal government to play in helping to address this situation, Congress has appropriated $8 million for the First Accounts program implemented by the Treasury Department.

Under the program, Treasury will provide grants to eligible entities, such as insured credit unions, to offer low-cost savings and share draft/checking accounts to low- and moderate-income consumers. Such accounts could be offered electronically, such as through an ATM, and ideally would also be accompanied by financial education to encourage the use of the account and highlight its advantages.

We are gratified that Treasury has reached out to credit unions to apply for the First Accounts. CUNA President & CEO Dan Mica and senior staff met with Assistant Secretary for Financial Institutions Sheila Bair in March, and she strongly encouraged credit unions, as well as other financial institutions, to seek grants through First Accounts.

In fact, West Texas Credit Union is one of 39 credit unions in 13 states included in the application of CUNA’s National Credit Union Foundation. Over 2 million unbanked consumers reside in communities served by this application. The Foundation has requested $3.7 million to fund a program that will provide banking services to over 28,000 unbanked consumers over a period of 24 months. Participating credit unions have pledged to invest $1 million into our first accounts program.

The Foundation's first accounts program covers a vast array of approaches. Some credit unions, notably those in New York and Michigan, have formed strategic partnerships with universities (Cornell University and the University of Michigan) to provide the financial literacy components of the program. The credit unions will provide the financial services.

The Foundation's first accounts program has several themes: (a) there is a strong orientation towards serving the unbanked African-American and Latino consumer; (b) the application covers urban communities of Los Angeles, Seattle, Portland, and New York, to rural communities located in South Dakota, Iowa, and Idaho.

The Foundation’s application also attempts to reach out to several distinctive audiences. For example, in Iowa an applicant will seek to use first accounts funds to provide financial services to the large influx of Bosnians and Hispanics through community partnerships. In Michigan, the applicant will use first accounts funding to provide financial services to persons with disabilities and other low-income individuals.

In short, the Foundation program model is rich in creativity, diverse in categories of persons who will be served, and national in scope.

You may recall this Committee’s hearing on February 28 regarding the status of international remittances. CUNA and WOCCU submitted a statement for that hearing’s record which provided details about the desperate need for affordable remittance services, the difficulties in providing these services, and the industry-leading efforts of credit unions in this area.

As you learned from that hearing, there is a growing population of Hispanic and other individuals in this country who for one reason or another are not able to utilize traditional financial institution services. These individuals frequently send their hard-earned pay to parents, children, brothers, and sisters in Mexico or other homelands. Those who do not have access to a credit union or other financial institution must use wire services that charge outrageously high fees to execute the transaction.

I am proud to say that West Texas Credit Union has been offering its members the opportunity to wire money back to Mexico and uses the WOCCU service called International Remittance Network (IRnet®). This service saves our users at least one-third the cost of using a high-cost money transfer agent. Our credit union has many individuals in our field of membership with familial ties to Mexico, and we know they send funds to relatives in Mexico using wire transfer services that charge as much as 28% of the amount transferred. By providing IRnet® services, we offer members an inexpensive way to wire money to family in Mexico, or in 42 other countries, at an affordable price. For peace of mind, members also receive a free three-minute phone call to inform the recipient of the transfer. The program has shown moderate success.

CUNA’s February 28 statement noted that while many credit unions are leading the way in ensuring that immigrants have access to affordable remittance and financial services, these efforts could be significantly enhanced if Congress would amend the Federal Credit Union Act to allow credit unions to provide these services to non-members within the field of membership. I am very excited that the House of Representatives has initiated legislation to do just that. H.R. 3951, "The Financial Services Regulatory Relief Act of 2002" provides credit unions the authority to sell travelers checks and cash checks for non-members within their field of membership. And H.R. 4612, "The Expanded Access to Financial Services Act," would allow the same authority, as well as provide credit unions the opportunity to provide wire transfer and money order services to non-members within the field of membership.

