MODERATOR THOMPSON: Good morning
and welcome to the FDIC's conference on
affordable, responsible loans for the
My name is Sandra Thompson, and
I'm the Director of Supervision and Consumer
Protection at the FDIC. It is my pleasure to
introduce our opening speaker.
Sheila Bair serves as the 19th
Chairman of the FDIC. She joined us almost
six months ago, and she has wide-ranging and
extensive experience working on issues
relevant to the banking sector. Her
experience includes serving as Commissioner on
the Commodity Futures Trading Commission,
Senior Vice President for Government Relations
at the New York Stock Exchange, Assistant
Secretary for Financial Institutions at the
Department of the Treasury, and most recently
she served as Professor at the University of
Massachusetts at Amherst.
I'd like to say at the outset that
Chairman Bair has made a huge impact on some
significant issues that are very relevant to
the banking industry. I mentioned earlier
that she hasn't been here quite six months,
and she has already addressed deposit
insurance reform implementation, policy issues
dealing with capital reform, Basel II, Basel
1A. She has established an advisory committee
for economic inclusion to help provide the
FDIC with advice on ways to bring more people
into the financial mainstream. And those are
just a few of the many items that she has
I didn't mention the affordable
small loan guidelines that we issued for
industry comment earlier this week, and I
didn't mention the industrial loan
corporations, the other high-profile and
challenging issue that she has had to face and
tackle head on during the past six months.
We at the FDIC are fortunate to
have Sheila Bair as our Chairman. I've had
the pleasure of working with her on most, if
not all, of these issues, and I can truly say
that she is committed, highly engaged, and
very motivated to come up with win-win
solutions. I know firsthand that she is
guided by two principles -- doing the right
thing and striking a balance.
She respects and is open to
different points of view. And this is very
important as she has had to consider on any
issue the views of the diverse banking
industry, the large institutions and community
banks, consumers, and the other regulators.
Her collaborative approach and willingness to
address tough issues puts us in the position
to come up with good solutions -- solutions
that work for the regulators, the consumer,
and the banking industry.
I might also mention that this
conference was her idea. We were at a meeting
a couple of weeks ago, and she challenged us
to help find an alternative to the high-cost
loan products that are offered to the
It is my privilege and pleasure to
introduce the Chairman of the FDIC, Sheila
CHAIRMAN BAIR: Thank you, Sandra.
That was a very flattering introduction, just
about the way we went over it.
The feeling of mutual respect and
admiration is truly mutual. I was pleased to
be the Chairman who convinced Sandra to accept
the job as the head of our Division of
Supervision and Compliance, which is the
largest division of the FDIC, and it has been
fabulous working with her.
Good morning, and welcome to our
program today on affordable, responsible loans
for military personnel and their families.
Thank you for your interest in this topic and
your support for our program. I know a lot of
you have traveled considerable distances. We
even have a contingent from Guam, and I really
do appreciate the time and effort all of you
are putting into this very worthwhile cause.
I would like to give special
recognition to General Andrew Egeland,
President of the Association of Military Banks
of America, who has provided invaluable
assistance in organizing this event. I would
also like to recognize our other guests from
the Department of Defense.
In addition, I would like to
extend a special welcome and thanks to our
speakers, particularly Congressman Frank, all
of whom have put in an enormous amount of time
and energy in preparing for this program
With this conference, we hope to
address a serious problem -- the pervasive
need for more responsibly priced, small dollar
loans. As we know from press reports and the
Department of Defense's recently-issued report
on predatory lending, military personnel and
their families are frequently turning to high-
cost providers for their financial services
The adverse impact of costly
credit on the military should not be
underestimated. According to the DoD report,
a recent study within the Navy shows the
number of security revocations and denials for
financial reasons increased from 212 in FY2002
to nearly 2,000 in FY2005.
The DoD report points to case
studies collected from military installations
showing that high interest loans, whether in
the form of payday loans or unscrupulous
automobile financing, can leave a service
member with enormous debt, family problems,
and difficulty maintaining personal readiness
for active duty.
Although high-cost predatory loans
are not the sole factor, they significantly
contribute to these problems. All of us --
regulators and members of the banking
community -- have a duty to help these
individuals and their families develop
alternative affordable credit options.
These alternative products could
be used to address an immediate financial need
or simply to help these individuals regain
their financial footing. Given the need, it
seems to me that banks have a perfect
opportunity to step in and offer more
reasonably priced credit.
Banks have the infrastructure and
the imagination needed to create an array of
affordable lending services, along with
savings plans, to meet the needs of military
customers. As we will hear today, there are
lenders that have found that this business has
manageable risks and can be profitable,
especially if the bank ties regular loan
payments to a savings account so borrowers
have an automatic mechanism to build a
Banks that reach out to establish
relationships with military consumers
participating in fringe financial services
will reap the awards of cultivating new full-
service customers by building relationships
that will strengthen as these individuals'
economic circumstances improve.
The broader question now is
whether the financial services industry and
their regulators can effectively encourage the
type of products, services, and outreach that
will motivate these customers to enter the
Indeed, this is the hoped-for
outcome of today's discussions. To further
our efforts, the FDIC recently released,
actually just yesterday, for public comment
the Affordable Small Loan Guidelines. These
guidelines explore several aspects of product
development, including affordability and
We encourage banks to offer
products with affordable, reasonable interest
rates, with no or low fees, payments that pay
down the principal balance of the loan, and a
savings component incorporated into the loan.
In addition, institutions offering these loan
products in a responsible manner will receive
favorable consideration under the CRA.
In addition to welcoming you
today, I also have the honor of introducing
this morning's keynote speaker, Congressman
Barney Frank of Massachusetts, the incoming
Chairman of the House Financial Service
And, Congressman Frank,
congratulations to you. The Steering and
Policy Committee nominated him to be the
Chairman of the Financial Services Committee,
and ratification by the full House is expected
Congressman Frank was first
elected to Congress as the representative of
the 4th District of Massachusetts in 1980. He
was reelected just last month overwhelmingly
to serve his 14th term. He is one of the most
influential members of the House of
Representatives, known I think as a principal
pragmatist for his non-partisan approach and
his ability to get legislation done.
He is certainly also a recognized
leader in affordable housing, and has
developed much of his legislative work
defining ways to increasing the availability
of affordable housing to low and moderate
income persons. He has championed protections
against predatory lending practices, and has
worked hard to encourage banks to reach out
and creatively meet the credit needs of people
who are not yet part of the financial
And I'm sure we all look forward
to a highly productive upcoming Congress in
the House Financial Services Committee with
Chairman Frank at its helm. And with that,
Mr. Frank, please.
CONGRESSMAN FRANK: Thank you,
Madam Chair, and thank you all for being here.
I was really eager to do this. I will tell
you -- you forget sometimes, and I got this
invitation and it's a busy week for us because
the majority has decided that they want to get
everything finished this week.
Well, they have decided that they
don't want to finish anything this week. They
want to leave it all for us, because all the
fun decisions were made before the election.
So all of the decisions no one wants to have
to make are the ones that are still pending,
and we'll inherit them, but that's part of the
job and it's a decision we would have made,
too, if we were in their shoes.
But at any rate, it has been busy,
so yesterday afternoon I was sort of saying,
oh well, I can relax tomorrow, the caucus
doesn't start 'til 9:30. And then, I looked
at my schedule, and at first brush I will tell
you this event fell in the category that
people in my business have, which is, why did
I agree to that?
Get out here from Capitol Hill at
8:15. But then, I remembered, seriously, and
I have cut down on the invitations I am able
to accept because of my new duties, but this
is as important an event as is going to be
going on in the financial services area. And
I am very grateful to the FDIC, to the members
of the Board for this, and to those of you for
Let me just set the general point.
Obviously, this is very important in the
specific. Helping the men and women who put
their lives on the line for the country, and
who at the very least disrupt their family and
make financial sacrifices, obviously we as a
society owe them much more than we can ever
pay. And anything that can be done to ease
their difficulty is really the patriotism of
the highest order.
So in and of itself, the specific
mission of improving the financial situation
for these young people, if you're worried
about the kind of thing you have to worry
about if you're in the military and facing
combat, then everything else ought to be a
And that's what you're here to do,
and I appreciate it, but it has broader
implications as well -- implications for what
I think is a central domestic issue affecting
this country, and that is, how do you change
public policy so that economic progress and
growth does not go forward in a way that
leaves the average citizen thinking, what the
hell do I care? Because we're in that
We're in a situation where the
average American does not see the connection
that he or she ought to see between growth in
the gross domestic product and his or her well
Now, I think there's an equity
issue here, but, by the way, that's based on
reality. We've got a situation where the
gross domestic product has been going up at a
very good clip. It recently tailed off, but
it has been going up at a pretty good clip,
three percent or more.
But real wages have been frozen,
and, in fact, if you -- depending on the time
period, five years, they've eroded. Fewer
people have health care. People are worried
about their pensions. That is, there has been
a disconnect between growth in the gross
domestic product and the well being of the
Alan Greenspan said this in 2004
to the Joint Economic Committee. "We have
done very well with increased productivity.
Increased productivity is being driven by
globalization and by the application of
technology, as much as anything else."
Both of those have two
characteristics -- and now I'm not quoting
Alan, I'll get back to him -- but
globalization and -- he did cite globalization
and technology as the main drivers of
productivity. They have one thing in common:
they exacerbate inequality.
Now, inequality is not a bad
thing. You can't have a capitalist system
without it. The problem is that you can reach
a point where you have too much inequality,
where it generates social unrest, or it may
even have negative economic consequences, and
you can get beyond what's needed for the
efficiency of the system.
Globalization -- obviously, the
key thing about globalization is the mobility
of capital. And one of things we know is
this: if you're in a negotiating situation,
and one party can pick up and leave, and all
the other parties have no options, the party
that has the option to pick up and leave has
an advantage. That's capital under a
globalized system. Capital is mobile.
Nothing else is quite as mobile.
People can't pick up quite as
easily. Governments can't pick up quite as
easy. So globalization enhances the
bargaining power of the most mobile element --
You also have technology, which
means that essentially if you're a high school
graduate with a willingness to work, you no
longer can make the kind of living you could
make 40 years ago. I mean, from the post-war
period into the '70s, high school graduates in
America could go to work in the steel or auto
or glass or rubber factories or elsewhere, go
into the building trades, make a good living.
That has become harder to do.
The consequence has been that
inequality has grown. And here let me go back
to Greenspan. He said, "We've done very well
with increased productivity, and that has
generated a lot of new wealth." But virtually
all of the newly-created wealth has gone to
the owners of capital, and none to people who
work in wages.
Now, obviously, the owners of
capital have to get a good chunk of it,
because otherwise the system doesn't work.
And that's where you come in, because your job
essentially in our system is to accrete small
amounts of capital from a lot of individuals,
bundle it up, and make it available to people
who can invest it productively. That's the
mediation function. It's very important.
It's one we're dedicated to helping you
perform as well as you do.
But when all of the increased
wealth goes to the owners of capital, what
happens is that the non-owners of capital say,
what do we care? Now, that's a problem for
this reason. Much of what generates wealth
can have short-term negative effects on some
You know, the model here is Joseph
Schumpeter's creative destruction, as he
called it, in which as the system goes forward
old forms of economic activity are destroyed,
and that frees up resources for the creation
of new wealth. And that's a good thing, if
the people who are the victims of the
destructive part can participate in the new
wealth. They don't think they are right now,
and that's the problem.
Now, you may say, what do I care?
Well, I have a view that that's unfair. I
think morally that's not right, but I
recognize you don't always win, you know, by
having the most moral argument. I mean, the
analogy that Adlai Stevenson -- once in every
speech, said them all -- "Governor, you're
going to have the votes of all of the thinking
people." He said, "Yes, but unfortunately I
need a majority."
Now, it was making cracks like
that about the people that probably helped him
not get a majority.
But I need a majority to deal with
Here's the problem. We are now in
political deadlock in this country. There
were measures that I would guess being in the
banking industry most of you think are a good
thing for promoting growth -- more engagement
with the global economy, trade, accepting
foreign direct investment, the ability to
adapt technology, which may mean outsourcing,
a reasonable level of immigration, not illegal
but legal immigration, the ability to bring in
people with skills.
None of those today command a
majority in the Congress. Foreign direct
investment shouldn't be -- that's a good thing
when people want to invest in businesses.
We're talking direct investment, not buying
equities. But after the debacle with Dubai,
when I think the administration made a
mistake, why somebody there didn't say, you
know -- to our good friends, and they're good
people there in the Gulf -- you know, this is
not the best time for you to buy seaports.
Could you buy, like, shopping malls or hotels
or office buildings or anything else? But not
airports and not seaports. It's not fair, but
that's the reality.
Instead, you got a reaction so
that some of us, including most of the
Democrats, wanted to pass a bill, and we did
in the House, to set up a regular welcoming
regime for foreign direct investment, which is
generally a good thing. And they wouldn't
even take it up in the Senate, because they
were afraid they would out-demagogue each
other and put in provisions that would make it
impossible for anybody to do foreign direct
For example, any investment of
more than X million dollars would have to sit
before a congressional committee for a couple
of months. Now, who is going to invest money?
And you don't know whether it's okay until it
sat for 30 days or 60 days before Congress,
all the -- all your competitors say it's
But that's -- now, we were able to
park that, but we can't get the good bill
through. And while nothing negative happened,
clearly businesses don't like uncertainly and
ambiguity, and it would be better if we had a
framework for them.
You can't get a trade bill
through. I've been critical of some trade
bills. I voted for the Vietnam trade bill.
It failed in the House under the Republicans.
They needed two-thirds. They didn't get two-
thirds. They got a narrow majority, but then
they were afraid to bring it up without a
majority, and it's being held in the Senate.
We even have objections to the
implementation of technology. When we passed
the bill, which I strongly supported, that
allowed those of you in the banking business
not to have to send people paper copies of the
checks, but to send them faxes, we got
complaints. People said, "Well, I want my
checks." I said, "Well, what do you do with
them? Do you put them in the drawer?"
You can get them if you want them,
you get a fax, and then they would say often,
"Well, okay, but why did you do it?" And we
would say, "Well, it will make the system more
efficient." And their answer often is, "Well,
what do I care?"
So the owners of the bank do well,
but it doesn't help me. There is -- so the
reason to break this deadlock and show the
average citizen that he or she does have some
skin in the game of economic growth is -- they
are able to park things that are pro growth.
We have a deadlock in the system.
People in the business community,
on the conservative side economically, have
had control for a while, and they have been
able to park measures that some of us support
that we think would diminish -- not abolish
but diminish inequality. And on the other
hand, people who are concerned about what they
perceive as inequality have been able to park
You might ask: well, how come --
you know, if you've got enough power to do
this, why can't you do that? The answer is:
in the American system of government, the side
that doesn't want to do anything starts off
with about a 25 percent advantage. I mean,
that's checks and balances.
So what we have is that each side
is able to use the veto powers to block
things. What we need to do is to work
together, so that we can show people -- the
average worker -- that they're going to make
some economic gains and then get the support
simultaneously for full growth.
Now, you had people in the White
House frustrated by this. There was a great
quote in July from one of the President's top
economic people who said, "This is very
frustrating to us, because we're getting this
great economic growth and we're not getting
any credit for it."
