BILL ANALYSIS
AB 2581
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2581 (Bradford) - As Introduced: February 19, 2010
SUBJECT : Banking development districts.
SUMMARY : Establishes a Banking Development District (BDD)
program with the state Treasurer's office, which would encourage
the establishment of bank branches and/or new bank services in
specially designated geographic locations where there is a need
for banking services. Specifically, this bill :
1)Makes findings and declarations regarding the status of
unbanked and underbanked consumers, as well as, the need for
baking services in underserved communities.
2)Provides that financial institutions, as defined, may seek to
participate in the BDD program if they do either of the
following:
a) Open a new outlet in a lower income, underserved area:
or,
b) Develop and market a new product line or group of
services in an existing outlet in an underserved community.
3)Defines "underserved community" as a remote location or
impoverished area that lacks banking services commensurate
with the services provided to higher income areas with a
population of similar size.
4)Defines "Banking Development District" as a specifically
designated geographic location where there is a demonstrated
need for banking servicers that has been designated as such by
the Treasurer and the Department of Financial Institutions
(DFI).
5)Provides that a local agency in conjunction with a bank shall
submit an application to the Treasurer and DFI in order to
participate in the BDD program. This application shall
request that specific underserved community be named as a BDD.
6)Allows for the Treasurer, DFI and local agencies to compile
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list of underserved communities or regions that lack a
concentration of banks and services in order to provide banks
with a clear demonstration of those areas that are in most
need.
7)Specifies that the application for participation in the BDD
program shall include the following components:
a) Clearly defined current and anticipated bank product and
service needs of the community;
b) Demonstrate that those needs are not currently being met
by existing institutions; and,
c) Demonstrate that the bank applying for acceptance can
meet the needs of the community as identified.
8)Requires the Treasurer and the DFI to set forth selection
criteria to evaluate a bank's application. The criteria shall
meet the following:
a) Result in needed and responsible bank products and
marketing of those products to local consumers;
b) Be flexible and allow for differences in local markets;
and,
c) Encourage viable business practices.
9)Provides that the Treasurer and DFI shall evaluate and approve
applications and designate BDDs to the extent that
participating banks can accomplish the following:
a) Help unbanked Californians open starter accounts that
include no monthly balance requirements, low cost overdraft
protection plans and second chance accounts;
b) Build the financial literacy of low income customers;
c) Provide effective ways for low income customers to build
savings and a credit record;
d) Provide competitively priced mortgage and auto loans;
e) Offer microloans and micro lending products and
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services;
f) Provide products to assist small businesses; and,
g) Provide specialized marketing, and specialized training
for staff.
10)Requires the Treasurer and DFI to develop and provide a range
of incentives to encourage banks to participate in the BDD
Program that shall be valuable to banks and significant enough
to encourage banks to locate in underserved communities.
11)Provides that a bank that is located in a BDD and that has
been designated as such, shall be eligible for a range of
incentives including, but not limited, to:
a) Access to priority of deposits of public funds and
access to below market-rate public funds as deemed
appropriate and approved by the Treasurer; and,
b) Incentives offered by local agencies as deemed
appropriate and approved by the Treasurer.
12)Allows the Treasurer to work with local agencies and economic
development officials to develop additional local incentives
for participating banks including, but not limited to, the
following:
a) Local agency deposits;
b) Assistance in locating suitable commercial real estate
space for branches;
c) Local tax incentives; and,
d) Workforce development.
13)Requires the Treasurer and DFI to adopt rules and regulations
for the establishment of the program, as well as, development
a performance review process.
EXISTING LAW provides for the regulation of state banks and
credit unions by DFI.
FISCAL EFFECT : Unknown
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COMMENTS :
In 1998, the state of New York, under Governor George Pataki,
created the first BDD program in the nation. BDDs were designed
to provide communities with a resource to assist in
providing economic development opportunities and incentives to
financial institutions to locate in underserved communities.
According to a 2006 Wall Street Journal Article, Citibank
executives acknowledged that without the below-market-rate
deposits from the state and city, the bank would continue to
lose more than $350,00 a year operating a three story branch in
a neighborhood where 38% of the residents live below the poverty
line. The goal of AB 2581 is to spur increased and enhanced
banking services in under-served communities that will spur
greater financial inclusion. The desired outcome is that more
Californians will enter the financial mainstream and build
savings and wealth through participating banks' offerings and
marketing of appropriate transactional, loan, and credit
products that can lead to long-term wealth building
opportunities.
