FROM THE OFFICE OF PUBLIC AFFAIRS

Good morning. I appreciate the opportunity to speak with you today. I'd like to thank Cliff Rosenthal and the National Federation for Community Development Credit Unions as well as the local credit unions, Zion United Credit Union, Denver Community Development Credit Union and the Seguache County Credit Union that have helped organize this conference.

I applaud all of you for your hard work and long-standing track record in helping communities build economic self-reliance through a network of strong, sustainable, community-based financial institutions. Treasury Secretary Summers recently visited a CDCU in San Francisco that is helping a community get back on its feet. The Northeast Community Development Credit Union, which serves low-income individuals living in the Chinatown section of the city, opened a branch in the Tenderloin neighborhood with the assistance of a CDFI Fund award of $720,000 in 1998. Until recently, the Tenderloin district, a community in steady decline, has been largely devoid of mainstream financial institutions. This new branch not only helps local residents obtain access to financial services such as low-cost check cashing, but will also infuse much-needed credit into this economically distressed area.

This is just one example of the great work that all of you do every day in your cities and towns that helps communities and their residents become economically independent. The Treasury Department greatly values your work at the community level, as well as our strong working relationship with the National Federation. We were excited that you joined us in the launch of the National Partners for Financial Empowerment (NPFE), which Secretary Summers launched on April 4th. NPFE is a coalition of private and public organizations dedicated to raising the level of financial awareness and improving the practice of personal finance across America. Our strategy is to build on the creative and energetic efforts of the hundreds of private and non-profit groups already at work on this important problem. While NPFE is currently in the start-up phase of development, we are working to put together a national campaign, including Public Service Announcements and a website. We hope to leverage existing expertise to bring greater focus and visibility to this issue. As you are all keenly aware, education is the bedrock for helping families and future generations achieve and retain financial independence. CDCUs have been long active in providing financial education to its consumers, giving them the skills to make better financial decisions. We would welcome and encourage your participation and expertise to help make NPFE a successful initiative.

We are gathered at a time of tremendous strength in the U.S. economy. We are in the midst of the longest peacetime expansion in history. Inflation is low. The unemployment rate, at 4.1 percent, is nearly the lowest in a generation, and more Americans are working than ever before--135 million. Even those who for too long were stranded on the bottom rungs of the economic ladder have experienced increases in employment and real income. In fact, real income for families in the lowest fifth of the income distribution rose faster than for any other group since 1993. But as you all know too well, there are still people deprived of the benefits of this economy.

Bringing Americans into the economic mainstream is a moral imperative. But it is also an economic imperative. At a time when our economy is so strong, there are still millions of Americans that are not benefiting from our nation's economic prosperity. If we can bring these individuals into the economy, it will help us to keep our economy growing strong. We can help to reduce social costs and increase productivity. Thus, your efforts benefit not only individuals you help, but all Americans. One of Treasury's core missions is to democratize access to capital. We have been working with NFCDCU and other groups' organizations to promote increased access to capital for underserved neighborhoods: through a revitalized CRA and through Treasury's CDFI Fund. And just two weeks ago, President Clinton and the Speaker of the House, Dennis Hastert, announced a bi-partisan agreement on our New Markets Initiative and Renewal Communities. All told, the President's New Markets initiative would unleash over $22 billion in private sector equity investment for business growth. This agreement, if passed into law, would help stimulate tremendous new private sector investment in communities that our new economy has yet to reach.

These programs demonstrate what the public and private sectors can achieve when they work together. While access to capital is an important part of the Administration's efforts to bring all Americans into the new economy, I would like to focus my remarks today on one aspect in which community development credit unions can play a key role: helping provide universal access to financial services for lower-income Americans.

I would first like to describe some of the problems currently faced by those living outside the financial mainstream, often called "the unbanked," but perhaps should be called the "un-credit-unioned;" and second, how working together we can help bridge this financial divide by providing new opportunities for those who have been left on the wrong side of this divide.

1. Problems of "Unbanked"

Today, in this Internet age, as many as 10 percent of American households--and more than a fifth of those with low-incomes--have not broken through the banking barrier, 8.4 million households.

Why is this number so high? A 1998 Survey of Consumer Finances asked unbanked individuals why they did not own a checking account. The reasons most often cited by respondents were not writing enough checks to make an account worthwhile, minimum balances and/or service charges being too high, not wanting to deal with banks, and not having enough money. But we know that low-income people, if given the chance, can save for their future. Studies show that given an institutional mechanism, such as an Individual Development Accounts (IDAs), low-income people have demonstrated the capacity to save. In fact, very low-income households save at a higher rate than other households.

Community Development Credit Unions are on the front line for finding solutions to these problems. There are 190 primary credit union members in the NFCDCU with assets ranging from under $1 million to up to $125 million. Many of your institutions operate in some of the poorest communities in the nation. You have a history of fostering savings among low-income Americans and are vital players in providing access to bank accounts and other financial services to low-income households. I know of one credit union serving a large immigrant community in the Washington Heights community in New York called Neighborhood Trust Federal Credit Union. This credit union found that two-thirds of its members did not have a bank account prior to joining the credit union. It is this work--your work, that will create greater financial opportunities for low-income individuals and families.

Working toward bridging this financial divide has been a high priority of this Administration and I would like to take a few minutes to describe our efforts to work with you to provide greater access to financial services to all Americans. Congress passed a law four years ago that included a provision that the federal government convert most of its payments to electronic funds transfer (EFT) by 1999. I stood with then-Secretary Rubin as he outlined the Treasury agenda for financial empowerment as we approached the 21^st century. In ticking through our objectives for the next four years, he was the first to recognize the importance of this little-noticed provision to our nation's communities. He understood from the beginning that EFT'99 presents "...a real opportunity to have an effect on a very large number of people in the inner city...[who] use expensive check cashing services to get a hold of cash. If we can figure out a way to get them into the banking system for the first time, not only will it give them a more efficient way to cash checks and access other financial services, but it may encourage people to save, to plan financially, and therefore, to improve their economic life over time."