And the answer is, yes, you're not
getting any credit for it, because the average
citizen does not see himself or herself as the
beneficiary. And you tell them oh, no, no,
no, this is a great economy, and they give you
the answer essentially that Chico Marx gave
Groucho in that scene where Groucho catches
Chico red-handed, and he says, "Why are you
doing that?" And Chico says, "I'm not doing
it." And Groucho says, "What are you talking
about? I saw you." And Chico says, "Hey, who
are you going to believe, me or your own
The question is Americans say, you
know, who am I supposed to believe, you or my
own wallet? They believe their wallets.
Now, I think this is unfortunate.
And so I want to break this, and I want to do
it in a number of ways. But this gets me to
what is happening here and why I am so
grateful to Ms. Sheila Bair and her colleagues
for going forward.
This is an example of how we can
use one of the most powerful engines of the
capitalist system, the financial services
industry that performs that enormously
important critical function of mediating
between the individual pockets of wealth and
investment, and show how this can benefit a
broader segment of the society, how equity and
growth can go hand in hand, by reaching out to
this segment, by making special -- basically,
by saying to people, here's the deal.
Right now, if you are poor, you
are almost certainly paying a much higher
percentage of your income in transaction costs
than any of us in this room do. You're going
to payday lenders. You're going to check-
cashers. You're getting money orders. That's
if you're doing it legally and you're not
going to the leg-breakers. I'm from New
Jersey, so there is still some --
-- residual stuff going on there.
But those of us -- and it's exactly the
opposite of what it should be. The wealthier
you are in this society, the smaller
percentage of your income you pay for
transaction costs. And if you are poor, you
are paying a significant chunk.
And here we have this wonderful
thing -- our banking system -- and making that
available -- by the way, I think it is a great
chance for people in the banking business to
dispel some unfair myths, to make clear that a
well-run banking system is not just an
important engine of capitalist growth, but can
be a way for the society to improve the
quality of people's lives, by using the
efficiencies that we have and reaching out
some to people.
So that's why, as I said, this is
important for what you're doing for the
military, but I intend to work with Chairman
Bair and others to encourage you to make this
a pattern for going beyond the military and
reaching out to others and reaching out -- by
the way, not just with payday lending but with
check-cashing, with other services.
We've only begun to do that with
the cooperation of the regulators, the
financial regulators, with remittances. You
also have some hardworking people working at
very unpleasant jobs for low dollars and
sending them back to support their families
elsewhere in the world, and paying very high
And by getting the banks involved
in the remittances, and working with the
Inter-American Development Bank, so there are
banks at the other end where they can get a
wire transfer and cash it, because what good
is it to get it if you're in Guatemala or
Honduras and you can't cash it, we're helping
So I encourage you to take full
advantage of this, not just for the good it
does but because you will be setting an
example, frankly, of an important part of the
business community of the capitalist system
that is showing people the advantage and how
we can work together and why they have some
stake in this operation.
Now, let me turn to one other
aspect of this that's important. By the way,
we're going to try and do this with subprime
lending for mortgages. It is across the
board. And here's the one issue I will raise.
And, obviously, the question is: when we
reach out in this way, and we reach a segment
of the population that's below economically
where we've historically been able to provide
these services, how do we make up for the fact
that there's going to be a higher loss rate
there than among the very wealthy?
And this is a philosophical
question I've been dealing with, and I urge
you to take it into account. And it's this:
obviously, you wouldn't be encouraged by your
regulator to go into this business if they
didn't think that a great majority of the
people who take the loans were going to pay
them back. I mean, there will be more losses,
but clearly if it was going to be a very high
one it wouldn't make any sense. So you are
being encouraged to do this.
Now, how do we deal with the fact
that these loans make sense? Because most of
the people who get them will pay them back,
but a higher percentage of them won't pay it
back. And our historical model I think has to
be challenged. I don't believe this is
And what we've done is we've said,
look, if we're going to extend economic
services -- borrowing -- if we're going to
extend the right to borrow to a class of
people with shaky credit history, because we
know that most of them will pay back but a
higher percentage won't, here's what we'll do.
We'll make the ones who are going to pay back
subsidize the ones who don't. That's the
Let me give you another example
outside of here. The Bush administration came
to us and said, you know what, we like home
ownership. Let's have the Federal Housing
Administration, the FHA, lend money to people
who are below where we have been lending
before, because implicitly we know most of
them are going to repay the loans. They're
going to buy houses.
A higher percentage of them won't
repay, so here's what we'll do. We'll say
that if you're in this category, you pay more
up front and your insurance premium is higher
going forward. In other words, the 90 percent
of the people who are going to get those loans
and pay them back will pay higher than I
would, because they're going to subsidize the
10 percent who won't pay them back.
And my answer was, no, that's not
fair to the people. Why should poor people
who are going to pay back be the ones who
subsidize the poor people who don't pay back?
It's important for us to reach out. We have
to find some alternative ways to do that. We
have to cross-subsidize -- a dirty word maybe
to some people, but that's important.
Here's what I'm going to do in the
FHA model, and I'm going to try and think and
work with you on what's the alternative -- the
equivalent here. The FHA now, as many of you
know, can't insure premiums, it can't insure
loans above a certain dollar amount. And some
of you may like that, because some people see
the FHA as too competitive.
But I'll tell you, here's the
problem. Under the current law, the FHA,
because of this top dollar beyond which it
can't get into the business, it's to keep them
from doing luxury housing. So as a result,
they cannot insure luxury housing in Nebraska
They also cannot insure luxury
housing in Massachusetts or California. In
fact, they can't insure any housing in
Massachusetts and California, because the flat
dollar amount nationally that cuts off luxury
housing in much of the country cuts off all
housing in my part of the country and
elsewhere. So what I'm going to propose is
that we substitute for the dollar -- flat
dollar cutoff of the FHA a percentage of
median house price.
We do that with every other
housing thing. If you've got Section 8
housing, you don't get the same rental in
Omaha that you get in Los Angeles. We take
into account in housing of all of the
important economic factors in our lives. The
one that varies most I believe in price,
according to location, is housing. Other
things are uniform.
And the reason, again, is
mobility. If something is mobile, it better
have the same price everywhere in the country
or you'll go buy it somewhere else. But it's
pretty hard to buy the house in South Dakota
and move it to the lakefront in Chicago. So
geographic differentiation in price is a
What I'm going to do is put in a
bill that says that we will lift the cap, so
we can lend more to people above the current
level in high-cost states. That will make
money for the Federal Government, because
those people will pay back. And I will take
the money, if my bill is successful, that we
gain from that and recycle it, so that that
will take care of the higher loan loss rate
for the lower income people.
And that's the kind of principle
that we have to have, so I encourage that.
That's not just for the military. We will be
working with you, so you can expand the
ability of low income -- not the ability,
because they have it.
And I have to say here, banks have
not been the problem, and I keep telling my
liberal friends this. It is not that banks
say no poor people allowed. It is the lack of
sophistication, the fears, etcetera, that keep
people out of the banks, the fear of high
I want to work very closely with
you to enable a system in which you can
encourage lower income people to come in and
price things so that the people who are going
to make the payments, the people who are going
to pay back their loans, the people who can
pay their own way, pay their own way. But
let's find a way not to make them pay for
their -- that minority in their same economic
category who are going to forfeit and default.
And that's where we will work together.
But, in general, I think this is a
very important point. It's namely -- I plan
to talk about it -- that the banking system,
as it now exists in this country, is an
underutilized asset for the lowest income
people in the country. That we should take
advantage of the existence of the banking
system, and the function it performs in our
capitalist system in general, and together
make a real outreach effort.
Now, the committee on which I
serve -- and I hope to chair -- because it
also has the jurisdiction over housing, has
the largest component of minority members of
any. We have about 15 African-American and
Hispanic members together. They are eager to
work with you on this. I have staff that is
eager to work with you.
So I just want to close by saying,
again, thank you for what you're doing for our
military personnel, and thank you for setting
a model here with the military personnel for
extending this service to people outside the
military, and to extending banking services in
general to lower income people. My job will
be to work with you. You're in the banking
business, and I'm not, and I don't tell you
how to run your business.
I do want to work with you, so
that we can deal with that one issue that I
raised, which is, how do we extend these
services in a fair way, because it is a good
thing. And by the way, these things
To the extent that the lowest
income people, in availing themselves of the
services, are going to be charged for the
higher loan loss rate of the others, then
that's a deterrent. And to the extent that we
can work out a substitute forum to take care
of that -- in other words, what we're saying
is that, society, we're going to gamble.
And we know that 90 percent of the
people are going to repay the loans, or I
don't know what your figure is, but it has got
to be something close to that or it doesn't
make sense. We are, then, going to find a way
across the board to subsidize the other 10
percent, and that will allow us to subsidize
the others better.
And I think this is a case where,
I don't know, you're doing something that I
believe would enhance the profitability,
because, look, not all of these people are
going to be poor all their lives. You're
going to get them into the banking system, and
that's a good thing for them as well.
And I don't know -- some of you
must remember, as I do, Tom Lehrer, the former
MIT mathematician who used to do these
satirical songs. Just a cousin of Jim Lehrer,
by the way, Jim told me that one time. And he
had a number of funny songs he would write.
Actually, there's one that sadly
has become more relevant -- that they're
rioting in Africa, there's strife in Iran,
what nature doesn't do to us will be done by
our fellow man. It was sadly predictive of
some of what is happening.
But he had one song called the Old
Dope Peddler, and it -- I have a terrible
singing voice. I won't inflict it on you.
But one refrain was, it was the old dope
peddler doing well by doing good, i.e. selling
the stuff and making money and making people
happy. Not a sentiment I endorse --
-- I want to be very clear. But
in a much better context, you can do well by
doing good. You can perform an important
social service, both specifically and in
general, by giving the business community an
example of how you can make social
responsibility profitable and help us reunite
this country in favor of a growing capitalist
economy that -- with the benefits more widely
So I thank you very much. I am
very appreciative to the FDIC for doing it,
and you will have my full cooperation.
MODERATOR THOMPSON: Thank you
very much, Congressman Frank.
And I'd like the first panel to
come up. And while you're coming, I'd like to
frame the issue for the rest of us. Military
personnel have characteristics that have made
them attractive targets for predatory lenders
in the small loan market.
What are those characteristics?
On the one hand, 48 percent of enlisted
service members are younger than 25 years old.
They have limited experience with managing
finances. They are on their own without
guidance or assistance from their families.
And they may be receiving their first
On the other hand, they have
steady jobs. They are paid regularly and are
not likely to be downsized, outsourced, or to
quit their employment. They are also part of
a military culture which emphasizes financial
responsibility with a basic policy in place
that explicitly states that they are to pay
their debts on time.
Finally, active duty military are
geographically concentrated in and around
bases where they live. Studies show that
payday lenders and other lenders with high-
cost products situate themselves intentionally
in close proximity to the front gates of
Sound alternatives are necessary,
and to that end we begin our series of panel
discussions with representatives from the
military banking community. These are
institutions that are dedicated to serving
military personnel, and they have developed a
number of alternatives to address the credit
The financial institutions our
panelists represent are members of the
Association of Military Banks of the America,
the AMBA, which is a nonprofit association of
banks operating on military installations,
banks that are not located on military
installations, but they serve military
customers, and military banking facilities
designated by the U.S. Treasury.
The AMBA is ably served by Major
General Andrew M. Egeland. Mr. Egeland comes
to the AMBA after a distinguished career as an
Air Force Judge Advocate. In his last active
duty assignment, he served from 1993 until his
retirement in March 2000 as the Deputy Judge
He was headquartered in the United
States and worked for the Air Force. As a
Major General, he was one of two senior
partners in the Air Force military law firm
comprising more than 1,500 military and
civilian lawyers. Throughout his nearly 32
years of active military service, Andy held
top leadership and management positions as a
military attorney and served as legal counsel
to senior military and civilian leaders of the
Department of the Air Force.
He served overseas in Germany and
Korea, and traveled extensively in Europe and
Latin America. I'd like to thank General
Egeland again for all of his help in planning
this event and, in particular, organizing this
panel of outstanding bankers that are
dedicated to serving military personnel.
These individuals will discuss
features of responsible loan products they
have developed and the priority military banks
place on offering alternatives to predatory
lending and assisting servicemen and women
address financial emergencies as well as
regain their financial footing.
General Egeland has kindly offered
to make some opening remarks and introduce
this distinguished panel.
Thank you all, and welcome. And,
General Egeland, I'd like to turn over the
podium to you.
GENERAL EGELAND: First of all,
thank you for that unexpected introduction,
because the real focus is on the panel
But, Madam Chairman and
distinguished members of the audience, I am
privileged to be here to represent the
Association of Military Banks of America, and
to introduce the panel of distinguished
members of the military banking community who
will discuss low-cost, affordable alternatives
to products being offered to military
personnel and their families by the high-cost
providers mentioned by the Chairman in her
The Association of Military Banks
of America is in its 47th year of service to
the Department of Defense, and, most
importantly, to the men and women in uniform
and their families. And as was mentioned, we
are a not-for-profit association comprised of
community banks and large banks operating on
the installation or off the installation,
serving the military customer.
Now, each year the military
departments recognize their outstanding
military bank of the year. Now, the criteria
for the award and the selection process are
established by each of the services. The
association has no role whatsoever other than
to host the luncheon in which the award is
The criteria include much more
than providing specific credit products, which
is the focus of today's conference. The
military banks support our nation's military
personnel, and it involves a commitment to
service above and beyond the normal banking
And I'm proud to say that the
winning bank for each service is represented
on today's panel. And while not a current
winner, the remaining two panel members
represent banks that have won this coveted
award in the past. Starting on your left is
Jay Dreibelbis, President of the First
Community Bank Shares, Incorporated, in Texas,
which is a holding company for Fort Hood
National Bank, which is the Army's Outstanding
Bank of the Year for 2005.
Seated next to Jay is Don Giles,
the past Chairman of the Association of
Military Banks of America, and the President
and CEO of Armed Forces Bank and Armed Forces
Bank California, which is the Navy's
Outstanding Bank of the Year for 2005.
And I might add, because I said
the commitment goes above and beyond just
providing products and services, last month I
had the privilege of attending a ceremony in
Washington in which the Secretary of Labor
presented one of three national exemplary
voluntary efforts awards, known as the EVE
Award, to Armed Forces Bank for its equal
employment opportunity support program and its
commitment to community service.
Seated to Don's left is Tammy Jo
Snyder, a Vice President and the Manager of
the Tinker Air Force Base Branch of First
National Bank of Midwest City, Oklahoma, and
that is the Air Force Outstanding Bank of the
Year for 2005.
And I might add that bank won the
award for 2004, so it's almost an
unprecedented back-to-back winning of the Air
Force Outstanding Bank of the Year Award.
Sitting next to Tammy is Dawn
Bannwolf, Vice President of Bank of America
Military Bank, which is also an Outstanding
Bank of the Year award winner on more than one
And, finally, on my far left, your
far right, is the immediate past Chairman of
the Association of Military Banks of America,
and the President of Eisenhower National Bank
at Fort Sam Houston, Greg Oveland. Greg's
bank is also an Outstanding Bank of the Year
So I encourage you to read the
biographies of each of these individuals, not
during the course of the presentations but
during the break, and you'll see that a wealth
of banking experience has been brought to bear
on the topic for this conference.
Now, these bankers' commitment to
our men and women in uniform and their
families is representative of all of the
military banks that provide financial services
and support to the troops. And the AMBA motto
is, "AMBA supports our troops." And I've been
with the association for a brief period of
time, but one of the big rewards for me is to
watch the commitment and to see what these
folks do, and others like them, to support our
men and women.