In the modern financial arena consumers are faced with a
confusing myriad of choices and options. This confusion is
amplified by the financial illiteracy of most consumers, and
what has been a traditional lack of outreach by financial
institutions to certain communities. Recently, the untapped
market of those without a banking relationship has become an
intriguing opportunity for those offering financial services.
However, as many studies have shown, the unbanked and
underbanked often do not feel comfortable dealing with financial
institutions that are not located in their neighborhoods.
The Unbanked : The unbanked, or those without a transaction
account with a financial institution constitute approximately 22
million, or 20% of Americans. This population spends $10.9
billion on more than 324 million alternative financial service
transactions per year. Bearing Point, a global management and
technology consulting company, estimates that the unbanked
population expands to 28 million when you include those who do
not have a credit score. In addition, Bearing Point, puts the
underbanked population, defined as those with a bank account but
a low FICO score that impedes access to incremental credit, at
an additional 45 million people. Although estimates find that
at least 70% of the population has some type of bank account,
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these individuals continue to use non-bank services, ranging
from the purchase of money orders, use of payday lenders, pawn
shops or sending of remittances. The Federal Reserve Board has
noted that 50% of current unbanked households claim to have had
an account in the past.
In California, 28% of adults do not have a checking or savings
account, according to the U.S. Census. In San Francisco, the
Brookings Institution estimated that one in five San Francisco
adults, and half of its African-Americans and Hispanics, do not
have accounts. Recent market research indicates that Fresno and
Los Angeles have the second and third highest percentages of
un-banked residents in the country.
Nationwide, the unbanked are disproportionately represented
among lower-income households, among households headed by
African-Americans and Hispanics, among households headed by
young adults, and among renters. A Harvard Poll of Hurricane
Katrina evacuees in the Superdome found that seven out of ten
did not have a checking or savings account.
The unbanked poor pay more to conduct their financial lives.
Check cashing outlets can charge between 2-3% of the face value
of a check. So, an individual who makes $30,000 a year can pay
$800 a year in fees to cash their payroll checks and pay their
bills. The lack of access to mainstream banking costs both
consumers and society, as well as, the financial community that
misses out on this untapped market.
Families without accounts don't have a safe place to keep their
money. They may walk around with wads of cash in their pockets,
or keep it at home in a coffee can. Robberies are more prevalent
around check cashing outlets. A burglary, or a fire, could cost
them their life's savings in a matter of moments. A bank
account helps people take the first step onto the path of
savings and mainstream financial products. Without an account,
it is much more difficult to get well-priced car loans, credit
cards, or mortgages-the exact financial tools needed to climb up
the economic ladder. Stable societies are built on financially
stable families who have access to high-quality, low-cost
financial services.
In January 2009, the FDIC sponsored a special supplement to the
U.S. Census Bureau's Current Population Survey (CPS) to collect
data on the number of U.S. households that are unbanked and
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underbanked, their demographic characteristics, and their
reasons for being unbanked and underbanked. The following are
the findings from the survey:
1)An estimated 7.7 percent of U.S. households, approximately 9
million, are unbanked.3 At least 17 million adults reside in
these unbanked households.
2)The proportion of U.S. households that are unbanked varies
considerably among different racial and ethnic groups, with
certain racial and ethnic minorities more likely to be
unbanked than the population as a whole. Minorities more
likely to be unbanked include blacks (an estimated 21.7
percent of black households are unbanked), Hispanics (19.3
percent), and American Indian/Alaskans (15.6 percent). Racial
groups less likely to be unbanked are Asians (3.5 percent) and
whites (3.3 percent).5
3)In addition to the unbanked households, an estimated 17.9
percent of U.S. households, roughly 21 million, are
underbanked.
4)Certain racial and ethnic minorities are more likely to be
underbanked than the population as a whole. Minorities more
likely to be underbanked include blacks (an estimated 31.6
percent), American Indian/ Alaskans (28.9 percent), and
Hispanics (24.0 percent). Asians and whites are less likely to
be underbanked (7.2 percent and 14.9 percent, respectively).
5)Taken together, at least 25.6 percent of U.S. households,
close to 30 million, are either unbanked or underbanked.
Approximately 60 million adults reside in these households.
6)Overall, almost 54 percent of black households, 44.5 percent
of American Indian/Alaskan households, and 43.3 percent of
Hispanic households are either unbanked or underbanked.
