By: Tim Fernholz
May 3, 2010
The New York City Department of Consumer Affairs is housed on some rented floors near Wall Street, amid great banks that profited as millions of American consumers bought toxic loans and catalyzed a recession that drove further millions out of work. While the department doesn't have jurisdiction over the big banks, it is often charged with cleaning up the messes they create. The office, which is painted in a decidedly un-bureaucratic neon-orange and royal-blue color scheme, features exhibits about the 40th anniversary of the Department of Consumer Affairs including a display of the brass weights once used by city officials to check merchants' scales and prevent fraud. Until recently, the department's core mission hadn't changed much: Ensure that weights and measures are accurate and that truth-in-pricing laws are enforced.
And so the city did just that, creating an Office of Financial Empowerment to develop pilot programs to meet those goals. They chose to house the OFE inside the Department of Consumer Affairs, rather than somewhere in the city's vast social-services bureaucracy, even though regulators are normally analogized to watchdogs or cops on the beat, not thought of as being responsible for administering social policy. "We are not running that safety net, but that safety net needs to be in place," explains Veronica White, who directs the task force that designed the OFE program. Instead, she says, OFE's mission is to give people the tools they need to get out of poverty.
"The lens of financial empowerment has remade this agency," says Department of Consumer Affairs Commissioner Jonathan Mintz, a quiet, genial man who previously worked as a lawyer, a law professor, and a second-grade teacher. The OFE gives his department "the ability to focus our enforcement, to think about zeroing in on neighborhoods" with high rates of people who lack access to financial services and heavy concentrations of fringe financial businesses such as check-cashers and pawn shops. Over 800,000 adult New Yorkers lack any bank account (the "unbanked"), and many more are "semi-banked" -- they may have bank accounts but also use check-cashers and their ilk at greater cost.
The Office of Financial Empowerment seeks to educate people about their finances, find ways to encourage wealth-building behavior, and provide services, from tax preparation to financial products, that bring the first two goals into being. The most innovative product from the OFE is the SafeStart Bank Account. It's what finance people refer to as a "plain vanilla" product, a simple savings account with a starting balance of $25, no overdraft or monthly fees, and an ATM card.
SafeStart accounts offer a fresh start for people who haven't had a bank account before -- or can't get one thanks to bad experiences in the financial sector. Combined with financial counseling and other resources in the OFE, these accounts represent one of the most forward-thinking and effective public-policy responses to the financial challenges of the working poor. The program began with a pilot limited to participants in a now-defunct anti-poverty effort called Opportunity NYC that gave cash incentives to low-income people who took steps to pull themselves and their families out of poverty. At first, 55 percent of Opportunity NYC participants were unbanked; two years later, only 7 percent are, with some 1,800 accounts opened. Now, the program is opening to the public and expanding citywide.
The reasons why certain people lack bank accounts are not Big Apple?specific: Our consumer-credit system is broken, with even brand-name banks adopting practices that range from usurious to predatory. In Washington, policy-makers are debating what to do about this consumer-credit crisis, which preceded the recession -- in the form of the sub-prime mortgage bubble -- and now exacerbates its worst effects. There is a broad consensus that more savings and safer loans are a key part of digging out of the recession. One of the most promising ideas is a federal Consumer Financial Protection Agency that would regulate financial products, kind of a New York Department of Consumer Affairs writ large. If we are to understand the potential of the CFPA, we must start with what's happening in New York.
"We've been working with the Treasury Department, advising them on a national banking initiative that they have proposed in the budget," Mintz says. "If New York City can leverage a bank account, imagine what the Treasury Department can do."
Melrose, Bronx, is a world away from Wall Street, nearly 40 minutes north on the subway. Where the financial district's bustle is contained within antiseptic lines of concrete and glass, here the skyline is lower and the storefronts colorful and haphazard; more people are on the street, buying and selling at sidewalk stands. A third of the neighborhood's residents are unbanked, and half are low-income. In the eight blocks between the subway and the OFE's local outpost, I count some six check-cashing stores and pawn shops. But there are just as many branches of regular retail banks scattered through the neighborhood.