And with that, I'm going to turn
it over now to Jay, and he'll begin the
presentation on the specific products.
MR. DREIBELBIS: Thank you, Ege.
Let me see -- do we have a slide?
There we go. Actually got it working.
It's kind of a scary thought when
you look across the audience and you see this
many bankers and regulators all in the same
room. That's frightening.
But, Chairman Bair, thank you so
much for having us here today. We're excited
about the opportunity to share what we're
doing for the military in our own places of
First, a little bit about Fort
Hood National Bank, six-time Defense of
Defense Distinguished Bank Service Award
recipient. We're very proud of that, and most
recently recognized in September of this past
year for our efforts during 2005. We have
seven on-post banking centers that are -- and
two of those are in AAFES locations in PXs
which are open seven days a week from 8:00 in
the morning until 10:00 at night, and 67 on-
Now, some of you may not be
familiar with Fort Hood, but Fort Hood falls
in the heart of central Texas, 355 square
acres -- I mean, square miles of land mass,
which is bigger than the District of Columbia.
So a huge facility and home to some 50,000
soldiers which we try to serve on a daily
basis, and we're excited about that
As Sandra mentioned earlier, many
of those soldiers are young and under the age
of 25. And because of that, we recognize some
special needs, and because of that we've
created some programs that we think fall in
the category of affordable and responsible
short-term loan products. And I'm going to
talk about a couple of those today.
The first one that we had that we
want to talk about is the housing assistance
loan, and when we tried to work with our
command group and identify specific needs that
the soldiers might have. Starting back in
June of 2004, a soldier eligible for on-post
housing at Fort Hood is required to pay a pro
rata share of that rent within 24 hours of
being notified that they have available
Now, as we mentioned before, when
soldiers are young, and at that particular
age, have not accumulated any type of savings,
they need the ability and the resource to be
able to get that cash quickly.
And in some other situations,
unlike their civilian counterparts -- and I
always use my children as examples -- who can
do a -- go and get a part-time job or work at
night, mow a couple of yards or do a garage
sale. Our military personnel don't have the
opportunity to do that. So they need
resources that can take care of them quickly.
The housing assistance loans are
made up to $1,000 with affordable repayment
terms, 12 months or less. We have to have a
quick response time and closing time and
funding time, so it has to be done within 24
hours. No collateral required, and most of
these individuals, since they have no credit
history at all, this helps them to build
One of the important aspects of
any loan program that we have to the military,
or to anyone, is communication. And in order
to do that, so that they know that it's
available, so that they don't go to an
alternative source -- so we work directly with
the on-post housing advisors and provide them
with information about housing assistance loan
programs, so that they know at the time, that
they notify the soldier that there's housing
available, that there is available financing
for them with the bank on post.
The next category we have is
overdraft repayment loan. And I know from
reading some of Chairman Bair's comments in
the past overdrafts are not a popular topic.
But, unfortunately, when we're dealing with
young people, as we talked about that are 48
percent of soldiers under the age of 25, they
They have temporary financial
needs, if they decide this is the only
alternative that they have, or back again
making mistakes, which we all do from time to
They need assistance in being able
to get out of the cycle which is created if
they get into the overdraft and then they find
their next paycheck puts them back in the
overdraft with routine experiences. And as I
said before, they don't have the same
resources that our civilian counterparts have
to get out of that cycle.
Because of that, we feel like it's
extremely important that we provide them with
a low-cost alternative. Our overdraft program
repayment loans have the ability to help them
avoid additional fees, not only additional NSF
fees, overdraft fees, but actual fees that
they have for merchants and fees that they
incur throughout life whenever they're in that
kind of a situation.
It also helps to build his or her
credit report, which they have none at that
time. And we also provide educational
products along with them, and we think that
education is very important, and I'll speak to
that in just a minute. But we provide them
with counseling and assistance on getting
their account back in line and getting them
back on track.
The idea -- this is creating a
long-term customer that can benefit both the
bank and themselves.
Communication on overdraft
repayment loans is a tricky one, and one that
I'm sure will be talked about, because it's
not actually something that you want to put
out there on the wall and encourage people to
overdraw their accounts and then go into a
loan program. So we do it after the fact.
When an individual gets into the
overdraft, we have ticklers that are built in
place, so we know when to call the customer
and say, "It appears that you have a problem
that you can't get out of on your own. We'd
like to offer you a solution." We do that in
both oral communication, and we do it in
written communication as well.
The last program that we have is a
small loan program. Many bankers around the
room are thinking about the minimum loan
amounts that they have and how difficult it is
to make money at small loans. We know the
last I think functional cost analysis the
Federal Reserve did was in '99, said the cost
of booking a loan was over $150, and then
another $19 a month in servicing. So when you
put the math to that in small loan programs
and affordable products that could be
profitable, it doesn't work real well
But we've identified some ways
that we can provide a product that we think is
needed out there for the military, and
sometimes we have to look at it from the
standpoint of investing in the future in
trying to build a customer that's long term.
We have a program that we call
Flash Cash, which is a loan program that's $50
to $500 with monthly installments from four to
seven months. Finance charge as low as $19.
Now, I know that some of you mathematicians
out there are already computing that $19 on
$50, and we'll talk about that later on, but
it's a relatively low amount when we compare
it to the alternatives that are out there.
The product saves the soldier from
having to spend more money borrowing from
high-cost alternative sources. In addition to
that, one of the most important things that we
can do for soldiers is help them to build
credit and establish credit, so that they can
enter into more traditional banking products
and loan products.
It doesn't have to be renegotiated
monthly, as some of the alternatives would
have to be. It does not require surrender of
personal property, as some of the alternatives
have. And it doesn't require collateral.
It's extremely important that we
provide media coverage out there for that,
because it's not the traditional loan products
that you see advertised. And they're looking
and their traditional idea is the place that I
can get $50 to $500 is not from the bank. It
usually is from an alternative lender of some
So we provide media advertising
especially at critical times of the year,
during holidays, during -- slightly before
deployments to make sure that the customers,
that the soldiers know, that it's available.
We also think education is
critical, and we -- any time that a soldier
takes one of these loans we actually have an
additional disclosure that we provide to them,
educating them and encouraging them not to use
this as a long-term alternative for their
financial needs, because it is very expensive,
and that they should seek other ways of taking
that and correct their financial condition.
I talked before about how
important education is, and we take that very
seriously at Fort Hood National Bank and have
several financial literacy programs. In fact,
during this past year we have been working
with the command group and have actually made
presentations on financial readiness to over
46,000 soldiers and their family members.
And we do that in a number of
different ways. We do consumer affair
briefings, where we actually work with in-
processing and out-processing soldiers, to
help to make that transition either into the
military or out of the military easier. We
talk about automobile financing. We talk
about automotive repairs, some of the door-to-
door sales and telemarketing schemes that can
befall them, budget and account
reconciliation, and establishing and
protecting your credit.
We also do pre-deployment
briefings, and certainly in recent years that
has been an extremely important part of our
job. We have soldiers at Fort Hood, both in
the 1st Cav and 4th ID, who are deploying to
Iraq and Afghanistan on a regular basis. And
right now we're going through that transition
So in pre-deployment briefings we
talk to them about the advantages of online
banking. We talk to them about preparing
budgets and deployment accounts and preparing
for the aspects that they will face while
their loved ones are deployed in foreign
We also do rear detachment officer
family readiness group to try and prepare
those that are left behind for the ability to
take care of those unforeseen problems that
always seem to befall soldiers while -- or
their families while they are deployed.
We provide adult education
programs. We have bank representatives that
conduct a one-hour class on the FDIC Money
Smart Adult Education Program, which is an
excellent product, and soldiers and family
members take advantage of that to learn how
the credit scores -- correcting mistakes on
their credit reports, and also maintaining
And probably the most important,
or at least we feel like the most beneficial
that we provide out there, is our work with
the command financial specialists. We have
bank representatives that host classes with
every command financial specialist to provide
financial readiness, information, and tools
that they can use to take back to their
In addition to that, we have an
entire department, which is liaisons of
banking professionals that stand available any
time to assist the command financial service
people in taking care of the needs of their
soldiers regardless of where they bank, and
helping them to reconcile their accounts and
make plans for the future in budgeting.
Education is extremely important,
and we think it is an important aspect. So a
combination of innovative loan products and
outstanding educational opportunities, and I
think Fort Hood National Bank, and we're proud
to say that we live up to our motto, and
that's "serving those who serve."
And with that, I turn the
microphone over to Don Giles.
MR. GILES: I am here to today to
talk about a program that we developed in
2003. But, first, I'd like to talk a little
bit about our bank.
Our bank is a privately-owned
bank. We specialize in military banking.
We're only located on military installations
around the country. Our average assets are a
little over $700 million. We serve all
branches of the service. We serve Army, Navy,
Air Force, and Marine Corps. We have 55
branches on 30 military installations in 17
states across the United States.
Other bankers kid us about being
the smallest bank that is located coast to
coast. We have -- we're on military
installations in New Jersey, Florida, Texas,
North Dakota, California, and Washington. So
we're kind of spread out.
Approximately, I would say, 95 to
98 percent of our customer base -- these are
active duty dependents of or retired military.
So we are really a true military bank in that
we are located only on military installations.
So that's a little background on the bank.
What I'm here today really to
mainly talk about -- I want to talk about a
few other programs we have -- but really is
our workout loan program. And this program
gives a service member an opportunity to work
out of debt through a structured repayment
On Saturday mornings, usually our
senior executives and myself spend that time
kind of brainstorming on what we can do,
what's going along good at the bank, what's
not, and I guess in early 2003 we started
looking at a number of our customers that were
-- check-cashing places were bringing in on
paydays, and just stacks and stacks of checks
of our customers, and cashing those checks on
payday, and thus causing the account to go
And we also have a mechanism where
we monitor overdrafts on our accounts. And we
wanted to come up with a program that -- could
we offer something to these folks so they
wouldn't continually be overdrawn or go to the
check-cashing or payday lenders and offer an
alternative to that.
This was something that we had to
think really kind of hard and long, because,
well, how would the OCC, our regulator, look
at this, because if we would be making a loan
to somebody who really wouldn't qualify from a
safety and soundness perspective, but at the
same time we felt like we needed to do
something, because it was just churning over
and over again.
So we came up with a plan. I
challenged our senior lender and consumer loan
department to come up with some ideas. We
tweaked that some and went to our board of
directors, who is made up of retired military
folks and other civilians who are non-military.
And they left -- blessed the
program and told us to move forward, so we
started the program in the summer of 2003.
The workout loan program is an
alternative, as I mentioned, to a payday loan.
It's a new start. It helps borrowers regain
their financial integrity, to try to get them
on an even keel and where they can make their
payments on a regular basis.
It provides an opportunity for the
-- an opportunity to pay back debts and to
rebuild their credit. We tell our borrowers
that if they will repay us on time, then this
is reported to the credit bureau, and this is
going to raise their credit rating, and, thus,
in time their credit rating will increase.
So loan decisions are not based on
the credit report. If you based it on the
credit report, you're going to see collection
items you're going to see chargeoffs, you're
going to see terrible past dues, and it's
nothing most banks or credit unions would
Loan payments are automatically
debited from am Armed Forces bank account. We
ask the customer to have an account, either a
checking account or a savings account, with
us. We want to continue to monitor the
deposit side, because if we don't monitor the
positive side as well as the loan side, then
they're going to get right back into the cycle
So we're real diligent on our
collectors about watching that to make sure
they don't fall back into the cycle.
Sometimes we have them in a checking account,
we've got to move them to a savings account,
because they continue to write checks.
Paid loans are reported to the
credit bureau. We've already talked about
that. It will improve their scores. Monthly
payments are designed to fit their budgets.
There is no point in making these loans if
you're going to make the payment such that the
person can't afford it. So we're real
conscious of that. We try to structure
payments where they will not cause the person
to be overdrawn.
Again, they must have an account
with us with a direct deposit relationship.
Borrowers must maintain adequate funds in
their account to make the loan. That's pretty
obvious. Borrowers must keep their Armed
Forces bank account in good standing with no
overdrafts. They sign an agreement at the
time that the loan is made that they will not
overdraw their account, so they won't fall
back in the same pattern.
Borrowers can take up to 24 months
to repay the loan. This is really depending
on the amount they borrow. We will -- we have
had -- made some exceptions where we've gone
longer where the amounts are larger. Loan
amounts are generally no more than the one
month's gross pay.
A workout loan is a fixed 18
percent. There is no application fee, no
closing fees, no other fees. It's just a flat
18 percent, and there is no collateral
required on the loan.
The program itself, let's see,
started in the summer of 2003, and during this
period of time we have originated over 12,000
loans, about $13.5 million. It started out
that the average loan was somewhere around
$900 to $1,000, and that has gone up, and
today we're making somewhere around a little
over $1,000 on the average loan.
Some other initiatives that we
have, I'd like to just mention those. We do
consumer education classes, either one on one
or in briefings, and on the installation. We
work real closely with the installation on
these education classes; the same thing that
Fort Hood does.
We have increased our debt-to-
income ratio. We used to be at 36 percent,
but we have raised that to 41 percent, so more
people will qualify for loans. We also offer
a low fixed rate credit card that could go as
low as $300 for the low income folks.
We also have a preapproved ready
line. That's really for more of our larger
balance customers, where we preapprove them
for larger amounts, so if they write a check
and it's -- rather than overdraw their
account, it would draw against this ready
reserve. And then, when -- they can repay it
either over time or they can -- whenever they
come into their money, they can pay it back
And then, we also have a six-month
starter loan that we offer to folks who have
no credit whatsoever. And this has been
pretty successful, too. So those are just a
few comments about other products we have.
And rather than me get up here and
continue to talk about the program, I think
the best thing I could do is probably just
read a few comments. We get thank-you letters
from customers, and let me just spend time
just reading you a few comments. And this is
from an Army -- I don't know the rank, but I
won't get into the name.
"In these times of struggling
financial situations for veterans and their
families, it's nice to know that there are
people like you to help them. The
introduction of this workout loan program is
an excellent concept, and I believe you are
the only bank that offers it."
Another letter, "Thank you so much
for your help that you provided me. It's not
very often that in this fast-paced life that
we live that people are concerned and
thoughtful enough to get the job done. You
have given me the ability to face this surgery
with confidence that I don't have to worry
about paying bills."
The last letter, "I am very
thankful for Armed Forces Bank. Without the
workout loan, it's going to allow me to move
forward financially and emotionally. I truly
worried if I would ever get out of the
consistent advanced cycle. You and your team
were excellent and supportive throughout. God
bless Armed Forces Bank."
This loan program that we've got
is not the answer. It's a big problem out
there. But maybe it's a small step forward.
All these panel members up here have other
programs that are similar, and we're glad
today to share what we do.
MS. SNYDER: Thank you, Don.
I've been reminded several times
that I -- my speaking, I am very soft-spoken.
My family, especially my husband, would
strongly disagree. So --
-- if for some reason you cannot
hear me on the back row, just wave or do
First National Bank has been a
partner with Tinker Air Force Base even before
it was an Air Force Base. Back in the early
'40s, it was Tinker Field. That's when
American State Bank, which is now First
National Bank, family-owned, by the same
family then as it is today, began their
Tinker Air Force Base is the
largest ALC, Air Force Materiel Command, and
Tinker's largest organization. The facility
provides depot maintenance, management
expertise, product support, supply chain
management, as well as installation, services,
and informational support for 31 weapon
systems, 10 commands, 93 Air Force Bases, and
46 foreign nations.