7)While 17.9 percent of U.S. households are known to be
underbanked, another 4.1 percent of U.S. households, or
roughly 5 million, are banked and may also be underbanked, but
their use of Alternative Financial Services (AFS) could not be
determined because of missing data. The number of adults that
reside in these households is estimated to be 11 million.
8)The proportion of unbanked and underbanked households varies
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across different regions of the country, with the highest
incidence in the Southern United States.
9)A substantial percentage of lower-income households are
unbanked. Nearly 20 percent of lower income U.S.
households-almost 7 million households earning below $30,000
per year-do not currently have a bank account. Households with
earnings below $30,000 account for at least 71 percent of
unbanked households.
10)The proportion of unbanked households declines with education
and age. Households more likely to be unbanked than all U.S.
households have less than a college education or a householder
under age 45.
11)Not having enough money to feel they need an account is the
most common reason why unbanked households are not
participating in the mainstream financial system.
12)The 9 million unbanked households are approximately split
between households that have never had a bank account (46.9
percent) and households that were previously banked (49.0
percent).
13)A considerable proportion (an estimated 41.1 percent) of
unbanked households believes that opening a bank account in
the future is "not likely at all." However, among all unbanked
households, the previously banked are more likely to consider
opening a bank account in the future. About 16 percent of
previously banked households believe that they are "very
likely" to open a bank account, compared with 4.8 percent of
those that have never been banked.
14)About 66 percent of unbanked households use the following
alternative financial services AFS: nonblank money orders and
non-bank check-cashing, pawn shops, payday loans, rent-to-own
agreements (RTOs), and refund anticipation loans (RALs).
About one-quarter of unbanked households do not use any AFS,
suggesting a strong reliance on cash transactions.
15)Approximately 12 percent of unbanked households have used a
general spending prepaid card, and an estimated 3.1 percent
receive their income through a payroll card.
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16)The underbanked rate declines with age of the householder but
is more evenly distributed across most educational and income
groups. For example, middle-income households (those with
annual income between $30,000 and $50,000) are about as likely
as lower-income households (those with annual income below
$30,000) to be underbanked. The proportion of underbanked
households is considerably lower among the highest education
level of the householder (at least college degree) and the
highest income group (at least $75,000).
17)The AFS products used most frequently by underbanked
households are non-bank money orders (an estimated 81.1
percent of underbanked use money orders) and check-cashing
(30.0 percent) transaction services. Underbanked households
also use on payday lenders (16.2 percent), pawn shops (15.8
percent), RTO services (13.0 percent), and RALs (13.2 percent)
for credit services from non-banks.
18)The survey data indicate that the majority of underbanked
households that go to nonbanks for money orders and check
cashing do so primarily for convenience. Speed and cost were
also reasons underbanked households use these non-bank
transaction services.
19)Many underbanked households that use payday loans or pawn
shops rather than banks for credit services do so primarily
because it is easier to qualify for a loan from the AFS
provider or because it is more convenient.
20)Approximately 16 percent of underbanked households have used
a general spending prepaid card and an estimated 4.2 percent
receive their income through a payroll card.
Following up on the aforementioned survey, in February 2009, the
FDIC released the results of a survey of insured institutions
regarding the unbanked and underbanked as required by Section 7
of the Federal Deposit Insurance Reform Conforming Amendments
Act of 2005. Here is a sample of those results:
1)Seventy-three percent of banks are aware that significant
unbanked and/or underbanked populations are in their market
areas, but less than 18 percent of banks identify expanding
services to unbanked and/or underbanked individuals as
apriority in their business strategy. Over three quarters of
banks (77 percent) have not conducted research on this
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potential opportunity in their Community Reinvestment Act
(CRA) assessment areas. The 25 largest banks are more likely
than smaller banks to identify expanding services to these
groups as a priority, although fewer than half of larger banks
(46 percent) have done so.
2)When asked to rank-order the three most effective ways of
educating and reaching out to unbanked and/or underbanked
customers, banks identified "Providing financial education
sessions" as most effective, followed by "Participation in
other organizations," and "Outreach visits." Almost all
banks (98 percent) rank "Participation in other organizations"
or "Outreach visits" among the top three most effective
programs.
3)Sixty-three percent of banks provide financial education
materials to unbanked and/or underbanked individuals, often in
the form of brochures and pamphlets. Basic banking or savings
program educational materials for unbanked and/or underbanked
customers are provided by about 39 percent and 34 percent of
banks, respectively.
