Good morning. My name is Fran Grossman, and I am the Executive Vice President of Shorebank Advisory Services. SAS is the consulting arm of Shorebank Corporation, the nationís first and largest community development bank holding company with $1.3 billion in assets and operations in Chicago, Cleveland, Detroit, Washington state and the Upper Peninsula of Michigan. In addition, Shorebank assists other development organizations across the United States and around the world. At the heart of our business operations is the belief that we can change communities for the better by matching residentsí determination and vision with our financial resources and market knowledge. Over the course of our 30-year history, we have provided more than $1 billion in financing to homeowners and landlords, small business owners and churches, non-profit organizations and community residents.
I have been involved in community development banking and finance for 20 years. Prior to joining Shorebank in 1999, I was President of Bank of America, Illinois Community Development Corporation, and I initiated and led the community development finance group at Continental Bank and Bank of America, Illinois. Currently I am a board member of the Coalition of Community Development Financial Institutions, the Community Development Bankers Association, and the National Association of Affordable Housing Lenders. I especially want to thank NAAHL for its commitment to working with us to make banking more responsive to low- and moderate-income families.
I also want to thank the members of the Banking Committee, Sheila Bair and the Treasury Department for your support of the First Accounts initiative and other efforts to bring the unbanked into the financial mainstream. We all are here today because we want to develop initiatives to provide wealth-building opportunities for more Americans. This is no easy task. The First Accounts initiative is a strong first step in recognizing that solutions will be born in large part out of private-sector innovation. But it is only one step along a continuum of initiatives and policies that are needed.
Assets are a crucial ingredient in the recipe for financial stability and wealth accumulation. Assets link individuals to mainstream financial institutions and capital markets. This in turn increases access to networks that connect people with jobs and other resources. Many low-income families are already savers, whether or not they have a bank account. But without the connection to a formal financial institution, these families will face more obstacles along the path to longer-term prosperity.
Low-income people with bank accounts are more likely than the unbanked to save regularly, to have a car loan, and to have a home mortgage. Yet at least 10 percent of American families Ė including 25 percent of African-American and Hispanics - have no bank account. The majority of these unbanked consumers have incomes below $25,000. They say they are uncomfortable in banks, donít trust banks or think that they donít have enough money to open an account. Some have privacy concerns, while others are shut out of the system because of lack of identification or poor credit. As a result, most of them have no assets.
Yet they are generating positive economic activity. They receive paychecks and tax refunds. Some own cars and homes. Often, they have accumulated significant amounts of consumer debt. Clearly some are saving. They just need an institutional mechanism to facilitate the growth of their assets over the long term. The rapid growth of the fringe financial services sector suggests that the unbanked have a demand for financial services that is not adequately met by the existing supply. Traditional checking accounts are predicated on consumer liquidity, a luxury poor people do not generally have. Even banks that have one or two products appropriate for modest-income consumers generally lack a full line of products that would enable consumers to build on their initial successes. The location and feel of typical bank branches often are not convenient or comfortable for the poor. And while the financial services industry is quite sophisticated about segmenting upper-income consumers and crafting appropriate marketing messages, little attention has been paid to outreach efforts at the lower end of the income scale.
Over the past six years, Shorebank has focused significant energy on serving the unbanked. We have experimented with new products, delivery systems and outreach strategies. One of the first new products we introduced, in 1998, was an Individual Development Account. An IDA is a savings account that is matched dollar for dollar for low-income families saving to buy a home, start a small business or go to college. As one program participant put it, IDAs are "an IRA for the rest of us." To date, we have opened nearly 600 accounts, trained hundreds in money management techniques and witnessed the transformational effects of the program. One participant, a 20-year Shorebank employee, began contributing to the companyís 401(k) program after she successfully saved for a downpayment on a house and literally began to see her money grow.
In an effort to increase customer convenience and decrease delivery costs, we have worked with customers who are unfamiliar or uncomfortable with technology to learn how to use ATM cards, point-of-sale machines and Internet banking. In one of our lobbies, we have installed a freestanding computer with Internet access that customers can use free of charge to check their account online, sign up for an e-mail account, or simply surf the Web.