Having the authority to cash checks and provide wire transfer services to non-members within the field of membership would further enhance the ability of credit unions to reach the "unbanked" and "underserved" and provide an affordable and financially sound alternative to high-cost payday lenders. It would allow credit unions to play an even more important role in combating predatory lending practices. And by getting the "unbanked" in the door with these services, we would hope to gain their trust, respect, and loyalty so that they would join the credit union as full-fledged members.

I am proud that West Texas Credit Union is one of many credit unions that are among the leading providers of Individual Development Accounts (IDAs). Referring again to Chairman Sarbanes’ announcement of the purpose of this hearing, one of the issues referred to was the inability of the "unbanked" to acquire financial assets and save for the future. If ever there was a product developed to serve exactly that purpose, it is the IDA. And if ever there was an institution developed to provide these accounts, it is the credit union, whose mission of "People Helping People" fits perfectly with the goal of IDAs.

IDAs are savings accounts with the added benefit of matching funds by government and private organizations. Participants must meet certain requirements such as, income qualification (usually 200% below the poverty level), and attendance at educational sessions. Each participant sets a savings goal for a specific purpose. The funds can only be used for the purposes of buying a first home, education and/or to start a small business.

West Texas Credit Union, in partnership with El Puente Community Development Corporation (CDC), began offering IDAs in October 2001. El Puente CDC is a non-profit organization. It provides new sources of social, educational and economic opportunity such as enterprise development, bilingual on-the-job training and access to technology, and promotes community revitalization through building the capacity of individuals and families to decide and design their futures. Once a participant reaches his or her goal, El Puente CDC will authorize the withdrawal of the funds for the above-stated reasons. But before the funds are withdrawn the account holder must complete a course in financial literacy.

Legislation currently before Congress would greatly enhance the number of IDA accounts in existence within credit unions and other financial institutions. The Savings For Working Families Act (SWFA) has been introduced both as a free-standing bill and incorporated within other legislation. The House has passed its charitable giving bill, which includes the SWFA, while S. 1924, the CARE Act, includes it in the Senate. The CARE Act is currently pending before the Finance Committee. Essentially, the SWFA would provide tax credits for matching funds to IDA accounts, dramatically increasing the market for IDAs. I urge the Senate to support this very important initiative.

Credit unions recognize that it is necessary to offer some form of financial literacy training to successfully integrate the "unbanked" into the financial mainstream. We also believe that similar to a "continuing education" requirement for many professionals such as doctors and lawyers, consumers require similar continuing financial education to help them navigate the many pitfalls and opportunities available to them. As detailed in CUNA’s statement for the record of this Committee’s February 6 hearing on Financial Illiteracy, that is why credit unions have traditionally made financial education a part of their mission. Credit unions, including West Texas, provide financial information and training to members on a one-to-one basis. Many credit unions, including West Texas, actively work in schools to teach personal finance skills to children and teenagers. CUNA has formed a national partnership with the National Endowment for Financial Education (NEFE) to teach the High School Financial Planning Program® to high school seniors across the nation. And financial literacy is another aspect of providing Individual Development Accounts (IDAs), described above, which are also available through many credit unions in addition to West Texas.

Throughout the course of the year, we participate in several programs that bring financial awareness to our members. Every spring we organize a Credit Fair. We bring together the Consumer Credit Counseling Services and the Credit Bureau of El Paso to advise members on building and maintaining good credit. Other topics include the following: learning to be debt free, how to live within your means, and how to save for the future. We have a good turn out every year and our members show gratitude for the added convenience of bringing these services to them.

In order to promote International Credit Union Day, in October, and National Credit Union Youth Week, in April, we have participated in local high school presentations. In these presentations we teach the importance of financial literacy to our youth. We cover topics such as, "Time Is On Your Side," which explains the benefits of saving at an early age. Money management is emphasized. We review a "good" credit report and a "bad" one, while explaining why it is important to maintain "good" credit. Students, as well as teachers, are grateful for our involvement with the youth.

Every quarter in our bilingual newsletter we include articles that increase our members’ financial awareness. We try to tackle issues that are of interest to our members and affect our community.