More than 14,000 civilians and
military personnel perform the mission of the
ALC, and another 10,000 people perform the
missions of many associate organizations that
call Tinker their home.
Together they make Tinker Air
Force Base the single site employer in
Oklahoma with an annual payroll exceeding $1.1
billion, and the statewide economic impact
estimated at more than $2.79 billion. Just a
little background there.
The mission, the need in
education, is what drove us to prepare the
program we call Second Chance Lending. With
the numerous commands on Tinker, as mentioned,
it became evident that Tinker's leadership
needed something to help their troops with
their finances. There seemed to be a large
and increasing number of military getting
larger in debt.
The problem with just
consolidating a loan just to pay off their
debts, there is no follow-through. And what
you're going to hear it today, you've heard it
before, and you're going to continue to hear
it throughout -- it's the education.
The Tinker leadership -- they
needed financial education. These troops need
the education. They needed a place to send
their troops for some type of consolidation
loan, but also needed the education to follow
it. There was a need to help relieve some of
the pressure from our leadership, so they
could focus on their mission.
They were spending too much time
helping their troops with their finances and
having to answer calls from collectors.
Second Chance Lending was designed for
Tinker's leadership. It was designed for
those who want to have a military career,
career goals, and professionals with ethics.
They are committed, and they are focused.
But because of a financial debt,
due to circumstances beyond their control,
they cannot get ahead. The reason this was
designed for the leadership is because they
know their troops. They know the person's
background, family, their work, their job. Is
this someone that needs that second chance?
Someone that if they could not get the help
most likely would end up leaving the force,
getting into trouble, possibly start failing
at their job, their relationships, their home?
When you're in debt, depression
kicks in. And when that happens, it's very
hard to get back your self-esteem. If there
is nobody backing you, then why try? A lot of
times that is where the mind-set goes is into
the depression. The troops need to focus on
the mission at hand and not worrying about
what collection company is going to be calling
These individuals that we want to
keep in the military just might be our next
first sergeant or chief at the next command.
If they were to get a consolidation loan, if
they were to try to get a consolidation loan
on their own, nine out of ten times they would
be declined because of the collections, the
repossessions, credit scores, 500, 300, 400.
They do not have the qualifications to qualify
on their own.
Because of these conditions, they
end up getting further in debt by getting more
debt to pay the first part of the first debt.
The loan program that we have is a minimum
between $1,000 to $5,000. The history with
the military on Tinker is that the minimum is
to be about $1,000.
If the amount was less than
$1,000, then we usually find another way to
help them out, and that usually requires a
session for several months of one-on-one
The process starts when their
superior calls and sets up an appointment for
that person. We go over their debt dollars,
look at their monthly budget, if it's even
possible to consolidate the debt. The program
is not offered by the bank. The Second Chance
Program is only offered by Tinker's
The program is written to their
needs, and they're the ones that approve the
conditions. We do not offer, nor discuss, the
product unless we are contacted by the
superior for consult. This loan is done as a
short-term fixed-rate loan, no longer than
their date of separation.
The condition of the loan is they
have to open up an account with First National
and have their direct deposit. It is an
unsecured loan. There is no collateral, no
co-signing. At the time of the closing, the
superior, the military person, and our loan
officer are all together.
Part of the loan requirement is
the military member's superior and our officer
sign a written agreement. The signed
agreement basically states that this loan is
being done only at the request of the
leadership, that there is no other
alternative, and the leadership of Tinker Air
Force Base believes, because of the
circumstances, that this military member
deserves that second chance.
It further states that the
superior is kept abreast of the troop's
progress and, if needed, will help First
National contact the military member, if for
some reason contact has failed. Furthermore,
the superior and the bank officer will let
First National Bank know is that person is
being transferred, going to be TDY for more
than 45 days, or if anything unusual has
happened within their life or their job.
The reason for that is because if
something has happened within our life, our
finances will always follow it. The signed
agreement by the superior is basically what
our collateral would be.
The document also states that the
troop must keep their account open until the
loan is paid in full, and during the entire
time of the loan they are to meet with the
loan officer, reviewing their monthly budget
through this -- through to maturity.
They do not get just a
consolidation loan to pay off their debt.
They get the financial education monthly. At
the time of closing, a monthly budget is
worked out for their expenses. Each month the
troop and the loan officer review their
expenses, making sure they're on track, if
they need to adjust the budget.
During this time, they are taught
how to use a checkbook, what a checkbook even
looks like, the register, how to balance that
checking account. They learn about savings.
Part of the monthly budget is applying money
to a savings account if that's possible. They
learn how banking works.
Furthermore, if possible, we apply
more of the principal to the loan within the
budget to get it paid off quicker. It's the
education that's the most important part of
the program. To be eligible for the Second
Chance, you have to be referred by your
superior, you have to agree and maintain the
financial education process throughout the
The end result is that hopefully
at maturity they have learned, during the life
of that loan, financial management, so that
they do not fall back in that circle of debt
that we call the black hole.
Another reason the agreement was
designed so the superior signs is not only to
lessen the risk for us, but to show that
military member that they have the trust and
they have the faith in them. This brings back
to their self-esteem.
It's amazing how when the loan is
closed and everything is complete, their
entire body language changes in an instant.
Giving a consolidation loan, or helping
someone with their finances just once, well,
it doesn't work. That's just the quick fix.
By relieving financial worry, it
helps with their mental and physical well
being, so they can focus on the mission that
we need them to focus on. Overall, that's the
most important part is to have a successful
We've had this program for almost
three years, and to date it has been 100
percent successful. Also, there are numerous
other programs, financial education classes
are conducted, monthly/weekly on base at any
time, any day, nights, Sundays, Saturdays,
whatever the need is. We stay in close
contact with all of the commands, our first
sergeants, or chiefs. What they need, we do,
and we work that out with them.
Dawn, I think it's your turn.
MS. BANNWOLF: Well, Chairman
Bair, thank you so much for having us up here,
and we're really pleased to be part of this
I'm with Bank of America Military
Bank. I think you probably have heard of Bank
of America, but many of you probably didn't
know we actually have a military bank segment
that's headquartered in San Antonio, Texas,
Military City, USA, and was founded back in
1920 by two Army officers, because they just
felt it was a big challenge to meet the
banking needs of this highly mobile group of
folks -- people serving our country in such an
You also may or may not know we
have especially designated military banking
centers. Some of them are located on
installations. There are 34 such centers. We
also have facilities in the State Department,
in Census Bureau, as well as the Pentagon. So
while we serve outside the gates at places
like Fort Sam, Fort Riley, Fort Stewart, we
are also honored to be the on-installation
banking center as well.
About 200 of our retail banking
centers, which may be located near a military
facility, also offer these special military
bank products and services. So when I talk
about rates and things that we offer, you may
not find those in every Bank of America across
this country. They are going to be in
So you might say, "Well, how come
that woman told me that there was a loan for
12.99? How come I'm not seeing that?" Well,
that is why. But if you looked on our
website, www.BankofAmerica.com, and then do
forward slash, military, you will see
information on all of our products and
services, loans with our rates noted as well.
We also have the honor of
operating the Department of Defense's overseas
banking contract. That's an open bid process,
and we currently operate more than 100
locations overseas -- Germany, Okinawa, Gitmo,
or Guantanamo Bay and soon Italy.
We're everywhere the Department of
Defense has asked us to be -- United Kingdom,
Okinawa, Germany for example -- so we're very
pleased to work with a number of the banking
liaison officers here in this facility as well
as we work to serve the soldiers or sailors,
airmen, and marines and their families.
I think what's really important
here is the commitment and the passion that
you're hearing from the folks on this panel.
We're here because we want to serve those who
serve, to use one of my colleague's bylines.
I think that's really important for you to
Are we in it for the money? As
you can hear the returns in the numbers that
Don was able to quote, there is not a lot of
money to be made, but it's in salvaging the
relationships and doing the right thing and
doing things that Tammy mentioned -- working
with those commands -- because they're there
to take care of those soldiers or the airmen
or the marines or the sailors, depending upon
the branch of service. And we want to be an
extension of that and offer additional help.
Now, Bank of America Military Bank
offers many of the products and services that
you've heard discussed today. We're at the
halfway point, so I can kind of point to them
and say, "Yes, we do all that, too." There
are some additional things as well. We, too,
have unsecured loans of $500 or more, and I'll
just quote you some stats. This is the low-
tech side of the table, so no powerpoint!
Current APR of 12.99. If you have
loans greater of $2,000, we reduce that APR to
10.25. But there are no fees associated with
the loan. There are no prepayment penalties.
The key product we want to discuss
is our unsecured starter loan for junior
enlisted. These are young men and women just
getting started with their careers in the
service, and so whether you're in the service
or not young people in general have a
challenge getting credit. And so we're being
mindful of that and working with them to offer
them an opportunity for lending in a positive
We also have a first-time auto
buyers program. If you're a young kid, you
want a car, you want a fast one, so we want to
make sure you have a loan product to do that.
Obviously, we want to have direct deposit and
a guarantee of repayment.
But we also have a condition where
we want you to buy it from an auto dealership.
You probably go, well, why? Because there
are too many things going on that it's tough
for those service members to check out, is it
really a good deal on -- just as an example --
on eBay or maybe at that corner lot where they
just have a couple cars out there saying "for
We want our service members to be
safe when they make that kind of investment in
purchasing a new car.
But something that FDIC
particularly had asked me about was our credit
line, and that's available for overdraft
protection for our checking accounts. Now,
the maximum amount that we offer on that is
$300, but it's revolving credit. So as you
pay that down, obviously that frees up more
The APR on that is 11.99. It's a
big difference than some of the other numbers
that you might hear.
We want you to pay a minimum of
three percent, or $25, whichever is greater.
We're blessed that we have more than 16,700
ATMs, 5,700 banking centers across the
country, and online banking, because we have a
highly mobile group of people. They like to
bank online. This is all about convenience
for the service member.
If you're deployed and you're in
Afghanistan, you're in Iraq, you're in Bosnia,
you don't want to have to be worrying about
your banking. You've got too many other
things on your plate, too many other things to
worry about. And if we can relieve those
apprehensions, you're going to get letters
that Don cited talking from his customers,
that all of us up here at this table have
received, saying thank you very much for
taking care of us.
When I sit and I look at other
things that I have heard Chairman Bair
mention, encouragement of savings -- savings
is incredibly important. A number of people
in this room have played a leadership role
with Military Saves, and, again, encouraging
our service members to set aside some dollars
and cents. It's not just service members.
It's everybody in this country who could set
aside a few more dollars.
And as a result of that, Bank of
America's military bank, we've got a separate
product with a couple checking accounts. If
we can get that service member to give us
their direct deposit, and they put aside 10
bucks a month for six months into a savings
account, we will match it and give them $50
bonus. And if they're further along in their
careers or at another stage in their lives we
have an account if they put 100 bucks aside,
we'll match it with $100. You may have seen
some pretty incredible commercials lately, and
that's that "Keep the Change" program. That's
kind of fun, where you use your debit card,
and instead of getting charged $5.17, you get
charged $6. That additional money goes into a
savings account, and we match that for three
months, and then after that five percent over
So there a number of things, as we
are trying to encourage that savings habit,
because things come up. Maybe something
happens to your car or something breaks down,
and you just don't have the cash. Maybe the
compressor has gone out in your air
conditioner. Who knows? But this way you've
been able to kind of set aside some money, and
I think that's important, because we can
incent these service members to save.
In closing, you heard a lot about
financial readiness. All of us are available,
at the request of the commands, to provide
this kind of training. It takes shape in a
lot of different forms, and that is what is
kind of neat about this panel -- you get to
hear what different people are doing.
And you have people that are
offering real basic budgeting. This is -- as
Tammy said, this is what a checkbook looks
like. Just because you have checks doesn't
mean you have money. Real basic kind of
things that you need to go over. But that's
not just limited to service members. That
applies to many people in our country.
I also know that you'll see folks
at this table who are not here to just work at
a bank because it's a good job. They have a
passion for serving the military. We have
people that get up at all hours of the day and
night to go meet planes at Fort Campbell as
the 101st came back. We have people that
stood in line to pack things to send off to
Iraq for the 3rd ID at Fort Stewart during one
of their deployments.
We pay attention to all of that.
We do it because we want to, because it's
important, and it's for the respect that we
have for those that have given so much and
continue to give, to serve our country. So
it's not just a job for us; it's something we
believe heavily in. Many of us have ties to
the military, and we're just honored to be
able to be of service.
Thank you very much.
MR. OVELAND: Thank you, Dawn. I
represent Eisenhower National Bank. We're
part of a small independent banking group in
San Antonio, Texas, and we've been proudly
serving the military since 1941. We offer
worldwide military banking services to the
military regardless of rank or your branch of
the military service.
We currently have and serve the
five military installations in Texas. We all
here presenting today have been competing with
one another, directly or indirectly, for a
number of years. And none of this information
has been shared amongst ourselves until
preparation for this meeting. And I think
that you will have noticed that we're all
taking notes on one another here as well as
But I think you'll notice there's
commonality in some of the products, because
we've independently identified some of the
common issues and needs of our military
customers. And at Eisenhower Bank it is no
I have two products, and the first
product I'd like to present is our First Loan
Program. Basically, for many, many years, we
noticed that in particular, our lower E grade
-- those are the privates, basically, up to
the PFCs -- that they were having difficulty
getting credit extended them, their first
credit experience extended to them.
And so we developed a loan whereby
a young man or woman in the military can come
in and borrow unsecured their first loan
experience with no guarantor, co-signor, or
collateral. We took the position that just
because someone does not have any credit
doesn't necessarily mean that they're a bad
credit risk, and so why wouldn't we give them
a chance? And we did.
Our First Loan Program process
starts first by the specific market manager or
credit underwriter of that military
installation personally educating this
individual one on one regarding what
establishing good credit means, how it is
done, how it affects your borrowing costs,
your insurance costs in the future, and,
obviously, your lifestyle in the future.
We also educate them about the
impact that poor credit can have on their
military careers, that poor credit can result
in them not being deployed, which was
mentioned earlier, and it can also jeopardize
their security clearance, which is required in
many of the jobs. And if that is not
maintained, that security clearance, then they
basically run the risk of being discharged
from the military service. So it's very, very
important for them to keep their credit at an
A plus rating.
After this financial counseling,
there are two types of this short-term loan
that we offer. One is an unsecured loan up to
$1,200, the interest rate is 16 percent, it
amortizes monthly over a 12-month period. We
do direct debit their account, and we do
require that they have their direct deposit
with us. But they do not have to have any
credit prior history, and, again, no
collateral, no co-signor, no guarantor.
The other loan is a secured auto
loan. This would be their first auto that
they had financed. It's up to $12,000, the
interest rate is nine percent, it amortizes
monthly for 24 months. We've actually
extended that a little bit beyond the 24
Again, we direct debit their
deposit account that they have with us. There
is no credit history required again. The auto
is used as collateral, and there is a
requirement of 10 percent cash put up --
basically, a 10 percent skin in the game. And
we go up to the NAD value of that vehicle.
