WASHINGTON (NNPA) - As Capitol Hill works to complete historic Wall Street reforms, most of the public debate has focused on mainstream lending such as bank practices, loans and credit cards. Yet according to one of the nation's Federal Reserve Banks, 30 million American households -- nearly one in four -- are either unbanked or under-banked. These families instead turn to alternative financial services for their monetary mainstays.
According to the Federal Reserve Bank of Kansas City, unbanked or under-banked residents operate in a subculture that eschews traditional lenders and instead patronizes non-bank operations such as pre-paid cards, check-cashing and/or convenience stores and pawn shops. Many households with unpredictable cash flow and few savings were found to experience difficulty maintaining minimum balances or managing limits on availability of funds as many traditional lenders require. Additionally, overdraft fees, unexpected charges to accounts and account disputes together have led many households to adopt a combination of cash, money orders and prepaid debit cards for their personal financial transactions.
Sadly, these recent 2010 findings mirror those of a December 2009 report from the Federal Deposit Insurance Corporation (FDIC). Although Black and Hispanic households respectively account for 13.1 and 11.1 percent of all U.S. households, FDIC found that Latino and African-American communities together represent more than 60 percent of the nation's unbanked households. Among the nation's unbanked households, 36.9 percent are African-Americans.
FDIC defines a household as "unbanked" if no one in the family has a checking or savings account. "Under-banked" households are those that have a checking or savings account but rely on alternative financial services that use non-bank money orders, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year. Each year alternative financial services drain an estimated $11 billion from the pockets of moderate and low-income households through a series of related fees.
According to Jeff Gerritt, a Detroit Free Press columnist, the nation's largest poor city – Detroit – nearly half of all Motor City households lack traditional bank accounts. "Convenience plays a part" wrote Gerritt, "especially for the nearly one-third of Detroit households that don't have vehicles. In many neighborhoods, the corner party store is a lot closer and more accessible than a bank – and presents a lot fewer hassles."
Among public policy advocates, some would readily agree with Gerritt's assessment. Recent written remarks to the FDIC from a wide range of organizations addressed many of the underlying issues surrounding unbanked and under-banked consumers and the inherent problems with building financial assets.
For example, Heidi Goldberg with the National League of Cities advised, "Lack of access to the financial mainstream makes it difficult for families and communities to thrive. Individuals who are un- or under-banked must operate in a cash economy, which means the few assets they do have are vulnerable to loss from theft or natural disaster. Neighborhoods also suffer from the consequences of a cash economy, which can erode public safety and increase theft and related crimes."
Ms. Goldberg continued, "Perhaps most importantly, financially underserved families miss out on opportunities to build assets when they do not have access to affordable, mainstream banking products."
Addressing the urban dynamics that lead consumers to alternative financial services, Dory Rand, president of the Chicago-based Woodstock Institute in part wrote to FDIC, "Products such as money orders are important because many landlord and small business owners in LMI [Low-to-Moderate Income] areas do not accept checks. The 'competitive market rates' charged for these services should be less than the rates charged by non-bank providers in order to entice customers into mainstream banking. To avoid gouging customers, rates for cashing checks and wire transfers should be capped and not based solely on a percentage of the check or wire transfer/remittance amount."
So although the Dodd-Frank Wall Street Reform Act represents a major step forward for consumers, it is equally true that much yet remains to be accomplished before full, equal and competitive access to lending reaches all of America and its people.
According to Mike Calhoun, president of the Center for Responsible Lending, "Auto dealers—whose lending record is rife with unfair, deceptive practices, especially for people of color and military personnel—should not have been exempted from oversight by the new consumer protection agency. Also, payday or other unscrupulous lenders should not be allowed to sabotage the consumer protection agency's proposed new rules before they even see the light of day"
In other words, the quest for fairness in financial transactions continues.
Charlene Crowell is on the staff of the Center for Responsible Lending