In the year 2000, a study was performed by a group of professors from New Mexico State University. The study indicated that a substantial market exists in El Paso County for affordable housing which is not being served. As previously mentioned, El Paso is one of the poorest Metropolitan Statistical Areas in the nation.

With grant money from CUNA’s National Credit Union Foundation and the Texas Credit Union League State Credit Union Foundation, eight credit unions located in El Paso County, Texas, chartered and wholly own the El Paso Affordable Housing Credit Union Service Organization (AHCUSO). The AHCUSO is an affordable mortgage and homeownership-counseling agency. AHCUSO’s mission is to provide financial literacy and homeownership counseling to thousands of low-income El Paso county residents.

The AHCUSO has partnered with the El Paso Housing Authority and has committed $1.8 million to the financing of affordable homes, of which approximately $500,000 has been closed. HUD provides down payment assistance, and the financing and servicing is being done by the AHCUSO.

Presently, negotiations are going on with Fannie Mae in an effort to get them to relax their underwriting criteria in order to provide more affordable housing to the El Paso community.

Over the past decade, high-cost credit facilities, such as payday lenders and subprime mortgage lenders, have flourished across the country, particularly in underserved areas. Unfortunately, many of these lenders incorporate predatory practices into their programs, such as exorbitant fees and interest rates, frequent "flipping" of the loans to needlessly increase costs, undisclosed balloon notes and unnecessary insurance premiums.

Credit unions have stepped up their efforts to combat predatory lenders in neighborhoods by offering affordable alternatives for both payday loans and mortgage loans.

A "payday loan" refers to the use of a post-dated check to receive a small loan until the next payday. Generally, the annual percentage rate for a payday loan is more than 400%.

The demand for these payday loans continues to increase, and there are now more payday lenders across the country than credit unions.

To reverse this disturbing trend, credit unions have developed affordable alternatives to the high-cost payday loan. For example, some credit unions offer their members up to $300 at 18% with up to six months to pay back the loan, as long as the member has direct deposit. Some credit unions offer emergency loans, for specific purposes, with no fees or interest attached. Some credit unions have opened facilities in underserved neighborhoods to offer not only small unsecured loans, but low-cost check cashing, affordable money orders, bill-paying services, bus tokens, and free credit counseling.

Credit unions also have developed a variety of subprime lending programs to help consumers build credit, get into homes with as little as 1% down, and pick up smart credit habits as they reduce their loan rates. For example, one credit union program offers subprime loans at 2% or 4% above normal rates, depending on collateral. The credit union drops this subprime rate to the prime rate when the borrower has made 12 on-time payments.

Another credit union program offers its subprime borrowers several ways to reduce their interest rates. For example, attending one consumer credit counseling class reduces the rate by 1/2 percent; attending more than one class will reduce the rate by 1%; depositing $15 a month into a savings account for a year reduces the rate by 1/2 percent; and for each year the debt does not increase, the rate drops 1%.

In cities like El Paso, predatory lending practices have reached epidemic proportions. Credit unions are uniquely positioned to help combat these practices, particularly if given additional tools to do so.

Finally, CUNA applauds Chairman Sarbanes and other members of the committee for your commitment to eliminating predatory lending practices through the introduction of "The Predatory Lending Consumer Protection Act of 2002." We look forward to reviewing the details of the bill and working with the Committee staff to support the passage of an effective anti-predatory lending law.

In conclusion, on behalf of CUNA, I am grateful for the opportunity to have commented on the plight of the "unbanked" and "underserved" and how West Texas Credit Union and credit unions across the country are trying to reach out and bring them into the financial mainstream. There is no more pressing need in my opinion, for it is only through economic opportunity that we can solve many of the problems facing our nation’s poorest and most deprived individuals. I have witnessed first-hand that poor people want to work and know even with a little bit of savings they can grow and thrive. Whether it is through the First Accounts Program, affordable housing programs, enhanced IDAs, expanded opportunities to serve their communities, or financial literacy, credit unions stand ready to meet this very important challenge.

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