The next product I want to present
is Eisenhower Bank's Second Chance or
Overdraft Workout Account. And this account
was developed to help the customer who had
mishandled their checking account to the point
where a negative balance was consistently
being carried in that account, and their
overdraft limit was constantly being drawn
upon throughout the month to cover checks
written. They're in that cycle.
When the customer reaches this
critical point, they no longer have their full
take-home pay to cover their expenses, living
expenses, since their overdraft is set up to
automatically be paid first when their
paycheck is deposited at the beginning of the
In essence, the customer will be
forced to live on considerably less money than
what they are paid. Consequently, many of our
customers become overwhelmed by the situation
and seek to borrow money elsewhere, many times
a payday lender or other such creditor at
rather high interest rates.
Or some of them have moved their
direct deposit to other financial institutions
before this bad credit report can be made by
the bank, and the bank -- our bank -- will be
left with the position of losing the customer,
number one, having to charge off the funds
advance, pursuing the customer for non-
payment, and thus damaging their credit
rating. This is obviously a lose-lose
situation, and it's just not something that we
wanted to tolerate.
So we developed a solution that
is, again, called the Second Chance Overdraft
Workout Account. I think it's best
illustrated by this example. The example is a
customer with a direct deposit of pay of
$1,000, who has a constant $600 overdraft
amount, they're in the red by $600 on a
constant basis, as a result they're living on
not the $1,000, but the $400 left after the
$600 overdraft is paid at the beginning of the
month in their pay.
Our Second Chance Overdraft
Workout Account works by moving the negative
overdraft balance -- in this case it's the
$600 that I'm mentioning -- into a savings
account at the bank. Obviously, since it's in
the red, it's not going to accrue any sort of
interest, but it is into a savings account
that we set up for them.
What we do, then, is the balance
is then paid from direct debiting the
customer's direct deposit of pay checking
account. When they get paid, we debit it $200
each month for three months, and the customer
receives at -- their next direct deposit pay
they receive out of that $1,000 they now
receive $800 versus -- to live on versus the
$400 that they had been living on and really
having difficulty living on.
Once it's paid in full, a smaller
overdraft account balance -- or, excuse me,
overdraft limit is given. Normally, it's
$150, $200, or so, depending on the
circumstances. But not enough -- as we say in
Texas, not enough rope to hang themselves.
And we allow them to keep the safety of the
overdraft service, but at, again, a more
manageable level, and the savings account is
able to be retained by the customer past this
This account was designed to help
the customer really to regain a solid
financial standing and retain them as a
customer. There are no fees, there is no
interest, there is no cost to the customer for
this account. We merely have designed this to
retain the customer and to get them out of
this vicious cycle that many of them have
We have special computer reports
and designated personnel who monitor our
customer accounts daily on a proactive basis
to identify those customers whose deposit
accounts may indicate the characteristics of
difficulty in managing their checking
Once identified, we quickly
attempt to contact these customers through
various means. First, letters, which quite
frankly is probably the least effective, the
phone calls is next, the cell phone calls is
-- follows, e-mails we will send, and we even
now are starting to use text messaging to
contact these young men and women.
When contact is established, we --
our trained staff will explain why they are
being contacted and offer the Second Chance
Account. At the same time, we offer the
financial counseling, which is part of all of
the programs I think that have been presented,
is explaining to these young men and women
about the dynamics of credit and dynamics of
account management and all. Very, very
We offer them this individualized
counseling, and we've had a number of
responses. Most are very thankful, most will
take the extension of overdraft workout
account. We have actually had a number of
cases whereby that the young men and women
will break down in tears. They've been living
in this hell of not knowing what to do.
Most are first generation bank
customers in their families, and we're able to
-- they can't go to their families, because
their families don't have credit. In fact, a
lot of their families are asking them for
money. What we're able to do is provide that
assistance and get them out of it, give them
that ladder in the well as they say, to climb
out of it, and so we've had a number of great
I will tell you that we do have
some that actually tell us to mind our own
business, because they'll manage their account
how they wish to. So it's not always
successful. There are those that are rather
However, since we started offering
this account in 2003, we have set up over 400
of these accounts and a retention of those
first that have taken it back in 2003 and
2004. Our retention rate on those people,
even as of today, is over 50 percent. They've
stayed with the bank. In the old days when we
didn't have this account, we lost all of them.
So we have a retention rate of over 50
And to our surprise, the savings
account that we have for that same group of
people, we've had them -- we've had 25 percent
of them retain that savings account and
continue to make deposits into it. So we've
developed now not just one account, a checking
account, but also a savings account, and that
savings account has provided the vehicle for
them to save money for their future and for
their unforeseen costs.
We are -- all of us here want to
thank Chairman Bair for having us up here, and
the FDIC. We are very proud, as you can tell
from all of us, about the military. And also,
I'm very thankful of the fact that the FDIC
has come forward with this issue, and we're
airing it today. And if any of us can be of
any help, we're certainly here waiting to
So thank you.
MODERATOR THOMPSON: Well, that
was really great. That was very inspiring.
And what I'd like to do is open it up for
questions. I think we have microphones set up
throughout the audience, so if you have
questions please raise your hand and the
microphone will come to you. But I would like
to ask a question first, if you don't mind.
We've talked a little bit about
some of the positives of these programs. Can
any of you speak to the collection procedures?
What happens when someone doesn't repay the
loan? What kind of contact is made with the
military installation? How do you handle --
what are your procedures for non-payment of
these loans? And I'll throw that out to
anyone on the panel.
MR. GILES: I'll jump in and
answer that question. That was one thing I
wanted to cover when I did my presentation but
I left out. The program that we started, we
are having around a 75 to 80 percent success
rate. In other words, we're charging off
around 20 to 25 percent. And when you think
about the customer base and the lack of
literacy in the financial management area, we
feel that that's a success.
Is it a 100 percent success? No.
But it is a step forward in the right
direction, and we see that as a big
MODERATOR THOMPSON: Okay. Anyone
I just had one quick question, and
that was for Dawn. On your savings account --
is it a restricted savings account? Can the
military personnel access the savings at any
time, or do they have to maintain a certain
amount for a period of time?
MS. BANNWOLF: Through our Liberty
and Liberty Plus products, that is just a
"regular old savings account." And it has to
be an automatic debit into that account, those
$10, and then it -- and they have to maintain
that for that six-month period, and then at
the seventh month is when we add the bonus to
And after that, technically, yes,
they could close out that account and say,
guess what, I got a great return on my money,
but we're, of course, not encouraging that.
MODERATOR THOMPSON: Okay. Great.
MR. LOWERY: Yes, I have one
question. Tammy, you mentioned in terms of
your loan dealing with the military leadership
-- I'm Charles Lowery with the Center for
Responsible Lending. We've done a lot of
outreach to military installations on short-
term lending, and it seems that the military
members often go to the payday lenders,
because they don't want their leadership to
know about any of their debts. They are
concerned about even though that would be a
good source for them, they turn away from that
and they go outside the gates to these
But your program really deals
specifically with the leadership. How do you
-- how does your program seem to overcome that
problem where the service member doesn't want
their leadership to know about their issue?
MS. SNYDER: Well, the one -- the
leadership finds out about the debt from those
payday lenders. They have already been there.
They have already gone down that track, and
there is no return.
Our first sergeants and our chiefs
work just right in the neck with our airmen.
You would have 2- to 300 airmen per one first
sergeant or one chief, and their days are
spent answering phone calls from collectors or
payday loan companies or check cashing
companies threatening to cut off legs. I
mean, it just -- it gets really hard core.
So the Second Chance Program takes
them from that hole that they already got to.
So the learning process already started.
They were there. They went down to the
bottom. So we're taking all of that, wrapping
it into one, so it's not like, well, I just
got in debt, so let me see. They've hit rock
bottom already. So we're getting them out of
the rock bottom, and through the education
process they've learned not to get back to
that point. I hope that answered your
PARTICIPANT: Dawn, you had
mentioned that your products are geared to
specifically for the military, as all of you
indicated. How do you see such a product
working out in the general marketplace, not
working with military personnel but working in
general out in the public? Do you see a
similar product being offered out in the
general marketplace, as you offer with the
MS. BANNWOLF: I'll speak
directly, first, to the depository product.
As you can see, that Keep the Change -- and
that has been rolled out nationally to any and
all folks that would take advantage of that.
I think we definitely are taking a look to see
how these different programs and products that
we're able to offer might play out into the
At this point in time, can I point
to a specific initiative? No, but we're
continuing looking at that as we reevaluate
all of our products.
MR. SAELI: Jeff Saeli from
Columbus Bank and Trust at Fort Benning, and
my question is in general for the panel.
You've described some fantastic products and
services, many of which we have considered as
One of the problems that we face
by the virtue of the fact that we are
training-based with a highly transient
population is communicating with our customers
once they leave the installation, which the
vast majority of them do. And what we're
interested in hearing is if any of you have
had a similar experience in how you resolve
that communication issue with the transient
MR. GILES: Yes, that's a problem.
You know, we face the same issue.
As I mentioned, we have 55 offices on 30
installations around the country, and the one
thing about the military is they are
transient, they are moving, always moving.
We've got customers located throughout the
And we -- years ago we tried to
start building a real good database on e-mails
and trying to communicate with the customer
through e-mail, but we do, certainly, the
mail, and by phoning. But I think probably of
late, the last couple of years, going through
electronic means of communicating with the
customer has been the best for us, and most
successful. But it's an ongoing problem.
And, secondly, let me address --
the gentleman asked a question about the -- we
are part of a privately-owned five-bank
holding company, and we kicked off the Workout
Loan Program on the civilian side. And I'll
have to say, it's not as successful as the
military side. We're having some more
chargeoffs, but we are doing it, and we feel
like it is successful from a standpoint of,
one, keeping a customer a little bit longer,
and the percentages.
I think we drop around 5 to 10
basis points in the chargeoffs or increase on
the civilian side. So we are doing that, and
we are into it for about a year, and now a
year and a half.
MR. DREIBELBIS: Back to the
question, we also have, at Fort Hood, a very
mobile and very constantly moving and changing
group there. One of the things that we
recognized, though, in recent years with
deployments continually happening, the
soldiers are away from post more than they're
So electronic means to communicate
with those soldiers is critical. And also,
having the ability to provide 24-hour service,
either through security e-mail or through
telephone centers in order to take care of
those deployment needs, is critical for you to
have a successful operation there.
And also, speaking back to the
products outside of the military group, we are
in a similar situation. We have a number of
branches across the State of Texas that are
sister banks to what we currently have there,
and we offer similar programs.
But one of the distinct
differences between the military and the
civilian counterparts is it's a whole lot
harder to quit your job with the military and
walk away. And yet if you're working for, you
know, one of the major retailers out there,
they have 100 percent turnover on the front
line. So changes in employment make some of
the programs that we offer in the military
much more difficult to really put into play on
the civilian side.
MR. OVELAND: I might add before
we move on is that with regards to
communication -- and it's going to come out in
the American Banker here, so I can air this --
is that Eisenhower Bank is beta testing a
mobile phone banking system, whereby that most
of our young military men and women, the first
thing that they buy is a cell phone if they
don't already have one.
And the cell phone allows either
communications through -- if it's internet-
enabled, it can get e-messages or you can get
text messages. And we're -- we have a list --
as Don was saying, we have a list of e-mail
addresses that can be used for the
communication. But we feel like with this
mobile device that will allow us really a
chance to keep in touch with those young men
The product also allows for
alerts, which can alert a deficiency in a
balance or a check clearing or a check "not
coming in" as a deposit, and what no. So we
have great hopes that this will help fill some
of that void with regards to the
MS. GUERRERO: Yes. Good morning.
My name is Lou Leon Guerrero, and I am from
the Bank of Guam, and I did travel the
farthest. We are like 12,000 miles away from
Thank you. We also have two
civilian-based -- two military -- big military
bases in Guam. And we are expecting more
military with the relocation from the Okinawa
base. And we are also the only local bank
that is located in the military bases. We
have one in the naval station and one in
We do have a consumer loan
program, which is -- which we allow a minimum
of $500 up to $25,000 unsecured loan at a 9.75
rate. No application fees, no closing costs,
and so we think we have a very good consumer
loan program which is a civilian, but the
military can participate in these loans.
But they do have to have some
qualifications and eligibility, and what I
hear is going to happen is that we would be
then lending to subprime borrowers. And I
wanted to ask the panel members up there, how
do your regulators treat those loan programs?
And what impact does it have in your asset
I also wanted to say, before I let
go of the microphone, that as far as our
collection process is in working with the
military, we have a good working relationship
with the commanding officers of those bases.
And when a military individual is delinquent,
we pick up the phone and call the commanding
officers, and they actually just ask us: is
it a banking issue? And we say yes, and they
get the person to come in, and they actually
We also get information from them
in terms of when we have to locate them. But
I do want to be able, as a bank, to provide
this service to our military people. And we
do want to take the business opportunity also,
because we feel it's going to greatly increase
the economy of our island. And an increase
from 9,000 active personnel to about 20,000
active personnel is a big increase in our
But I do want to know how your
regulators treat them, because we want to be
able to not upset our regulators.
MR. OVELAND: I can address from
the Office of Comptroller of the Currency is
that with the overdraft workout account that I
outlined is that they specifically had an
appointment with our chairman of our board
talking about the fact that this was --
encouraged us to continue to offer the
overdraft workout account, and felt it was the
right thing to do. So there was support all
around for it.
MR. GILES: We also are regulated
by the OCC, and my philosophy is try to keep
everyone informed. And when we came up with a
program, that was one of our concerns -- how
the regulator from the safety and soundness.
But when you look at the number of loans we're
making, and the dollar amount, it's somewhat I
won't say insignificant, but it's a much lower
amount than when you consider the larger
commercial real estate loans and car loans and
other type loans that you'd make.
And I think it helped us receive
an outstanding rating the last two times that
we've been rated. I think they gave that
significant part. But also, I think they view
that we're trying to do our part to help the
MR. DREIBELBIS: I'll go one step
further, and I do think it's encouraged.
We're also regulated by the OCC, and they
encourage us to do things to help the
soldiers. But from a safety and soundness
standpoint, you also have responsibilities on
establishing reserves. And the loss
percentages on these are higher than what you
And if on some of the overdraft
type products that are rolling overdrafts into
-- I'd really encourage you to visit with your
specific regulator and talk with them about
the merits of the program and how you
structure it, and how you're going to do your
reserve calculations, because I think that's
critical, that you establish that in advance
rather than doing it during an examination,
because it never turns out like you'd like for
MR. MOORE: I'm Jack Moore with
United Southern Bank in Hopkinsville,
Kentucky, which is near Fort Campbell, home of
the 101st Airborne. We don't have a program.
That's why I'm here. Can anyone on the panel
tell me what your approval ratio is? Thank
MS. SNYDER: On our --
MR. MOORE: That's approval to
MS. SNYDER: On our Second Chance
Program, we have not turned down any to date.
And everyone has been successful, because it
comes from the command.
MR. GILES: We also are at 100
percent. These are our customers, and these
are situations where we would take a loss, and
we're trying to work with that customer. We
are -- we pay out some money, because they
might have outstanding checks. But we're also
covering losses internally, and we're trying
to keep that customer to clean up their
In a couple situations, we work
with a command, Army community service or Navy
relief, where they will come to us with
another bank or credit union customer, and
they'll ask us to make a loan. And in some
cases, we have actually paid out money to
cover checks on other institutions. And so
far, we are batting a thousand percent right
now on that also.