The conventional wisdom about the unbanked is that they simply don't have access -- that banks don't invest in neighborhoods where poor people live, and therefore poor people don't have bank accounts. But a recent study of consumer finance in Melrose and in Jamaica, Queens, conducted by the Department of Consumer Affairs, turned up some counterintuitive conclusions. In Melrose and Jamaica, as in other places, there was no correlation between the number of bank branches per capita and the number of people with bank accounts.
That leaves another hypothesis: It's not the access; it's the products. The savings and checking accounts offered by banks weren't meeting the needs of the residents of neighborhoods like Melrose and Jamaica. Low-income New Yorkers don't need online bill payment, they don't have direct deposit, and they are often the victims of overdraft fees that are poorly explained and nearly as usurious as the check-cashers' policies. What they need is clarity, speed, and reliability, which are all things the check-cashers provide, at a cost. The 110,000 residents of Melrose and Jamaica are estimated to spend some $19 million per year in check-cashing fees alone.
It may seem obvious, but overpaying for consumer credit is a critical obstacle to escaping poverty. That isn't the only downside of participating in the fringe financial system. At the most basic level, it's not as safe; keeping cash on hand invites crime and makes a mugging or a robbery a devastating financial experience. Without savings and a bank account, it's hard to build a credit score that would support a home or automobile loan that isn't predatory; it can even be difficult to access rental housing. It can also be harder to get a job now that employers have started checking applicants' credit scores as part of their interview processes. Even getting a cell phone is complicated with bad credit. This is a problem that affects low-income people generally and minorities in particular: Federal Deposit Insurance Corporation studies find that nearly 8 percent of Americans are unbanked, including nearly one-fifth of black and Hispanic households.
If the problem is product, how do you solve it? The private sector seems uninterested; check-cashers have managed to corner this market because commercial banks don't think it is profitable, and credit unions can't compete with marketing and ease of access that fringe financial firms offer. The Department of Consumer Affairs decided to leverage the government's brand and resources by creating and promoting accounts that would be both safe for consumers and attractive to the banks -- and thus the SafeStart Bank Account was born. The department gathered nearly all the banks and credit unions operating in New York City and asked if they would sell the product in return for the city's promotional efforts. Ten agreed: five banks and five credit unions.
"Where the rubber hits the road for us, if we find that we're making money off these customers, that's the best sales pitch," says Steven Flax, a vice president at the participating M&T Bank. "The city sort of makes the case: These are the diamonds in the rough that we nurtured from theoretically unbankable to bankable."
Taking customers from unbanked to banked doesn't just mean creating accounts that won't hurt them; it also means providing financial education so they don't hurt themselves. The city, thanks to private funding, has set up financial--empowerment centers staffed with full-time counselors who make appointments with people who need help straightening out their books. One such center is located at the Lower East Side Peoples Federal Credit Union, an unassuming corner storefront in Alphabet City. Inside, it looks like George Bailey's bank from It's A Wonderful Life, but the tellers sit behind thick, bullet-proof Lexan glass.
That's where I meet Michelle Morillo, a social worker whose employer, a nonprofit called Credit Where Credit is Due, has been hired by the OFE to staff the bank's financial-empowerment center. Sitting at a metal desk located next to the old vault, Morillo, who sports neon-blue Ugg boots and a Long Island accent, offers crisp advice and tough love to her clients. "If they live paycheck to paycheck, unbanked, scared to get banked? Get over it," she says. She knows whereof she speaks: A single mother raising a 14-year-old son, she had her own trouble making payments on her student loans. There is, she realizes, a pervasive "fear of facing the situation. A lot of people don't want to know how much debt they owe."
I sit with Morillo while she meets with a client who we'll call Elizabeth, a 32-year-old recent divorcee who is living paycheck to paycheck and is several thousand dollars in debt as she starts a new business. Morillo quickly runs her through her "pieces" -- the student loan piece, the debt piece, the medical bill piece, the budget piece. By the time they have gone over Elizabeth's finances, she has applied to consolidate her debt, tightened up her monthly budget to make more room for savings, and drafted a legal challenge to a debt collector. Although Elizabeth already has a bank account, it's easy to see how this kind of personal attention would help put people who are unbanked back into the system.
