FROM THE OFFICE OF PUBLIC AFFAIRS

Good morning. I am glad to be here. Treasury and the Consumer Bankers Association have a long track record of working together to expand affordable financial services to Americans who live in low-income communities. We welcome your many valuable contributions, most recently, with your participation in the launch of the National Partners for Financial Empowerment and our report on the Community Reinvestment Act.

Economic inclusion has always been a moral imperative. But, at a time when our economy is so strong, the imperative of bringing all Americans into the mainstream economy is also an economic one. Clearly, growth is the best instrument we have in the sense that it is the most effective way of lifting people out of poverty. But it is not sufficient on its own to tackle exclusion.

One aspect of our drive to end economic inclusion is in our efforts to democratize access to capital. That is why we have been working with the CBA and other bodies across a range of fronts to promote broader access to capital in all our neighborhoods: through a revitalized CRA;

through Treasury's CDFI Fund: and through the President's New Markets Initiative.

These programs demonstrate what the public and private sectors can achieve when they work together. Today I would like to focus on one key aspect of these efforts that is a key priority of this Administration: bridging the financial divide by providing universal access to financial services on a fair and transparent basis.

Let me divide my remarks into two parts:

• First, bridging the financial divide by providing universal access to a bank account.
• And second, providing fair and transparent access to the financial mainstream.

People talk a good deal about the digital divide, and rightly so. But, just as there are many Americans who are still unable to take advantage of opportunities in the New Economy through lack of skills, so too there are many who are deprived of access to the benefits of a modern financial system because they lack a bank account.

Like money itself, the benefits that a bank account provides are easy to take for granted. Until you do not have one. And today, in the age of the Internet, derivatives, and embedded options, as many as 10 percent of American households - and more than a fifth of those on low-income - have not broken through the banking barrier. That is roughly equivalent to the population of California. Furthermore, it disproportionately affects minorities, more than 25 percent of whom still lack this basic passport to the broader economy.

The inability of these Americans to access a bank account matters for a number of reasons:

• Because it imposes a large financial burden on families and individuals. A recent survey found that almost half of EITC recipients used a check cashing service to cash their refund benefits in Chicago. And estimates suggest that the costs over a lifetime for low and middle-income families of paying fees for every check or bill payment can exceed $15,000.
• Because it discourages families and individuals from participating in the financial mainstream. Studies show that the principal gateway to saving and to responsible management of household finances is participation in mainstream financial services. Research by Bill Gale at the Brookings Institution showed that even after controlling for income and other factors, low-income families with bank accounts were 43 percent more likely to have positive net financial assets than families without.
• Because it interferes with the efficiency of the economy. Just as the unbanked bear a cost for lacking an account, so too employers and society as a whole must pay a price. For example, it costs just 2 cents for the Federal Government to pay an employee by electronic transfer whereas it costs 42 cents to process a paycheck. Private sector employers face similar costs.

That is why it has been a high priority of this Administration to help Americans bridge the financial divide. Our efforts to date have focused two core areas:

Four years ago, then Treasury Secretary Robert Rubin announced that by early 1999 most recipients of Federal payments would be required to receive their payments electronically by Direct Deposit. Last year, the initiative was expanded with the launch of Electronic Transfer Accounts that offered the more than 10 million recipients of Federal payments who lacked an account the option of setting up a low cost electronic bank account at a mainstream financial institution. The initiative has been growing rapidly and now includes the participation of more than 500 banks across the United States. We are making every effort to expand it further.

Opening a low-cost electronic account is a step that that makes life cheaper and more convenient for millions of recipients of Federal payments. But some potential beneficiaries of the ETA initiative may be reluctant to take advantage of ETAs because they live in an area where there are no Automatic Teller Machines that enable them to withdraw cash and service their accounts. In addition, many potential beneficiaries of ETAs are deterred from opening accounts because they lack safe and secure access to an ATM.

That is why Treasury has been working to provide easy access to banking services within previously under-served communities. Treasury has established a pilot program to place ATMs in local post offices to give families easy and secure access to funds at a low cost. We expect to extend this initiative to other localities in the near future.