MR. DREIBELBIS: I wish that I
could say we were at 100 percent, but that's
not the case. We do everything we can to try
and approve loans for our soldiers that come
in, but some of those are in such desperate
situations, because of the alternatives that
they have set. They need more help than what
we can provide them. So we try and provide
counseling, we try to do everything that we
can, and we're approving the vast majority of
those. But there is always going to be a
group that has just gone too long.
So that's one of the reasons why I
think when we talk about certainly the
products are important, but the education is
critical to make this successful of any small
loan program, whether it's military or
And then, in addition to that, is
advertising and communicating to make sure
that they know that there is an alternative
available to them other than some of the
So I think to get your approval
rates up high you have got to provide both of
those -- the education and the communication
-- to have a fully robust program.
REAR ADMIRAL GAUDIO: You know,
just a final comment. You've got to get your
senior loan committee and your board to sign
off on the program. They've got to believe,
because there will be losses. You're going to
have losses that are going to be much higher
than what you normally have, but they've got
to look at the big picture rather than the
And as long as they will sign off
and you set aside a certain amount of money
that you're realizing to risk and lose for the
long term, and that's the way our board looks
at things, from rather than a short-term view,
they look at it from a long-term perspective.
MR. McDONALD: My name is Alden
McDonald from New Orleans. We do not have a
program for the military, but it is quite
interesting to hear what you guys have gone
through and what you have set up.
My question to the panel is that,
can you share with us some of your delinquency
ratios? I think one panelist did say that
they had about a 25 percent chargeoff rate. I
think I heard that. And if I didn't, please
correct me. And also, some of the other
financial management numbers -- for example,
what is your average yield on this particular
This would help us to at least
begin structuring it from a cost point of
view. And it sounds like the program is not
very profitable, if profitable at all, but we
would really be appreciative if we would know
how much money we would lose on it going into
So as much of that information
that you could share with us as possible would
MR. OVELAND: I can address on our
products. The first loan program that's
unsecured we had to -- around 25 percent
chargeoffs on that before we required the
direct deposit. Now that we have the direct
deposit, we don't have the number -- we're
still taking some losses, but the unsecured
loan is -- you're going to take some losses.
Obviously, like what Jay was
talking about, the funding of the loan itself
being $247, I think if you add everything
together, we're much less efficient. It costs
us about $400 and some odd dollars to book a
note. So you're going to lose money on it.
And on the car loan that we have,
we've had good success with that, because it's
secured. And, again, the counseling that you
do at the beginning is extremely important in
your payouts. But we've had very good luck on
that, and -- but, again, at the rate that
we're charging it's break-even at best on the
MS. SNYDER: I know our program
has been so far 100 percent successful.
Again, there is going to be a time where it's
not. But our chargeoffs on the checking
accounts are probably 25 to 30 percent, and
those chargeoffs -- those are the dollars
going to the payday loan companies and to
other banks to try to pay those debts.
So it's on the DDA side, not
necessarily on our lending side. And you're
talking about profitability. There is no up
front profitability, but we need to realize
that it's your retention, it's the future, the
end result of retaining this customer,
watching their family grow, and keeping that
relationship with that person. That is going
to be your profitability in the long run.
PARTICIPANT: (Inaudible comment
from an unmiked location.)
MR. GILES: Well, I was wanting to
mention we have about a probably 25 percent
chargeoff on the military side, a little
higher on the civilian side. So you want to
keep that. But I think Tammy made a real good
point. You've got to look at it not only from
the loan side.
You've got to keep it -- look at
it from a retention on the DDA side or savings
side, where you have -- you retain an account.
If that 70 percent pays off, then you -- they
pay the loan off, you get a loan back, and
then hopefully you kept a customer on the
When we started the program back
when we were talking about did we want to do
this or not, we got into it real slowly, and I
monitored this almost daily. I'd walk over to
the Loan Department. Do we make a loan today?
Or what do you do? Do we do it? And we kind
of talked about, well, what if the situation
develops that these customers pay us off over
the term, and then they come back and want
another loan? What are we going to do?
And I'm kind of glad to say that
any time we have an exception it goes before
our Board of Directors, and we have one or two
pages of exceptions. And these are these
workout loan customers that have paid off the
first loan, they've come back to us for a
second loan, and now we're making them a
second loan. Some of them are unsecured.
Some of them are car loans. But I think
you've got to look at it, there again, from
the long-term perspective that you're
developing a customer, and they are not all
going to be a success. You're going to have
But if you can make 75 percent
work out to where they stay with you, they pay
the loan off, they keep their DDA with you,
then we think it's a win-win for us and the
MR. DREIBELBIS: On our small loan
program, unsecured $50 to $100, we typically
run a past due percentage somewhere around the
17 to 18 percent on a monthly basis. Now
that's also seasonal, because just like
civilians during the first quarter of the year
when you get tax refunds, we'll see that
significantly decline. but 17 to 18 percent
is what we see on the small loan program.
That's a small portion of our
portfolio, because they are very small loans.
But it's very high.
MS. McDANIEL: I have a question.
MODERATOR THOMPSON: Yes.
MS. McDANIEL: Yes, good morning.
I am Brenda McDaniel, Department of Defense,
Office of Family Policy. With all of our
installations, we have PFMs, personal
financial managers. And, Tammy, you mentioned
a great education program. I would like to
know, do you communicate or have a partnership
with the PFM, the personal financial manager,
at the family center on -- at Tinker?
MS. SNYDER: Yes, I work very
closely with family support and family
advocacy center. And, actually, when this
program started, they called me in to help
them with this program and to train.
The problem with -- that they face
is the time. You can't spend an hour with
somebody, and that's all that they have time
for is that one hour. There is not a
You know, a one-hour seminar and
class is not going to financially educate you
for the next 5, 10 years of your life, because
children may come and marriages -- all sorts
of things could happen in your life, and this
has to be expected, because our finances are
They have to deal with an 8:00 to
5:00 job, and try to somehow help 50 people
per person in a day, and they have a limited
amount of time. So a lot of times they will
call me and ask me to consult about this
program. And because it needs to come from
the leadership, if that's the question, I will
in turn call that person's first sergeant or
chief and talk with them first, and so that
MS. McDANIEL: Great. I
understand that. Thank you.
MODERATOR THOMPSON: Okay.
MR. FLEMMING: Yes. I'm Clente
Flemming from Columbia, South Carolina, South
Carolina Community Bank. My question is: do
you measure deposits on these accounts, and
your loan-to-deposit ratios?
MR. GILES: I'm not sure if I
understand the question. Can you maybe be a
little bit more specific?
MR. FLEMMING: Yes. If you're in
the -- if you're on a military base, how much
deposit that you have and what percentage of
those deposits are lent back out to the
individuals? Do you have a ratio?
MR. GILES: You know, I really --
I really can't say that. I can say typically
on a military installation -- and you probably
have the same situation -- is on a military
installation everything is provided for in the
federal budget. All the housing, all the
buildings, everything is completely paid for.
So, really, what we have to loan
on are really consumer debt. We're not going
to loan on the housing, because housing is
paid for. So what that leaves is it leaves us
the consumer loans, unsecured car loans, and
things like that. So our loan-deposit ratio
actually is very low, and in our bank, in
turn, we buy a lot of loans from one of our
civilian banks, one of our sister banks.
MS. MOAKLER: Hi. I'm Kathy
Moakler. I'm with the National Military
Family Association. I'd really like to
commend the Fort Hood Bank on their outreach
to the rear detachment and the family
readiness group folks as far as educating them
about the resources that you have for the
service members and their families to avail
themselves when they find themselves in the
black hole of debt.
What are some of the other
programs that you all might be using to reach
the spouses and family members who might have
a big influence on the way the service member
is going to go when he is trying to get
himself out of debt. And so if you could just
kind of address that, I'd appreciate that.
MR. DREIBELBIS: Let me say thank
you first. I appreciate that.
MS. SNYDER: When I do the
counseling, I'm not doing the counseling with
just the person that we're doing a loan for.
If they are married, the wife, significant
other, will be present. It's a family deal.
You can't have one partner or one
spouse controlling everything. The marriage
has to be complete. So the whole family is
educated throughout the entire time.
MR. GILES: On our workout loan
program, if there is a spouse involved, both
people are required to sign the note, and both
people are required to sign the agreement, so
both are aware of the situation.
And many times in the military --
and you know this -- is the family member in
the military is deployed lots of times, and so
you are dealing with a spouse. So many times
we will -- there will be a situation develop
when one of them is deployed, and we might
make the workout loan with the spouse's
signature, and then get an e-mail or -- and
get the other signature later. But many times
we are dealing directly with the spouse.
MS. BANNWOLF: We also do that and
work in the different installations. Power of
attorneys are real important, having people
understand what that entails, and what you can
and cannot do. But it really gets back to,
with us at least, a case-by-case basis.
If we have somebody come in, their
spouse is deployed, they're in a situation,
we're going to sit down there and work it
through with them. And that may look very
different from person to person depending upon
what extra help they need.
Our call center personnel are
poised and primed and ready to see folks
coming through that channel -- e-mail, walking
into our banking centers -- because we realize
it is a partnership. They are just an
important member in that person's life. And
we see that and we value and recognize that as
MR. THROCKMORTON: Thank you.
Good morning. My name is Garry Throckmorton.
I'm here representing a commercial bank with
a presence in a military community, that being
Fort Knox in Kentucky. I feel like we're a
pretty forward-thinking institution, although
we don't have a military-specific loan
We have tried to address certain
demands, and I'm just curious about your
overdraft protection, or I should say your
overdraft payment policy. I know that a lot
of our customers that get into difficulties,
it has to do with overdraft fees. So I'm
curious as to what you charge in the way of
overdraft fees, and what your policy is about
We, as it turns out, have a
structured and a specific overdraft protection
policy that has been looked at very thoroughly
in the last three exams by the FDIC. And it
falls under the interagency guidelines.
So you -- I'm going to make an
assumption, which may be a wrong thing to do,
that you don't have a structured overdraft
program, but I am curious about how you handle
overdrafts, and what your policy is about
MR. GILES: We do not have a
written policy on overdrafts. Many times in
the military, because you're receiving the
direct deposit, you hope that deposit is going
to come in and would cover any checks that you
might have paid.
If we see a trend of someone
writing -- continuing to write checks month
after month, those would really fall into that
workout candidate program, where we would
contact the customer, either by e-mail or
phone or letter, and trying to get them to do
the workout loan. But as far as a written
policy, we don't have one.
On the civilian side, it's a
little bit different, because you don't know
that that direct deposit is going to come in.
At the same time, on the military side, you
might have -- see that the direct deposit did
come in last month, but it could be pulled,
and it won't come in. And that happens to us,
you know, all the time, and they move the
account and go somewhere else.
And I think our challenge is to
try to reach that customer before they might
go somewhere else, and so we can offer a
program to try to help them rebuild their
MR. OVELAND: At the account
opening, we credit score our customers, and we
establish the amount of the protection with
that credit score, so that those that have
poor credit scores would have less money to
get in trouble with, basically.
MS. SNYDER: We have a type of
overdraft. Normally, items are to be paid,
but you have to watch and know your customer.
You don't want them overdrafting and then
charging every time. And then, when their
direct deposit comes in, then they're starting
at zero, if not down to a negative.
So a lot of times, depending on
the circumstances -- and we communicate with
that customer by contacting them -- what's
going on, what's in your life. We might
overdraft them, but there's not going to be
any charges, because all that does is just add
to a negative. And if there's a trend to
where it's a habit, then we do call that
customer and maybe consult with their first
sergeant and do a workout type program with
MODERATOR THOMPSON: Okay. We are
going to take -- I know there are a few more
questions, but our panelists will be here all
day. They've committed to that. And they
will be around to answer questions that you
I did -- we're going to take a
short break, but I did want to mention --
someone mentioned keeping your regulator
happy, and that is a very good thing. And I'd
just like to offer for FDIC-supervised
institutions, I think I mentioned in my
remarks earlier that this conference is an
initiative of our Chairman, and it is
supported at the highest levels of this
I did not acknowledge -- and I'd
like to now -- two of our Board members, our
Vice Chairman, Martin Gruenberg, and Director
Tom Curry. And they are both committed to
making sure that this program is a success.
On that note, we will reconvene at
10:15, and please feel free to ask questions
as you need to.
(Whereupon, the proceedings in the foregoing
matter went off the record at
10:09 a.m. and went back on the
record at 10:26 a.m.)
MODERATOR THOMPSON: I'd like to
introduce our next panel. Jim Blaine is the
President of the North Carolina State
Employees Credit Union, and Rodney Hood, the
Vice Chairman of the National Credit Union
We have asked both Mr. Blaine and
Mr. Hood to discuss features of successful
affordable loan programs that also might
benefit the military. Jim Blaine is the CEO
of the North Carolina State Employees Credit
Union located in Raleigh, North Carolina. He
has over a million members, 200 branches, and
a staff of about 3,500 people.
With 25 years' experience as a
credit union CEO, Mr. Blaine offers much
insight into issues regarding consumer
finance. His institution offers an
alternative to payday lending. They developed
their product when they came to realize that
their lobbies were full on payday, not with
members but with payday lenders cashing the
security checks that they held.
Mr. Hood is also dedicated to
promoting alternatives to payday and other
predatory loans. On November 15, 2005, Mr.
Hood was appointed by President George Bush to
a seat on the Board of the National Credit
Union Administration. And shortly thereafter,
I think it was about 15 days, the Board
elected Mr. Hood as Vice Chairman.
Prior to joining the NCUA, he
served in the Bush administration at the
Department of Agriculture as the Associate
Administrator of the Rural Housing Service.
In this position, he helped address the
housing needs of rural America and helped
administer a $43 billion loan portfolio.
Before he entered public service,
Mr. Hood worked in both insurance and banking.
He worked as the Director of Emerging Markets
Group for Wells Fargo home mortgage, and
earlier in his career Mr. Hood worked for Bank
of America as a Community Reinvestment Act
He is here today to speak on a
number of alternative programs developed to
respond to predatory and other high-cost types
And with that, I'd like to start
the discussion with Mr. Hood.
MR. HOOD: Great. Thank you,
Good morning, ladies and
gentlemen. I'm delighted to join you here at
FDIC's conference on affordable, responsible
loans for the military. Hats off to Chairman
Bair and the dedicated professionals at FDIC
for taking the steps to protect the brave men
and women who keep America safe.
Far too many of America's most
vulnerable consumers have fallen prey to
unscrupulous predatory lenders. I'd also like
to compliment Chairman Bair on the tremendous
research she has conducted on this important
topic of predatory lending, when she served as
Dean of the Financial Regulatory Policy Group
at Amherst University.
Having worked now in the banking
industry for almost 20 years, and management
posts, as Sandra mentioned, and community
reinvestment and affordable housing, I deeply
believe that America is only as strong as her
Credit unions, much like banks,
play a pivotal role in providing hardworking
people with affordable financial products --
the products they need to achieve their
American dream of home ownership, the products
they need to create small viable businesses,
and the products they need to save for their
family's future and send their children to
As Vice Chairman of the National
Credit Union Administration, I am delighted to
regulate and insure the 8,600 credit unions
that provide over 88 million hardworking
Americans with affordable financial products.