"Looking at my friends, some people are taught, and other people aren't. I just realized my parents are terrible with their money to this day," Elizabeth says. Before meeting Morillo, she says, "I was just kinda getting by."
When I ask Morillo whether her clients found the city-branded bank accounts useful, she nods. "A lot of people go into debt because they didn't trust, and just knowing that the city is connected is an asset."
Like any effort just getting off the ground, the financial-empowerment program doesn't always work. Though I spoke to a customer who was excited to open her first bank account at age 26 through the SafeStart program, another similarly enthusiastic consumer hadn't been able to open an account because a teller at Capital One hadn't heard of the Safe-Start account -- even though the bank is participating in the program -- and told him that he needed to pay off lingering overdraft fees on an account he had already closed. It's also harder for customers who have wound up in the ChexSystem, a blacklist used by banks to identify problem customers, to get another chance through SafeStart.
Felix Salmon, a Reuters financial writer who is also on the board of the Lower East Side Peoples' Federal Credit Union, appreciates the efforts of the Office of Financial Empowerment but worries that it is constrained by its relatively limited budget. All the financial-empowerment centers, including the one I visited at the credit union, are dependent on funds from private donors. Ironically, some of the funds come from American International Group, a firm at the center of the financial blowup, and from Citibank, which has declined to participate alongside other banks.
"It's working out well, but it's only one day a week, and we have more than enough demand for people to be there full time," Salmon writes in an e-mail. "The main challenge for them, I think, is to get onto the city budget as their own line item."
The question remains: Is this is a New York City?only program, made possible by the Bloomberg administration's unique ability to deploy the mayor's philanthropic connections, or potentially a nationwide approach to fighting poverty? The Office of Financial Empowerment's 2010 budget included just over $2 million in public funds, but its more innovative programs are primarily supported by private money: The financial-empowerment centers require $1 million in donations. Without the counseling they provide, the SafeStart accounts would be a no-go.
I ask Flax, the M&T Bank vice president, if New York's combination of financial education and safe-banking products could be a model for other cities. "Would it work in Cleveland? Maybe Pittsburgh? Or Dayton? My suspicion is that it wouldn't," he says. Indeed, though the Department of Consumer Affairs co-founded, with its San Francisco counterpart, a national organization called Cities for Financial Empowerment, the spread of these ideas has been limited.
Flax is more optimistic about San Francisco's Bank On model, which is now being adopted by six states and 56 cities around the country. Though the original program has a broad reach -- 48,000 new accounts in San Francisco, 40 percent of which come from low-income neighborhoods -- it also has serious drawbacks. Unlike the SafeStart account, Bank On doesn't set clear standards, offering only guidelines for limiting fees and improving access, which increases bank participation at the expense of riskier accounts. Financial education isn't a mandatory part of the program, either.
While Bank On provides a model for cities that don't have a strong bargaining position with the banks or the money to fund a more expansive marketing and education campaign, these compromises do weaken the positive effects of getting people banked. The Treasury Department has requested $50 million to spread these ideas nationwide, though it remains to be seen whether the administration will leverage federal power to impose national standards.
While SafeStart and Bank On may prove difficult to spread widely, New York offers another program, called $aveNYC, that has nationwide potential despite the fact that it is also privately funded. The program began when the Department of Consumer Affairs found that tax preparers were ripping off low-income consumers. The department began providing free tax preparation and found that tax time was an opportune moment to introduce people to poverty-reducing behavior.
$aveNYC accounts are part of an effort to kill a flock of birds with one stone. First, they steer low-income people away from predatory tax-preparation services that make loans in advance of an expected tax refund. Second, they make sure that those who are eligible for the Earned Income Tax Credit apply for that assistance. Finally, they encourage savings by asking consumers to save half of their tax refund and matching that amount with private donations in the special account. $aveNYC demonstrates how a regulator can utilize the knowledge that comes from supervising financial firms and accessing consumer complaints, mix in a little behavioral economics, and create a program that helps people build income.