Today, we are building on the success of these initiatives with two further steps to extend the benefits of low-cost bank accounts to the millions of Americans who do not receive Federal payments.

First, I am pleased to announce that the President's First Accounts initiative will this week be introduced in Congress by Senator Sarbanes and Representative LaFalce. This $30 million initiative will finance pilot strategies to help low- and moderate-income Americans open low-cost basic bank accounts. The legislation includes measures to significantly expand our ability to bank the unbanked:

• By providing incentives for financial institutions to offer low-cost first accounts to Americans.
• By offering incentives for financial institutions to expand access to ATMs, the Internet, and other electronic means of access to funds.
• By releasing funds to launch a public education campaign that will spread financial literacy in our under-served communities.
• And, by funding research that will enable us to explore the most profitable ways that banks can provide new products to consumers in under-served areas.

Second, we are taking steps to build on the success of the CDFI Fund that has acted as a leading catalyst for financial innovation in our low-income communities. Through its Bank Enterprise Award program, the CDFI Fund has granted almost $90m to the private sector that has already leveraged more than $1.8 billion of investment and lending by banks to projects in our low-income communities - a ratio of 20 to 1.

By rewarding private sector activity, the BEA program has stimulated financial institutions to pursue investment activities that they might not have otherwise undertaken and to demonstrate that lending in low-income communities makes sound business sense.

As a result of these achievements, last Fall we extended the scope of the BEA program to provide incentives for banks to create deposits in our low-income communities by offering ETAs and Individual Development Accounts to the unbanked. I am pleased to announce that this Fall the scope of the BEA program will be further expanded to provide incentives for banks to offer first-time accounts to customers who do not receive Federal payments.

By building a stronger connection between low-income consumers and reputable financial institutions, we can provide individuals with the tools to invest in their own futures while minimizing their vulnerability to exploitative financial practices. This is an objective that we all share: in the public sector, because those on the fringes of the mainstream financial system impose a cost on society as a whole; and in the consumer banking sector, because those who lack a relationship with a mainstream financial institution represent a real opportunity for banks to expand their customer base.

Working together, we should ensure that all low-income Americans have access to the types of financial products that the rest of us take for granted. For example, all individuals should be able to cash their checks without paying high fees. Individuals should have access to savings facilities and to proper overdraft protection that will cushion them from short-term financial problems. And individuals should have access to services that enable them to leverage their equity so that they can purchase their own home.

Of course, we recognize that those with poor credit background or with a history of default cannot get access to financial services on precisely the same terms as those with better creditworthiness. We also recognize that access on poor terms is better than no access at all. In that sense the rapid growth in "sub-prime" lending has provided a real service to many low-income Americans.

But within sub-prime lending, there is a growing class of exploitative lenders who prey on the lack of financial sophistication of borrowers to re-finance mortgages, short-term loans, and other types of credit at progressively expensive rates. Individuals who borrow money from such lenders are often left with a crushing debt burden that can ultimately lead to foreclosure.

This provides a real challenge to policy makers. In seeking to curb such exploitative practices, our approach must strike a balance between two key principles.

• On the one hand we can and should welcome the growth of sub-prime lending. In many ways the sub-prime lending market is working to the benefit of all parties - more borrowers get access to capital, and lenders can operate profitably and expand their client base.
• But on the other hand, we must be alert to the concomitant growth of exploitative financial services in our low-income communities both for the abuse it represents and the long-term impact that such practices could have in maintaining the financial divide.

Let me focus on three areas where trends indicate that markets may not be functioning in a fully optimal way:

Lacking a bank account is expensive: check cashers typically charge up to 3 percent per check. A minimum-wage worker would pay between $15 and $30 month for this basic service while the average Social Security recipient would pay $9-16 month to cash a risk-free government check. Furthermore, those who need to rely on such services are also more directly exposed to other high-cost - and potentially high risk - financial services.

As we move into a world of Direct Deposit, mainstream banks and thrifts should be in a position to offer low-income consumers a real opportunity to enter the financial mainstream. Of course, we recognize that many check cashing facilities do provide services to communities in which they are located including convenient hours, instant service and easy accessibility. Banks and thrifts ought to be able to serve these customers at least as well as the check cashers -- but they are not.