4)Thirty-seven percent of banks participate in financial
education or outreach efforts with other organizations to
expand services to unbanked and/ or underbanked individuals.
Examples of such efforts include working with employers that
use payroll cards, government entities that use electronic
benefit transfer (EBT) or prepaid cards, and faith-based
groups that provide cash assistance. The largest 25 banks are
more likely to participate in such efforts.
5)About half (53 percent) of banks teach financial literacy and
education sessions targeted at unbanked and/or underbanked
individuals. Larger banks are more likely to offer such
educational sessions. Among banks that do provide such
sessions, the topics most likely to be covered are basic
banking and savings programs.
6)Fifty-eight percent of banks conducted off-premise financial
education and outreach visits during 2007, most commonly at
high schools and community- based organizations.
7)Thirty-eight percent of banks work with corporate or business
customers to provide services for unbanked and/or underbanked
employees. Larger banks are more likely to work with
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businesses to promote services for the unbanked than smaller
banks.
8)A quarter (25 percent) of banks use targeted marketing to
reach unbanked and/or underbanked individuals. Larger banks
are more likely to engage in targeted marketing. Among banks
that target a specific demographic segment, Hispanic Americans
are most frequently cited. Perceived Challenges to Serving
Unbanked and/or Underbanked Customers
9)When asked to rank order the challenges banks face in serving
or targeting unbanked and/or underbanked individuals, banks
list "Profitability issues" first, followed by "Regulatory
barriers," and "Fraud concerns." Regulatory impediments are
perceived by 40 percent of banks, reflecting concerns related
to maintaining compliance with the Patriot Act and the Bank
Secrecy Act.
10)Over half of banks offer limited extended hours and foreign
language capabilities at their retail branches. Fifty nine
percent of banks offer extended branch hours, typically after
5:00 p.m. on weekdays and after 1:00 p.m. on Saturdays. Among
brick and mortar branch locations, 81 percent offer extended
weekday evening hours, 16 percent offer Saturday afternoon
hours and 5 percent offer Sunday hours. Fifty two percent of
banks have hired staff with foreign language capabilities.
11)Almost two-thirds (64 percent) of banks report that they have
modified their retail operations in the last five years to
make the bank more appealing or convenient for unbanked and/or
underbanked customers. Almost three quarters (73 percent) of
these banks reported doing this by offering Internet or mobile
banking. Forty seven percent of banks have installed external
automated teller machines ("ATMs") and 43 percent have added
off-premise ATMs. Thirteen percent of banks added
non-traditional locations in community centers, supermarkets,
etc. and 20 percent of banks added branches in low-to-moderate
income (LMI) areas.
12)When asked what efforts banks make as part of their branch
strategies to serve unbanked and/or underbanked customers,
less than half of banks identified providing check cashing (49
percent)and money order (41 percent) services. Far fewer banks
identified bill paying services (18 percent), prepaid card
issuance and reloading (12 percent), and check cashing kiosks
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(less than one percent).
13)Banks provide limited check cashing opportunities for
non-customers who may be unbanked and/or underbanked. Most
banks (96 percent) will cash checks for non-customers drawn on
the bank itself, but less than one-third will cash payroll and
other business checks not written on the bank for
non-customers.
14)Offerings of other transaction services to noncustomers who
may be unbanked and/or underbanked are more limited. Bank
checks/money orders and international remittances are
available to non-customers at 37 percent and 6 percent of
banks, respectively. Check cashing cards are offered by 2
percent of banks to non-customers.
15)Government-issued identification is required by most banks to
open a new account. Most banks will accept either a driver's
license (99 percent) or passport (92 percent) to open an
account. Matricula Consular cards are accepted by 27 percent
of banks and 38 percent of banks accept Individual Tax
Identification Numbers (ITINs) during the process of opening a
new account.
16)Unbanked and/or underbanked individuals with blemished
account or credit histories often face challenges to opening
new accounts. Most banks 87 percent) require a third party
customer screen such as ChexSystems when opening a new
checking account.6 A quarter (25 percent) of banks
automatically reject a new account application that receives a
negative result in the screening process and about half (49
percent) of banks are able to override a negative result at
the branch location. A quarter (25 percent) of banks offer
"second chance" accounts designed for individuals not
qualified for conventional bank accounts.7
17)When asked to rank order the three most common reasons that a
new account applicant is declined, banks identified "Negative
account screening" first, followed by "Insufficient
identification information" and "Low credit score." Deposit,
Payment, and Credit Products and Services Offered to
Entry-Level Consumers
18)Almost two-thirds (62 percent) of banks offer an entry-level
checking account with no minimum balance. Another 8 percent of
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banks normally charge a minimum fee on their most basic
checking account but will waive the fee if the customer uses
direct deposit. When required, the median minimum balance with
or without direct deposit was $100.