While our credit unions are doing
their level best to serve their members, our
military-affiliated credit unions, such as
Navy Federal, Pentagon Federal, Andrews
Federal, and Langley Federal Credit Union,
they must work especially hard in reaching
young men and women in uniform before they are
introduced to unscrupulous predatory lenders.
As a native of North Carolina,
I've seen firsthand how the unscrupulous
financial services providers place their
offices near military bases and military
installations. Driving recently through
Jacksonville, North Carolina, to give a speech
at Camp Lejeune, I couldn't help but see the
ubiquitous pawn shops, check cashers, and
payday lenders. These fringe providers of
capital have no desire to help our enlisted
members achieve economic empowerment.
Their loans with high fees and
interest rates as high as 300 percent to 1,000
percent prevent consumers from achieving the
Most recent data shows that
predatory lending outlets have proliferated in
the past few years. In fact, I mentioned just
a few moments ago that there are 8,600 credit
I am now going to ask you a few
questions. How many Starbucks are there in
the United States? Any guesses?
MR. HOOD: Not quite. Give them
time. If you've seen their business model.
MR. HOOD: There are 8,400
Starbucks. We have 8,600 credit unions. How
many McDonald's in the United States?
PARTICIPANT: (Inaudible comment
from an unmiked location.)
MR. HOOD: Close. Well, 14,000.
But your number is more correct, ma'am, with
the number of payday lenders -- 22,000. There
are 22,000 payday lenders in the United
States, and studies are showing that they are
continuing to grow exponentially.
President Bush, I believe, said it
best when he said that the true measure of
compassion is more than good intentions. It
is good results. Credit unions are indeed
producing results that help our enlisted men
and women enter the financial mainstream by
giving them access to affordable loans,
financial literacy, and hope.
Today, 1,000 credit unions offer
alternatives to payday loans, and almost all
of our military-affiliated credit unions offer
products to military personnel. I'd like to
just comment briefly on some of the comments
that Congressman Barney Frank made earlier
I am -- as a regulator, I am
pleased to report that, yes, credit unions are
lending actively to provide alternatives to
payday lending. And also, the credit unions
that are engaged in this product have a very
healthy balance sheet. I, as a regulator, see
no systemic risk from those credit unions
participating in this book of business, nor do
I see any immediate threats or eminent threats
to our $6.85 billion insurance share fund.
I also recognize the importance of
this book of business in the sense that I have
met with their examiners. And as they are
going out to look at credit unions and give
them their risk exams, I am also letting them
know, along with our other board members, the
importance of looking at the whole financial
profile of the credit union they are
regulating, meaning that they must look at
loan loss reserves, they must look at their
historical trends and managing risk and
assessment models, and things of that nature.
So not only do I, as the
regulator, see the importance of it, but it is
important that I ensure that our foot
soldiers, the ones who insure and regulate and
examine those institutions, also are singing
off the same songsheet.
Ladies and gentlemen, I'd be
remiss if I didn't mention the great work that
we have on behalf of Mr. Artie Ortega. Artie,
if you are here, Artie Ortega serves on our
Defense Credit Union Council where he is
working diligently wit our military personnel
affiliated with credit unions to ensure that
they have access to financial products.
Artie, if you could raise your
hand. I know you're very shy.
Thank you for your energy and
And also, Andy Egeland, I'd also
like to say what a pleasure it is to see you
again, and on behalf of all the work that
you're doing with the Association of Military
Banks of America.
It was just a few months ago that
we all met each other in Germany, and it was
there that I saw, ladies and gentlemen,
wonderful opportunities for both banks and
credit unions to work together on a common
agenda and helping our military personnel have
affordable products in their midst and fight
While safety and soundness is
indeed my main philosophy, or it's my main
concern as a regulator, I also am working
diligently to ensure that our credit unions
have the regulatory flexibility and the
regulatory empowerment to serve their members
As I tell our examiners, I believe
that we must manage risk and not avoid risk.
This, in my opinion, can be accomplished with
regulation that is effective as opposed to
regulation that is excessive. I hope this
framework allows even more credit unions to
offer alternatives to payday loans.
On a recent trip to Mississippi, I
had the opportunity to meet a young lady of 72
years of ago who had six payday loans pretty
much with payments costing her anywhere from
$1,800 to $1,900 a month. Her Social Security
check, ladies and gentlemen, was only $1,200 a
month. At the end of the month, she had
little or no resources at all to buy groceries
Her local credit union was able to
consolidate those six predatory payday loans
into one loan payment of $400 a month. She is
now in prepurchase counseling to buy her first
home, so she can leave a legacy for her
children. So these are the types of things
that can happen with good alternatives to
I'd like in a few moments -- and I
can't talk about what all 1,000 credit unions
are doing, so I won't dare do that, but I will
give you some highlights. What are some of
the things that our military credit unions are
doing to work with their members? The Fort
Bragg Credit Union in Fort Bragg, North
Carolina provides installment loans as small
as $300 up to our maximum of 14 percent APR.
This product requires a minimum of
$20 per month payment towards principal and
interest. The Fort Bragg Credit Union also
provides the asset recovery kit, which are
loans of $50 to $500, or 80 percent of the
applicant's pay, for a flat fee of $6. Loans
are for two weeks and include financial
education and counseling.
Another credit union, which is
Credit Union West, which serves the Luke Air
Force Base in Arizona, provides a payday
assistance loan with a line of credit up to
$500 at 18 percent APR, payable in one to four
paydays. In addition, the borrower is
referred to financial counseling and must open
a savings account.
The last example that I'll give,
and that is of Wynward Credit Union. It's
with the Marine Corps Base in Hawaii. This
group provides loans of less than $2,000 for
six months at interest rates between 10.9
percent and 12.9 percent.
The credit report is used to
determine the applicant's ability to repay.
And those with debt-to-income ratios of
greater than 55 percent not only are
encouraged to receive counseling, but they
also are encouraged to immediately set up
These are just a few of what some
of the credit unions are doing to fight and
provide alternatives to payday lending. While
my comments today are designed specifically
for the audience -- I'm talking about military
payday lending alternatives -- I'd like for it
to be known that credit unions are also doing
this for the general consumer as well. So
it's not just for the military folks that
credit unions are participating in these
products. It's also for the general market as
I'd like to mention that the
overarching theme of the products that I've
mentioned, and some of the things that I'm
seeing within credit unions, is that there are
three things that the alternatives to payday
lending have in common. One, they are
affordable. Two, there is a component of
asset-building and credit-building. And then,
third, it would be education.
Education is extremely important
to helping everyone learn how to avoid
predatory loans. We must explore, however,
innovative techniques to providing financial
literacy. Having recently, as I mentioned,
been in Garmich, Germany, where I stayed at an
output, I, Artie, and Andy would like to work
with you all, schedule permitting, to pursue
ways of using the 24/7 satellite television
service that I saw there on the military
And what this is, ladies and
gentlemen, if you're staying on the outpost,
they have infomercials and workshops that they
have videotaped. I would like to work with
those other stakeholders and members of DoD to
see what we can do to have segments on the
24/7 satellite that deal specifically with
predatory lending and financial education.
Until that vision of mine,
however, comes to fruition, I would like to
also think there are other things that we can
do to educate our enlisted men and women,
especially in helping them differentiate
fringe lenders from mainstream lenders. Such
things we need to encourage them is that
mainstream providers of credit offer
affordable products, no prepayment penalty,
the ability to build credit, and also assets.
There is regulatory oversight from
bodies such as NCUA and the FDIC. There is
financial education, and there is a community
development and enrichment component.
But we also must help them realize
how to avoid some of the fringe providers of
capital -- those folks with the high loan
origination fees, high interest rates, no
regulatory oversight, no financial education,
and no commitment to philanthropy or outreach.
In addition to payday loans, it is
also important that we look at various
unscrupulous mortgage lending practices as
well. Many underdeserved consumers have
mortgages that are on the verge -- that they
are on the verge of losing, because they were
not financially prepared for the
responsibilities of home ownership.
I'm sure many of you saw this
reiterated yesterday in your Wall Street
Journal. I want you all to know that there
are indeed resources available to help those
who are on the verge of foreclosure. One such
resource is through NeighborhoodWorks America,
a quasi-government entity charged with
stabilizing and enriching America's urban
NeighborhoodWorks has launched a
new foreclosure prevention initiative across
America to help families sustain their dream
of home ownership. Chaired by FDIC Board
Member Tom Curry -- Tom, thank you for your
leadership. I don't know if you're here. I
knew you were here earlier, but thank you for
And, ladies and gentlemen, the
NeighborhoodWorks board is comprised of
members from all of the other regulatory
agencies. So I am pleased to represent NCUA,
along with John Rich from OTS, Julie Williams
from OCC, Randall Krozsner from the Federal
Reserve, and Brian Montgomery, who serves as
the FHA Housing Commissioner.
Legislation will also play a role
in protecting societies must vulnerable from
predatory lenders. With the recent Talent
amendment at the federal level, and the
various anti-predatory lending regulations in
states such as my home state of North
Carolina, this topic is going to remain top of
mind for many days and years to come.
As you all in this room this
afternoon and in the days ahead, as you all
diligently examine financial products and
services to fight predatory lending, it is
important that financial regulators and
community stakeholders work together in
crafting user-friendly and flexible policies
that don't produce unintended consequences for
banks, credit unions, and the very people we
are all in this room trying to protect those
individuals who have devoted their lives to
preserving American democracy and keeping
MR. BLAINE: Good morning. My
name is Jim Blaine. I'm delighted to be here.
You'll have to bear with me. I'm from the
south. I can't speak that fast.
If I appear to be anxious, I am.
Two specific anxieties come to mind. First, I
feel a bit like Bambi at the beginning of deer
-- being here. And since Paul
Stock, my friend from the North Carolina
Bankers Association and a Duke graduate is
here, I also feel like a Duke football player.
They had the longest losing streak in the
country, went 0 and 13 last season. In that
sense, I know I'm not going to win today, but
I hope you all don't run up the score. Okay?
One thing I want you to notice on
my resume is I am a CPA. Okay? And
regardless of what you think about credit
unions, there are no socialist CPAs. Okay?
So I do want to --
I do want to go over some
practical aspects of the program that we have
now operated for five years. I think -- I
heard many of the questions of the first
panel, questions about profitability and cost
and chargeoffs, and those kind of things, and
we have a project that has actually been live,
real-time, for five years.
We have made over $700 million in
salary advance loans, is what we have called
it. We have made all of the mistakes, and I
want to share that with you today, very
briefly, but leave it open for questions,
because I think the most important part of
this session is if you can go back and
convince the people in your organization and
your board of directors that these kind of
efforts are worthwhile and profitable and do
make sense for your community and your banks.
Got a little presentation. Very
short. Give you a little background. I know
you're familiar with payday lending, but in
North Carolina -- first of all, I'd like to
give credit to Self-Help Credit Union and the
Coalition of Responsible Lending, which are
headquartered out of Durham. Those two
institutions led a legislative battle in North
Carolina, and we no longer have payday lenders
in North Carolina. That's one action point
you may consider in your home state.
First thing to do with cancer is
remove it, right? And then, you can try to
cure it. There are no payday lenders here,
are there? Okay. All right.
All right. He is the diplomat.
I'm the blunt guy, all right?
Let's get this understood. All
right? But the Coalition for Responsible
Lending, they have a website, CRL. I think
Mike Calhoun is here. They have a lot of
innovative ideas about how you do payday
lending for your customers.
In North Carolina, what we had at
the time was a maximum of $300. Right? It
was generally a two- to three-week loan. They
were allowed to charge $15 per hundred. All
right? Simple as that. Generally a two- or
And the way it works, consumer
gives a post-dated check for $300, walks out
with $255, right, and pays a $45 fee. And I
think the pricing is pretty similar in all of
the states that I'm familiar with. So you all
And there is no question, even the
-- where is Keith? Even the Federal Reserve
admits that this is a loan, right, and you'll
see on -- this is one of the providers. There
is no question what the interest rate on these
loans are, right? That argument has been
resolved, so it's a 4-, 6, 800 percent loan,
depending on the length of the loan. Right?
So we're all together so far. Okay?
And as Sandra said, how we found
out that we needed to offer this program is
the first person in our lobby on major paydays
was the payday lender, and he had a stack of
40 checks, right? So he was presenting checks
from our members to make sure that he had
first grab at that money, and also messing up
our teller lines, right? Somebody gets behind
somebody with 40 checks, they don't like you,
right? So we thought we needed to offer an
It's one thing to prohibit people
from doing business. Another way to do it is
you need to offer -- there is a need out
there, there is a demand, there is no question
about that. It's not just the military. It's
in all society. And so we need to offer an
alternative that's reasonable and affordable
for our members and for your customers. Okay?
Our design was a $500 loan,
maximum of 31 days, right? You have to have a
checking account with our organization. By
definition, a payday user has a checking
account with your institution, right? Because
they give the payday lender a check anyway.
We require direct deposit. One of
the panelists mentioned that will reduce your
collections and chargeoffs significantly.
Most employers have payday -- have direct
deposit these days, right? So it's nothing
really hard to create.
Our underwriting criteria -- I
heard a question about that, and it's very,
very simple. You must be able to fog a
mirror. Okay? You must be alive.
And you cannot be under
bankruptcy. All right? And why? Because you
can't lend to somebody under bankruptcy, so
you must pull at least one credit report to
take a look. And you will see some blemishes
on the credit for sure, but you'll also
identify -- there are some -- we call them
sorry people in North Carolina. "Sorry" is a
word that really doesn't have a description,
but they are pretty sorry. You don't want to
lend. There are some that you don't want to
lend the -- make this loan to.
So fog a mirror, not under
bankruptcy, give them a chance. Our interest
rate is 12 percent. That is the highest loan
rate that we charge on any loan in our
organization. And with 36 percent -- by the
way, we think it's -- we know it's the most
profitable loan we make in our organization.
May I repeat that as a CPA? It is the most
profitable loan we make at 12 percent in our
Now, I can't imagine charging 36
percent and not making money on this product.
You would have to really try to mess up not
to make money at 36 percent, let alone 18, and
I'll show you some examples of how we price
Now, for the cost accountants and
for the -- let me -- well, let's see. Twelve
percent, let's go through it, $500, right? 14
days, interest rate is -- interest charged
$2.50. Okay? That's math, that's not
algebra, everybody can do that. Okay?
Well, let's take a look a little
bit at how we cost it out, and this may lead
to some questions a little bit later on. All
right? We do it on a percentage basis, so --
and we use average cost and average funding
cost. Okay? You see on the top line I hope
that we charge 12 percent, right, so that's
your revenue income stream.
From that, we deduct loan losses.
Now, we use four percent, and I'll show you
what the real figure is. We had to lie to get
it by our board. But four percent -- we use
that because that is a standard credit card
chargeoff rate, right? Four to six percent,
something like that, if you make a credit card
loan, then you're expecting those kind of
losses at the margin, right? So very
reasonable within what you do.
So we have eight percent left, and
then we have a cost of funds, and at the time
we did this slide it was about four percent, a
little bit higher now, but you have to fund
the loan. Right? So you have a cost of
funding, and ours is about four percent.
Deduct that. That leaves a net
margin of four percent, and our average
operating cost for the organization is about
two percent of assets. Okay? I think with
banks it can vary all over. Some are that
low. I think Bank of America is around three
percent. But at any rate, you know that
average cost of running your organization,
So we deduct the average cost --
and I'll tell you why -- because we do not
employ any new loan officers, any new computer
systems, any new accountants, any new
branches, nothing extra to add this loan. So
we think an average cost allocation is an
appropriate cost to assign to this loan.