The provision of services is an important part of the Community Reinvestment Act, but insufficient attention is paid to the need for innovation in this sector. We believe that bank regulators can help by providing additional guidance on services and by publishing "best practices" that can help banks and thrifts continue to push for further innovation and expanded access. And, all of you can play an important role in this marketplace by providing increased competition so that the unbanked can have the chance to enter the mainstream financial system.

Even with a bank account, there are many Americans who are stuck on the wrong side of the financial divide and who are prone to making bad financial decisions because they do not know where to seek advice, because they lack knowledge of basic finance, or because they are plagued by unfortunate circumstances.

People in these situations are vulnerable to payday lending, where they are charged high fees in exchange for short-term loans. These average about $36 on a two-week $200 loan. Such loans are often "flipped", or subject to repeated re-financing, so that the consumer gets further and further behind. As the Reverend Jesse Jackson said: "Frequenting payday lenders could be your ticket to bankruptcy."

For all these reason, we are making efforts to understand and ensure that this market develops in ways that help consumers, and I encourage banks to make similar efforts. In that regard, it is very encouraging to note that under Commissioner Charles Rossotti, the IRS is taking strong steps to reduce the length of time it takes for taxpayers to receive a refund on their payments. This will help obviate the need for one particularly prevalent form of short-term borrowing, the refund anticipation loan.

Going forward, further government measures might be appropriate. [But we believe payday lenders are in a position to fulfill two basic principles now.

• First, payday loans should be what they advertise themselves to be: a tool for helping individuals to weather a one-time financial contingency. To this end, lenders should limit the number of "rollovers" that they process for a given customer on a payday loan.
• Second, payday loan customers should be given clear information about all fees associated with the product, and payday lenders should make clear to these customers that such products are designed to help meet short-term of cash needs only.

In the appropriate regulatory environment, check cashing and payday lending services can provide a legitimate service to low-income Americans. The same cannot be said for predatory lenders who impose extortionate fees on low-income Americans by repeatedly re-financing loans. This enables the lender to generate additional fees with complete disregard for a borrower's ability to repay. These features may be accompanied by other abusive practices, such as high-pressure sales tactics or outright deceptions.

In response to this problem, Housing and Urban Development Secretary Andrew Cuomo and I are co-chairing a joint HUD-Treasury Task Force on predatory lending. We will be spending the next several weeks focusing on this problem, and plan to release a report at the close of our fact-finding. Without pre-judging the findings of the report, I anticipate that it will confront this issue on broad three fronts:

• First, by tightening enforcement of existing laws that target abusive lending and look at whether we can further strengthen these statutes. Senator Sarbanes and Representative LaFalce have taken an important step by introducing legislation that would tighten enforcement and increase penalties against such lenders. While we consider what new legislation may be required in this area, the Federal Reserve Board should use its existing authority under HOEPA to bring more loans under HOEPA's protections and to combat abusive practices occurring in this marketplace.
• Second, by improving public education so that all Americans are in the position to consider carefully all of their borrowing options before they purchase a home. And through the NPFE, that was launched last month, we aim to promote better financial literacy, including the provision of counseling services to borrowers on home purchases and loan re-financing.
• Third, by expanding access for these borrowers to the prime market. Banks and thrifts, as well as the secondary market, should continue to explore how to reach out to prime borrowers in these markets, and how to graduate sub-prime borrowers into the prime marketplace. In that regard, there is no valid business reason for a sub-prime lender to fail to report a borrower's sound credit rating to the credit bureaus.

Let me conclude where I began. Just as explosive growth in technological innovation in computers and IT has not been sufficient alone to bridge the digital divide, so too the remarkable financial innovation of the last decade has not been enough on its own to bridge the financial divide. As the CBA and other organizations have shown, we can work together to expand access to capital in all our neighborhoods. But we can and must do more.

If the challenge of the early 20^th century was to provide clean and safe drinking water to all Americans, and the challenge of the mid-20^th century was to provide every American with equal voting rights, then surely one of the key challenges of the 21^st century must be to provide universal access to fair and transparent financial services. We look forward to continuing our work with you in the private sector to achieve this vital objective. Thank you.