19)Nearly all banks (99 percent) charge a per-item overdraft fee
on their most basic (lowest cost) transaction account.
Overdraft fees range from $8 to $38 with a median of $25.
While over half (60 percent) of banks offer some type of
program that will cover or waive the fee, such programs
frequently involve a line of credit or transfer and may not be
available to underbanked customers. Over half of banks (57
percent) that charge overdraft fees automatically close an
account after a customer has a certain number of overdrafts
(ranging from one to 500) or after an account has remained in
negative status for a given period of time (ranging from 10 to
180 days).
20)Nearly all banks (97 percent) offer low-balance (under $500)
basic savings accounts, but few offer savings programs
designed to help unbanked and/or underbanked customers. Seven
percent of banks offer savings accounts through work place
based programs, eight percent of banks participate in or offer
Individual Development Account (IDA) programs.
21)Less than a quarter (22 percent) of banks partner with
organizations to promote savings products and about half (49
percent) of banks offer special savings clubs. The largest 25
banks were more likely to offer some of these programs. Funds
availability from deposited checks at many banks, while in
compliance with federal regulations, is slow relative to
non-bank check cashing services. At least one-third of banks
require at least a one-day wait for funds to be available from
any check. Longer waits are frequently required for government
or payroll checks and checks drawn on another bank.
22)Banks offer few advance or credit products tailored to LMI
and/or unbanked and underbanked customers. Less than 6 percent
of banks provide an advance on funds due to arrive by direct
deposit or check. While over two-thirds (69 percent) of banks
offer closed-end unsecured personal loans for amounts under
$5,000, eligibility requirements may hinder access for
unbanked and/ or underbanked customers.
23)Survey responses to a question asking whether banks offer
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"affordable small dollar loans" revealed confusion about the
product since a number of banks counted overdraft programs
with a line of credit in their affirmative responses.
Recent developments.
In October of 2009, the Los Angeles City Council approved a
motion to establish a local BDD program by requiring the City
Attorney and City Treasurer to draft an ordinance establishing
the program. Additionally, the City Treasurer must set up a
task force with department heads and council members to
determine what modifications may be needed to adapt the New York
BDD model program to Los Angeles.
On January 24, 2008, Governor Schwarzenegger announced an effort
to assist unbanked and underbanked Californians. This
program, called Bank on California, is built off of a pilot
project in the City of San Francisco, known as Bank on San
Francisco. The idea behind the Bank on California program is
too increase the availability of starter checking accounts
through partnerships with financial institutions. Additionally,
this program creates partnerships between local officials, banks
and community groups to raise awareness on the importance and
benefit of entering the financial mainstream.
Questions.
1)What sort of incentives can be offered given legal
requirements that the State Treasurer must maximize the return
on investments and deposits?
2)The Bank on California program attempts to get more people
banked. How could this bill assist that effort, or vice
versa? Could this bill conflict with that effort? Are there
statistics on the Bank on California program that demonstrate
its effectiveness?
3)How many people have been assisted with banking accounts by
the New York BDD program?
Amendments.
Committee staff recommends the following amendments to address
inconsistencies in the language and to correct technical errors.
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1)Page 4, lines 1 and 2, strike "a demonstrated need for banking
services." Insert "an underserved community"
2)Page 4, line 5 strike "lower income, underserved area" and
insert "an area designated as a banking development district."
3)Page 4, line 7 strike, "underserved community" and insert "in
an area that is designated as a banking development district."
4)Page 4, line 21 strike "where there is a demonstrated need for
banking services" and insert "comprising an underserved
community."
5)Page 4, lines 33-37 (section 40002(c)) and move to new section
40002(b).
6)Change section 40002(b) to new section 40002(c).
7)Page 5, line 17 strike "viable business practices" and insert
"safety and soundness"
8)Page 5, line 35 after "build" insert "or improve."
REGISTERED SUPPORT / OPPOSITION :
Support
New America Foundation (Sponsor)
Center for Responsible Lending (CRL)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081