Reaching the 'unbanked'

By JOI PRECIPHS, UPI Business Correspondent  |  March 17, 2005 at 3:24 PM
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WASHINGTON, March 17 (UPI) -- With the intensity of a Jackson Pollock portrait, a splotchy collection of red, black and brandy-colored patterns decorates assorted maps of New York City's five boroughs. This isn't some new-fangled abstract art, though. Instead, the maps illustrate the degree of economic inequity in low-and-moderate income communities throughout the city.

For the "unbanked," the estimated 20-to-56 million Americans who lack full access to the nation's financial institutions, these maps spotlight the targets of "alternative" service providers such as check cashers, payday loan and auto-title lenders.

Deyanira Del Rio, program director for the Neighborhood Economic Development Advocacy Project (NEDAP), said their primary purpose is to demonstrate the difficulty people have gaining access to financial services that help them deal with every day transactions, such as depositing checks, as well as those who lack substantive wealth creation and investment opportunities that could rebuild communities -- and lives.

"If you can give people a map, it's really powerful," Del Rio said. "People can really grasp what's going on. It's a point of leverage."

NEDAP's work represents an enduring and sometimes contentious debate between community organizers, financial institutions and federal regulators about how to improve the range of financial services available to the unbanked -- and to prevent them from being unfairly preyed upon with high-cost, low-yield products.

While some of the New York City maps show the concentration of sub prime mortgage lenders in particular areas, Del Rio said others depict the number of bank branches within communities - which in several places come few and far between.

Del Rio said neighborhood groups throughout the city are using NEDAP's data to challenge the way financial services are delivered in their respective areas. The information has been used from everything from corporate accountability campaigns against predatory lending to legal services to prevent home foreclosures.

"We've used the data to testify that if banks are getting benefits through mergers and acquisitions they should be held accountable to the communities where they're not doing enough," she said.

On Capitol Hill, lawmakers from both parties are uneasy about recent regulatory agency decisions and recommendations in the Bush Administration's current budget proposal to phase out key programs that reach the unbanked. Democrats, for example, have challenged the administration's recommendation to eliminate funding for the Treasury Department's 11-year-old Community Development Financial Institutions fund.

The CDFI fund was created to increase the availability of credit, investment capital and financial services in economically troubled communities. It offers equity investments, grants, loans and technical assistance to community development banks, credit unions, loan funds, venture capital funds and microenterprise funds, which in turn provide financial services in markets that are underserved by traditional institutions.

New York congresswoman Nydia Velazquez, the ranking Democrat on the House Small Banking Committee, recently issued a report challenging the administration's proposal to roll the CDFI fund into a new program that would be managed by the Commerce Department.

"CDFI has channeled capital to countless enterprises such as grocery stores, construction contractors and daycare providers, creating jobs and improving the standard of living in underserved communities," the report said.

What has upset Velazquez and other community development advocates is -- along with other economic development programs that have been targeted for changes -- the new program recommendation would have less funding and "no existing relationships or track record in the communities traditionally served by CDFI."

Critics of the current arrangement say "local development should be financed at the state or local level, not by the federal government, since its benefits are not national in scope," according to a recent Congressional Budget Office report. Another argument offered is the fund is "redundant that because so many federal programs and home ownership and local economic development."

Last year, the Republican chairman of the House HUD/VA appropriations committee, Rep. James Walsh of New York, in a letter to the chairman of the Federal Deposit Insurance Corporation, criticized the agency's decision to further relax financial institutions' responsibilities under the Community Reinvestment Act of 1977. The CRA was created to prevent economic "redlining" of communities by federally insured institutions (either because of race discrimination or economic make-up) and requires them to meet the credit and banking needs of the communities they serve.

Walsh, according to media accounts, was upset about the FDIC's decision to allow its institutions to narrowly select the criteria their community outreach efforts would be rated under the CRA. His concern, which was primarily focused on community development efforts in rural areas, was that the relaxed guidelines would allow banks to skirt providing basic financial services or build branches in underserved locations.

What the unbanked face in the U.S. speaks to a larger issue of defining just who participates in President Bush's "ownership society." The subject crosses several fault lines: financial literacy, good corporate practice, and making sure that some sort of safety net -- both public and private -- is in place to address the economic insecurity many more middle-income Americans are now facing because of financial problems related to health care, chronic unemployment and other issues.

Robert Woodson Sr., director of the National Center for Neighborhood Enterprise, has been an outspoken skeptic of various federal anti-poverty initiatives. That skepticism, he said, comes from accountability and enforcement problems certain federal programs have had over time and their failure to incorporate strategies that leads beneficiaries to self-sufficiency.