This morning, Iíd like to focus on one very promising outreach strategy for bringing the unbanked into the financial mainstream Ė linking tax refunds with bank accounts. As you know, the Earned Income Tax Credit is the largest federal anti-poverty program, both in terms of dollars and participation levels. In 2001, more than $30 billion was paid out to some 18 million households. The average credit was about $1,600.
The EITC has incredible reach in low-income communities, and Shorebank has sought to harness the power of this popular incentive. Three years ago, we opened our bank lobbies in Chicago to volunteer tax preparers from the Center for Law and Human Services, one of the largest and most successful VITA programs in the country. As working families waited to have their taxes prepared, personal bankers were on hand to open free savings accounts for those who wanted one. No initial deposit was required as long as the customer agreed to have her tax refund electronically deposited into the account. An ATM card was made available, and the account earned interest. We called it the Extra Credit Savings Program.
Through a formal evaluation of the initiative, we interviewed those who opened accounts and we tracked their account usage over time. A copy of the full evaluation will be included in the official record. Let me share some of the key results.
These positive results encouraged us to continue. Over the past three years, we have opened 350 accounts with tax refunds totaling more than $250,000. We also have helped others replicate the initiative across the country. Several of the bank regulatory agencies have embraced the concept and are working to spread the word. Last year, for instance, the IRS partnered with the FDIC to encourage links between tax preparation programs and financial institutions.
Why did the Extra Credit Savings Program work? We found three primary keys to success:
First, the timing of the outreach was critical. People said yes to a bank account because they anticipated having money available.
Second, the size of the refund was important. The larger the anticipated refund, the more likely people were more likely to say yes to a bank account.
Third, technology was crucial for both the consumer and the bank. The combination of an electronically filed tax return and a directly deposited tax refund meant that customers could receive their refund in as few as eight days. This shortened waiting period comes closer to being competitive with refund anticipation loan providers. Meanwhile, direct deposit and ATM usage reduced transaction costs for the bank.
These lessons, along with our other experiences in this arena, demonstrate the complexity of the issue. Universal access to financial services and wealth-building opportunities is a multi-faceted challenge that requires multiple initiatives by both the public and private sectors.
First, we should fully leverage the power of the Earned Income Tax Credit by institutionalizing the link between the tax system and financial services. Just like the Motor Voter law that allows Americans to register to vote while applying for a driverís license, tax refund recipients should be able to sign up for a bank account while having their tax returns prepared. The technology to open accounts electronically already exists and further bolsters the Treasuryís goal of increasing electronically-filed returns. Now we need another line on the 1040 that asks the question, "Do you want a bank account?" and a system to facilitate the transaction.
Second, I ask for your support for the Savings for Working Families Act. Title II of S. 1924 would expand IDAs to 900,000 working families over the next decade, and I hope it will be included in the Finance Committee Chairmanís mark on the charity bill. IDAs have been piloted successfully across the country, proving that the poor can and will save when offered an appropriate financial product, a meaningful incentive and adequate information. For many, IDAs are an entry point into the banking system that can lead to full participation in the financial mainstream. By linking financial services to real opportunities for wealth creation, IDAs demonstrate to the uninitiated that a banking relationship is vital to their long-term prosperity.
Third, we must strengthen the CRA service test. CRA has the power to spur financial innovation. Recent studies have confirmed CRAís effectiveness as a catalyst in broadening homeownership and small business opportunities for low- and moderate-income families. But while the lending and investment tests both require quantifiable results, the service test can be met simply by demonstrating that a retail product or service is available to low-income consumers. Rather, financial institutions should be held accountable for the level of retail services being provided, and deposit accounts should be subject to a similar spatial distribution analysis as loans.
In conclusion, I hope I have successfully demonstrated that the issue of access to financial services for modest-income families is important, complicated and solvable. It is important that we have reasonable expectations and see the First Accounts initiative as a step in the right direction. There are no easy answers, but with all of our hard work, we can succeed in broadening financial opportunities for everyone. Thank you for the opportunity to be here today.
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