"That's the best program OFE has, and it could definitely be rolled out," Salmon writes. In Congress, several bills have been proposed that would create a program called the "Saver's Bonus" that is very similar to the $aveNYC accounts. The Saver's Bonus program has the support of the Obama administration, but while savings incentives like these generally attract bipartisan support, the idea of a public-private partnership to create safer financial products more broadly is controversial.
Last year, as part of Congress' post-crash attempt to overhaul the country's financial regulatory regime, the House of Representatives passed a bill that included the consolidation of existing federal consumer-protection regulation -- seven agencies and 17 statutes -- into one independent agency, the Consumer Financial Protection Agency. However, the CFPA was banned from creating "plain vanilla" financial products because conservatives saw the move as government overreach. While it was a setback for reformers, it's not deadly. Some believe that banks would not have emphasized those products anyway, and the real importance of the agency lies in its overall rule-making capability.
"For me to get people into banks, I need to be confident they won't be ripped off," says Julia Gordon, senior policy counsel at the Center for Responsible Lending, when I ask her about the problem of the unbanked. CRL, which is affiliated with a nonprofit bank called Self-Help, has long advocated practical consumer protections. Gordon worries that even if these safe accounts can move the unbanked into a more responsible financial situation, the temptation for banks to sell them new products that aren't as safe would be irresistible and could lead to a new cycle of predation.
This is perhaps the New York program's most important argument for a new consumer regulator on the federal level: Financial products have gotten so complicated and dangerous to consumers that local authorities had to step in to make something basic enough for everyone. Now, broad rules are needed to make predatory financial products the exception, not the rule. In his conversations with me, Mintz makes clear that local (and state-level) regulators are closer to customers and have a different set of tools they can leverage to supervise the consumer-finance market. Indeed, part of the new agency's mandate is lifting federal restrictions on lower-level regulators that often prevented them from acting during the last crisis, and Treasury officials recognize that different unbanked populations require different approaches. Nonetheless, to make a significant dent in the banking system -- to regulate the big banks that surround Mintz's office -- requires a broader, national agency.
Like the New York Department of Consumer Affairs, the CFPA aims to be responsive and complaint-driven, able to spot new rip-offs and act quickly. It will also house an Office of Financial Literacy that will have capacity similar to the OFE, providing opportunities for consumers to learn how to manage their money. Perhaps the most important lesson from New York is about leverage and doing as much as possible with limited authority. While the CFPA is banned from mandating that banks provide certain products, it is likely that the new agency could come up with criteria for financial products that would allow interested banks to apply for a government-approved status. That would be a huge step forward. Consider this comparison: If FDIC insurance were optional for banks, would you have your account at a bank that had the insurance or one that didn't?
"The CFPA would be on the frontlines of what frauds, scams, abuses, or problems are happening," says Assistant Treasury Secretary Michelle Green, who works on financial-access issues. "That would be great information to fold back into how we focus our outreach, resources, and education. Marrying those two things would be terrific."
It's too soon to say whether New York's program or it's West Coast cousin, Bank On, are the most effective ways to reduce the unbanked population, but early studies reveal both the promise of these programs and public demand for them. On a national level, the convergence of anti-poverty and regulatory policy may be hindered by the fraught politics of regulation and the difficulties of finding the funding for a new anti-poverty program. The lessons of New York show, however, that a consumer regulator can both restrain the worst practices of banks and cooperate with them to promote anti-poverty goals.
"Our role is to be unique, value-added, rather than hegemonistic," Mintz says, brushing off concerns that government is interfering too much in the financial sector. "It's our mandate to make people's lives better."
Tim Fernholz is a writing fellow at the Prospect. His work has been published by The New Republic, The Nation, The Guardian, American Lawyer, and the Washington City Paper. He is also a Research Fellow at the New America Foundation.