Last year, the initiative was expanded with the launch of Electronic Transfer Accounts (ETA) that offered as many as 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 550 banks, thrifts and credit unions across the United States, including several community development credit unions such as: Alternatives in Ithaca, NY; Bethex in the Bronx, NY; Central Appalachian People's in Kentucky and New Horizons in Philadelphia. We are making every effort to expand it even further.

This year, we are continuing to build on the success of this initiative with further steps to extend the benefits of low-cost bank accounts to the millions of Americans who do not receive Federal payments. In January 2000, President Clinton announced a new initiative - First Accounts - to bring the "unbanked" into the financial mainstream. The President's FY 2001 budget includes $30 million for the Treasury Department to pilot strategies to help low- and moderate-income Americans benefit from basic financial services that most of us take for granted - such as basic accounts and ATMs. The initiative involves four components:

• First Accounts: The Treasury Department will work with financial institutions to pilot low-cost, electronic banking accounts. The effort builds on the Department's "EFT'99" initiative.
• ATMs: The Treasury Department will work with financial institutions to expand access to automatic teller machines in safe, secure, and convenient locations, including U.S. Post Offices, in low-income neighborhoods that often lack even these basic services. This program will build on a small pilot recently begun with a financial institution placing ATMs in post offices in neighborhoods in Baltimore, MD and Tallahassee, FL.
• Financial Education: The Treasury Department will work with other organizations to educate low-income Americans about the benefits of having a bank account, managing household finances, and building assets.
• Research and Development: The initiative will also fund new research at the Treasury Department on the financial services needs of low- and moderate-income individuals, as well as the development of products that can help financial institutions meet those needs. This part of the initiative will build on the extensive original research that Treasury conducted for EFT'99.

I am happy to report that on May 18, 2000, the First Accounts initiative was introduced in the House (HR 4490) by Representatives Leach and LaFalce, and in the Senate by Senators Sarbanes and Daschle (S 2592). On June 20^th, Chairman Leach will be holding a hearing before the House Committee on Banking and Financial Services on the First Accounts initiative and the unbanked.

By building a stronger connection between low-income consumers and mainstream financial institutions, we can provide individuals with the tools to invest in their own futures while minimizing their vulnerability to exploitative financial practices. 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 and have access to mainstream savings facilities.

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. "Sub-prime" lending can provide a real service to many low-income Americans. However, within the domain of sub-prime lending, there is a growing class of exploitative lenders who prey on the lack of financial sophistication of borrowers who re-finance mortgages, obtain short-term loans, and procure 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.

Let me focus on three areas that warrant special attention.

Lacking a bank account can be 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, all financial institutions should be in a position to offer low-income consumers a real opportunity to enter the financial mainstream. However, many banks and thrifts do not have accessible locations and often times, check cashing facilities can provide convenient services to their communities, including better hours, instant service, and easy accessibility.

CDCUs offer their consumers, who are often low-income, a low-cost alternative to using check cashers. The impact of these services is measurable. Let me give you an example. The Community Trust Federal Credit Union in Florida estimates that it cashed nearly $50 million worth of checks for more than 3,000 migrant farm workers and their families over a three-year period throughout the state. In addition to providing low-cost check cashing services, this CDCU is also helping its consumers increase their savings.

Payday Lenders.

Even with a bank account, there are many Americans who still find it difficult to get into the financial mainstream. Many 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. Again, CDCUs continue to provide a cheaper and safer alternative to these institutions. In fact, several credit unions have developed new loan products to specifically compete with payday lenders as a source of emergency loans for families without a sufficient safety net. Over the longer term, we need to focus: first on ways to combat abusive practices. Second, on ways to enhance competition. And third, on ways to improve household financial management and savings.

Payday lending can keep a family in a high-cost cycle of debt. When abusive lending practices serve to deplete the equity in a family's home, however, the consequences of default and foreclosure are that much more devastating. Unfortunately, we are seeing growing evidence of these predatory practices in a segment of the home mortgage market. Predatory lenders put lower-income, elderly and minority borrowers at serious risk of losing their homes by repeatedly refinancing their mortgage loans, levying exorbitant up-front fees with each new loan. These lenders will often make a loan without any regard for the borrower's ability to repay the loan.

These features may be accompanied by other abusive practices, such as high-pressure sales tactics or outright deceptions. CDCUs have been a valuable instrument in the fight against exploitative lenders by providing greater education to their consumers in the areas of predatory lending and helping them recognize these tactics. Martin Eakes of Self-Help Credit Union has been among the leaders in combating these practices.

The federal government is also getting involved. In response to this problem, Secretary Summers and Secretary Andrew Cuomo are co-chairing a joint Treasury- HUD Task Force on predatory lending. We have spent the past several weeks focusing on this problem, and plan to release a report this month. Without pre-judging the findings of the report, I anticipate that it will confront this issue on three broad fronts:

• First, by tightening enforcement of existing laws that target abusive lending and looking at how 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, 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.

The last ten years have brought remarkable financial innovation to the United States. But there still exists a gaping financial divide. The current strength of our economy provides us with an enormous opportunity to make progress in providing greater access to financial services to low-income consumers and communities. The valuable work that CDCUs continue to do in their communities coupled with the Administration's strategy for universal access to fair financial services, provides us with an unprecedented opportunity to make real progress. We look forward to working with you in bringing all Americans into the financial mainstream. Thank you.