"I have been very critical of what we (the government) have done in the name of poor people," Woodson said.

At issue is matching the objectives of existing federal regulations with the need to offer low-and-moderate income communities financial products that aren't predatory by nature, help individuals and local institutions with asset building, and address banks' and other financial institutions' desire to promote sustainable, profitable products.

Woodson said he's looking for more creative ways to engage financial institutions in working with low-income communities.

"The so-called advocates for the poor just celebrate the fact that they've driven these sub-prime lenders (and other alternative service providers) out of the community," he said. "I just think that one has to balance of predatory lending laws with the reality that poor people need access to capital."

Woodson's D.C.-based organization partners with HSBC North America (formerly Household International) and the National Council on Economic Education to offer financial literacy workshops run by faith-based and community organizations in Alabama and other states.

But just this week, HSBC came under fire by more than 100 national and New York-based consumer organizations and community groups calling for state restrictions on "tax refund anticipation loans" and the high amounts of interest and administrative fees charged for them. According to the Buffalo (N.Y.) News, HSBC controls half of the market for refund loans through partnerships with tax preparers such as H&R Block of Kansas City, Mo.

Critics are saying these tax preparers are "essentially unregulated brokers for large national banks that have carved out a humongous and growing profit niche," which disproportionately target the working poor. They say consumers are confusing the loans with rapid refunds and that they don't realize they're actually borrowing against their refunds in order for a speedier turnaround. In addition, providers charge the equivalent of 67 to 700 percent APR in loan fees, according to a report by the Consumer's Federation and the National Consumer Law Center.

HSBC officials have said in media accounts that its practices are market-driven, meaning that the demand is there for them -- and that the terms of their refund anticipation loans are spelled out clearly to those who use their partners' services.

NEDAP's Deyanira Del Rio said discussions of personal responsibility and financial literacy are appropriate ones to have, but too often she thinks certain financial institutions and alternative providers fall back on this as an excuse for engaging in deceptive practices that end up burdening those who can least afford it.

"We educate communities on financial literacy," she said. "We sort of shift the burden," she said. "Some of the onus should be on the institutions themselves."

At the most basic level, Del Rio said her partners want to see more bank branches serving low-and-moderate income communities and they want them to avoid or end practices that push people out of the banking system.

"The banks are doing whatever they like. They're serving (the public) with these inferior, expensive products."

Critics of the current regulatory environment say it doesn't provide enough incentives or guidance for financial institutions to fulfill their responsibilities under the Community Reinvestment Act - although the original act has undergone several changes in the last 20 years. In an exhaustive report on the subject, University of Connecticut economics professor AKM Rezaul Hossain favorably noted that while CRA "brought community residents and the depository institutions into an atmosphere in which they can negotiate and pursue their self-interests," more work must be done to ensure that the objectives of act will be addressed appropriately as the financial environment changes.

Observers of the situation say that one way to do this is to encourage creative methods for financial institutions to open new markets to the unbanked.

For banks, "there is always a seemingly more profitable product for an upper income market in the queue," said Ann Stuhldreher, a fellow at the New America Foundation who has studied the issue.

Stuhldreher and colleague Jennifer Tescher recommended in a recent foundation report that the Treasury Department should create a $100 million "Innovation Fund" that encourages financial institutions to invest in aggressive planning for services that meet the needs of low-income consumers -- research and planning that the institutions already do to generate products for higher-income consumers.

"We would like to incentivize (sic) banks to develop good, affordable products, get them over the research and development hump," and foster competition, she said.

Both Stuhldreher and Tescher, who runs the Center for Financial Services Innovation, a partnership between ShoreBank Advisory Services and the Ford Foundation, have been involved for some time in asset-building strategies for low-income communities. Their work promotes the idea of partnerships between banks and non-banks to provide more services in these communities.

That proposition, however, is one that consumer groups say should be approached with caution. Consumer's Union, publisher of Consumer Reports magazine, reported as early as 2001 that Texas banks were loaning money to check-cashing companies and other "fringe" providers to set up shop in areas traditional operators had abandoned. At the time, the banks were telling federal regulators that these investments were their attempts to fulfill their CRA requirements.

Stuhldreher acknowledged that these kinds of partnerships sometimes have had unfavorable penalties for consumers -- one example would be banks and non-banks joining to offer payday loans -- but she said that shouldn't deter identifying public-private ventures that would be beneficial.

"We want to find win-win opportunities," she said.

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