Underbanked in America

September 24, 2011

It's scary, but it's true: a large and growing number of Americans would be hard-pressed to get their hands on money to cover emergencies, such as illnesses or unexpected auto repairs.

The National Bureau of Economic Research revealed in May that half of all American households would be unable to come up with $2,000 within 30 days to cover an emergency of this sort. What's more, an additional 19% said the only ways they could come up with that kind of money would be to pawn possessions or strike deals with payday lenders.

More recently, a National Foundation for Credit Counseling (NFCC) survey found that only 36% of Americans would be able to tap into savings accounts to cover a unplanned expense of $1,000. The remaining 64% said they would have to turn to family, friends or non-traditional lenders, pawn possessions, or forego paying other financial obligations to cover a $1,000 emergency, NFCC reports.

This is not just data exercise. I know personally of folks in this situation, and I suspect many readers do, also. A few years ago I urged my friend Linda to open a savings account anda to start making regular (albeit modest) deposits. A single mother of three who lives below the "poverty line," Linda agreed, but reaching and maintaining her goal of at least $1,000 in savings has been a struggle. "Every time I get close, something comes up. This time it was the truck," she said recently.

Sure, but things would have been worse had she not had $600 in a bank that she could use for those truck repairs.

"People often say they can't afford to save, but the truth is they can't afford not to," explains Gail Cunningham, a spokesperson for the NFCC. "Without adequate savings, consumers have poor resolution choices when an emergency arises."

Washington Hosts Topic

Washington was abuzz this week with talk of the unbanked and underserved - a sector of the U.S. population that exceeds 25 million households. There was a public policy forum on Capitol Hill September 21, sponsored by several think thanks, including the National Urban League, the Competitive Enterprise Institute and the Hispanic Leadership Fund. Check out this Web page for details and a Web cast of at least one panel discussion during that event.

A day later the House Financial Services Subcommittee on Financial Institutions and Consumer Credit brought together regulators, academics and advocates for consumers and banks to address the availability of credit for consumers, or more precisely the lack of affordable bank credit for low-income Americans. (The FDIC estimates that two-thirds of unbanked and underserved American households earn less than $50,000 a year.)

One of the witnesses at the House hearing, Gerri Guzman, Executive Director of a non-profit group called the Consumer Rights Coalition, gave a compelling account of how this plays out. "I know first-hand that traditional bank products don't always offer a realistic solution for people without a significant financial cushion to help absorb unexpected expenses," Guzman related. "I relied on a payday loan when I was in danger of losing my home. It was simple, transparent, and less expensive than bouncing a check or making a late payment," she added. "And I knew it wouldn't damage my credit rating."

Representing the Center for Financial Services Innovation, Melissa Koide, the group's Policy Vice President, raised concerns about lax oversight of nonbank lenders, and called for stepped up regulatory scrutiny and better consumer protections. And she pointed to the newly opened federal Consumer Financial Protection Bureau as a logical starting point.

Earlier in the week, the full Financial Services Committee announced that it has five bills under consideration that address small company credit needs.

And what about consumer credit and the unbanked?

My research suggests only one bill addressing unbanked Americans is on the panel's docket at present. That bill, titled the FFSCC Charter Act, would direct the Office of the Comptroller of the Currency (the federal regulator that charters many of the largest banks in the country) to establish procedures for chartering national nonbank credit providers to the unbanked.

154 million people worldwide received micro-loans in 2007; Just 13,000 of these loans were made to Americans.

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