That leaves us with a return on
assets of two percent. Last time I checked
with the banking industry, if you were over
one percent, you were doing really well. If
you were at 1.5, you were doing superior,
especially in this kind of environment.
Right? So if you can do a 12 percent loan, if
I'm telling you the truth, and I may not be --
If I am -- if I am, and you can
introduce a product in your bank that gets you
in grace with Sheila Bair, and gives you a two
percent return --
-- I am not sure what reasons
exist that you would not offer this product.
All right? Okay?
Let's take a look at another one.
Any questions on that?
Good. I was just kidding. I
don't want you to ask any.
With credit unions, we still have
a usury limit. It's 18 percent. All right?
So I think in good conscience a credit union
could charge 18 percent for this type of loan.
Right? It's a credit card kind of rate.
Nothing dramatic about that.
Now look at the numbers. Only two
numbers change when you charge 18 percent
rather than 12, right? Your funding cost
doesn't change, your operational cost doesn't
Now, look at the bottom line. I'm
not certain what your accountants or
operational people will tell you, but I'm not
sure of any answers about why you shouldn't be
offering this product in your bank.
And under the Talent amendment,
let's just go whole hog, right?
Now I'm charging 36 percent. My
costs have not changed, and I've got a 26
percent return on assets. That's called
But it's good for your year-end
billets, okay? So you may want to look at
that. All right? But, again, I will validate
these figures with you. We will be glad to
share any information we have on our program.
Give you a little background -- we
now have after -- we started in 2000. We have
65,000 of our members enrolled in this
program. They come from all sorts of
backgrounds, demographic social strata. Forty
-- well, actually, 50,000 now -- 40,000 of
them renew these loans each and every month.
By doing this demonstration
project, we wanted to kill off a couple of
myths. Payday lenders say this is a one-off
product. You and I know that's a lie. Your
members, your customers, get into it, they are
in it for good. There is no escaping. This
is financial servitude of the worst kind.
Nobody can survive on a 400, 600 percent loan.
If you don't care about the
military, great place to start I think in
generating support, this is affecting your
sons and daughters. You should take this
personally. This is not somebody else's
And I can assure you can find a
neighbor, a child, or a relative that has a
payday loan and is paying these kind of rates.
And you ought to be a little incensed about
that, in my opinion. But as I said, I have at
least one opinion on everything.
Here are the actual figures for
our program. And the figure I lied about is
our chargeoff ratio. That is not 25 percent.
That's a quarter of one percent. Now, we
deal with teachers and state employees,
correction workers, DOT, very similar in terms
of the military in that they have a stable
job, they are not wealthy, affluent folks.
They are living payday to payday. They are
trying to educate their kids and feed their
They will pay you back, because a
person at the margin need -- who does not have
a rich uncle does need a reliable source of
credit. And the banking industry and the
credit union movement I think are the most
reliable, trustworthy groups they can turn to.
And that is perhaps with Wal-mart coming in,
they are coming into the market, aren't they?
With Wal-mart and some others
trying to get into the market --
-- maybe it's that you and the
credit unions have vacated the field and left
it vacant. So from a political, realistic
standpoint, maybe we want to repopulate that
field with products for a segment of folks
that others are trying to serve.
Okay. Now you see our 12 percent
product generates for our credit union a 4.75
percent return. Now, being a true nonprofit,
our ROA is less than is 50 basis points this
year. It's pretty tight, so we very much
enjoy having this product, let alone the great
publicity and community goodwill that it
generates also. Okay?
The real neat thing about our
program we believe is we found ourselves,
after three years at the end of -- the
beginning of 2003 in a position we did not
like to hold. We had become the largest
payday lender in North Carolina -- not
something to which a credit union generally
What we found is with the training
programs and cutting them off at three months,
and all of the seminars, I'm sorry, folks, it
doesn't work. Education doesn't work. We
were not meeting our members where they were
in life, so we wanted to change the cycle.
And what we did is implement a savings program
in connection with this loan. And when you
borrow, five percent of whatever you borrow
goes into a savings account at the credit
union. All right?
And our members who were paying
$75, right, for a $500 loan certainly didn't
mind putting $25 in savings. All right? They
didn't miss it at all. It's still a great
deal as a product. All right?
Now, for you practical folks,
generally you can offset savings against
loans, right, if you have a default or
something like that? So don't miss the fact
that as that savings grows you become a
secured lender. Right? And if you go about
18 months, your customers will have $500 on
deposit, and now you're making a loan that
should have little or no risk. Okay?
What we found interesting about it
-- nobody complained, by the way. And what we
found interesting is these folks, who by
definition are marginal, don't have any
savings at all anyway, right? Now after about
three years have $10 million on deposit with
our organization, and are glad to have it.
Many of them now have $1,500 or
$2,000 on deposit. We say take the money and
stop making the loan, and they say, "No, no."
That's where people are. They say, "No,
don't give me the money; I'll spend it. You
keep it. I've never had savings in my life.
Just leave it there and I'll keep working this
out. I'll get right."
So we end up with a secured loan,
great community goodwill, and $10 million in
savings balances. And at the end of January
it should go over $11 million. It's growing
The money is available if people
need it, right? And, hopefully, at the end of
18 months you can give them their $500 back
and say, "Go and sin no more. You are out of
debt." But, in fact, that is not the way life
works. So the savings component has been very
important to us.
I want to go through some
calculations. This one you will not believe,
and this is the one that makes me cry about
this program. Do the math, okay? Payday
lender, $500, $15 per hundred, right? Write
down $75. Credit union, $500, one percent a
month, right, $5 in interest, right? Write
Subtract $75 from $5. You are
saving your customer and our members $70 each
and every month, and we have 40,000 people
that do this each and every month with us.
Multiply what we're saving them.
Your monthly savings of 40,000 people saving
$70, who are at the margin, is $2.8 million a
month. Take that out to a year. With 40,000
of our members marginal folks, just trying to
get by, we are putting $33 million back in
their pocket. The money has always been
there. We have just rearranged their budget.
These folks and your customers and
the military need that $33 million that's
going somewhere else now. Take that back to
your board. That's the only reason you need.
Because when they're in Iraq, and their
spouse is at home struggling, you can put 33
million bucks back in your military customer's
pocket. That's what banking should be all
about -- good financial, prudent lending and
PARTICIPANT: Amen, brother.
(Laughter, followed by applause.)
MR. BLAINE: I'm certain I'm
preaching to the choir.
One more thing. And since we're
talking about predatory practices -- payday
lending would not -- is kind of marginally
bad. What's really horrible is what goes on
in the mortgage market. All right? I know
many of you address that with military
families living off base.
You see the statement from Fannie
Mae that subprime loans, right, they reviewed
the portfolio of millions of loans, and what
they found is almost 50 percent, right, half
the loans were mispriced by four percent.
They could have been made at a prime rate, an
A-rated mortgage rate, right? But they were
One thing on the impact of that.
Take a look at this mispricing. You see
11.75, right, and this is a $100,000 loan. If
you go over on the right 30-year column, most
folks make a 30-year loan, right? That's the
-- right? And at 11.75, your mortgage payment
is about 1,000 bucks a month, right?
If you had correctly priced that
loan -- look at 7.75 and look over in the
right-hand column at 30 years. Your customer
would only be paying $716. That's tremendous
for anybody in any economic class, right?
That's 300 bucks a month.
What I'd like to point out to you
is the figure in the 15-year column for 7.75.
If you price the loans appropriately, you can
give people back 15 years of their life. They
will have paid that mortgage off in 15 years.
By the way, an extra 180 payments of 1,000
bucks is $180,000 you just saved one
individual military member, let alone the way
all of us educate our kids is by borrowing
against our house, right?
So you've created the equity in
the home to finance an education for the next
Payday is a nuisance, and it's
horrible. This is sinful. And it goes on
each and every day. The banking industry, the
insured banks and credit unions, need to solve
it. We're the ones that are supposed to be
trusted and reliable and have big safes and
drive small cars and do things that are
We have a number -- I heard
several of the banks talk -- we have a number
of other programs that we use. We do have a
100 percent mortgage. We have demonstrated
that downpayment is what prevents people from
getting into a home. Lend them 100 percent.
They'll pay it back. They're paying that much
in rent already.
We have a basic transportation
loan, 100 percent, you've got to get to work.
And we have some other things on credit
counseling that I won't go into.
The most interesting thing we're
doing, and something you all might want to
look at, is we have gone into brokerage trust
services. And we call it wealth management
for the poor. We're trying to figure out how
you can offer these kinds of trust services
and special needs kind of programs to those
that are less affluent. They really are not
on the map for many of the banking industry.
But there are a lot of folks that
you serve every day that have a disabled
child, Alzheimer parents, those kind of things
that need trust and investment services.
I enjoy being here. You've been
kind so far.
Thanks for the invitation.
MODERATOR THOMPSON: I think we
have time for a few questions. Sir? You
don't mind if I sit next to you, do you?
PARTICIPANT: (Inaudible comment
from an unmiked location.)
MR. BLAINE: You keep talking
Paul, I'm going to mention Lacrosse.
PARTICIPANT: We have past due
accounts with one-fourth of one percent loan
losses, but everybody else we have been
hearing from has been talking more like 25
MR. BLAINE: It's easy. Great
You all didn't believe that, huh?
Direct deposit and automating the process,
right? You automatically collect it. You're
the first grab on payday, right? You posted
it on Thursday night. You take out the
payment on Thursday night. Whoever shows up
Friday morning is out of luck.
So the direct deposit assures that
the income is coming -- well, some of the
banks mentioned this. It's coming in, and you
collect first. So direct deposit and
By the way, we now allow our
members to do this over the internet, through
voice response. We even allow them to do it
-- they can borrower $20 if they need it,
right? So it's not just one time $500.
During the month, they can budget for more.
MS. KENNEDY: A comment, and then
a question. This has just been wonderful
sharing, and I really appreciate it. My name
is Judy Kennedy. I run the National
Association of Affordable Housing Lenders.
And Rodney Hood can't help it, you
can tell he's a former banker, my guess is
involved in community reinvestment, because he
kept -- he kept emphasizing what community
reinvestment bankers talk about continuously,
which is that the regulators' policy people
and their examiners' people are never on the
And the examiners who are out
there allegedly trying to evaluate the extent
to which a bank meets the credit needs of its
community usually is the most uninformed,
untrained examiner that a bank ever sees. And
how this plays out, then, is that the very --
vacating the field that you talked about here
is the safest and the soundest policy for a
lot of banks.
But I think the issue that -- and
that's something that I know that Sheila Bair
and this Board will address, as I'm sure the
other agencies will as we continue to talk
about how CRA has broken, not the law, but the
But I think the other thing worth
noting is both our -- we have 50 big banks and
50 blue chip nonprofit lenders who constitute
most of our group. And the other thing that
they talk about continuously is the reality
that over the last three years mortgage
lenders may or may not be predatory.
Mortgage lenders not associated
with an examined institution have climbed from
40 percent to 60 percent, now 70 percent of
originations come from lenders who have
nothing to do with standards from bank
regulators. And at the same time, Fannie and
Freddie have become the chief financiers of
subprime. The two of them bought 45 percent
of all subprime MBFs in 2004, 37 percent in
They are major, if not the major,
financiers of the competitors to the insured
institutions who have been the best customers
of the GSEs. So not until the GSEs have the
same standards applied to them as insured
institutions do can we expect any change in
predatory mortgage lending.
And I'd just like to know if
you've observed that, either from the credit
union side or the North Carolina State side.
MR. BLAINE: We -- that was a long
MS. KENNEDY: Yes.
MR. BLAINE: We don't agree with
all that you say, but I think it's kind of an
excuse. We're helpless and we're victims.
But we found in our organization if we would
move to a one-day approval -- we are a huge
mortgage lender. By the way, we only make
adjustable rate mortgages, and we book them.
All right? And you can sell an adjustable
rate mortgage in this market, believe it or
not, that's fair to the consumer.
What we found is that it was our
processes -- you know, you had to come in and
be strip-searched by us. It's called an
application. And then, we would take five or
six months to give you an answer. But we have
moved to solve the problem, if you want to get
them out of the brokers. We give same-day
We look -- the day the person asks
you about the loan, you have as much
information as you need to make the decision.
We say yes or no, subject to appraisals and
all that. All the customer wants is a yes.
If you will tell them yes on the first day, 99
percent of the time you'll end up making that
loan, and they will stick with you if you'll
just tell them yes rather than dragging him
through the hoops.
So I think it's the way we do
business. We make it too difficult, and the
brokers -- we're going to come over and have
coffee with you, right? Sit around. They
make it easier than we do in the banks and the
credit unions. Correct that process, and
you'll get all the mortgage loans you need,
because you are the trusted local provider.
You still are.
Did you like that answer?
MODERATOR THOMPSON: Well, I'd
like to get to the regulatory panel, which is
our next panel, and I think it's very
I'd like to thank Mr. Hood and Mr.
Blaine for their wonderful presentations, and
they, too, will be around for our discussions.
Okay. I think this next panel is
very important. This is -- first, I guess I'd
like to say we're very happy that you all are
interested in offering these products. And in
doing so, we appreciate that you've taken time
out to travel to Washington to attend our
conference, because it shows a commitment on
I think that this next panel will
provide a different perspective, because as
you're trying to develop these products, you
need to hear about some of the regulatory
issues, and this is an opportunity to hear
about a CRA consideration, the Talent-Nelson
amendment, the implications from a safety and
soundness perspective, and also Regulation E.
And with that, I'd like to
introduce our next panel. And we have with us
Bob Mooney, who is the Acting Deputy Director
for Consumer Protection at the FDIC; Serena
Owens, who is the Chief for Policy and Program
Development and Risk Management at the Federal
Deposit Insurance Corporation; and Robert Lee,
who is a counsel here at the FDIC; and Ky
Tran-Trong, who is a senior attorney with the
Division of Consumer and Community Affairs
with the Board of Governors at the Federal
Reserve Board here in D.C.
And with that, I will turn it over
to Bob to start the regulatory panel.
MR. MOONEY: Thank you, Sandra. I
have the easiest job this morning. I get to
talk about CRA, Community Reinvestment Act.
And let me ask how many of you have heard of
the CRA. A show of hands, please. Quite a
few. That's been around since 1977.
Now, second question, how many of
you have been where you -- in your careers in
the military or in banking are in the
regulatory arena since 1977? Show of hands,
and be honest. That's -- I don't believe
I don't believe it. General, I
don't believe it, you don't look it. I can't
believe that you are General Egeland.
Just put your hand down. Mike
Bylsma didn't raise his hand, because -- Mike
Bylsma from the OCC is here, ladies and
gentlemen. He wasn't even born yet.
I mean, it's incredible.
And Mark Flanagan, who is going to
be our -- one of our facilitators this
afternoon, I know he has been around. Mark,
where are you? There you are. I know you've
been around since 1977, because you look like
I mean -- what? What happened?
No, we kid Mark -- I kid Mark. Mark, you look
terrific. You do. I don't know how you do
it. Let's hear it for Mark Flanagan.
He is remarkable, how he does it.
The main question about affordable
small dollar loan programs in CRA is: does it
count? And the quick answer is: yes, it
counts. And in regulatory speak, we say it
receives favorable consideration. I translate
that to say you've hit a home run.
I have out at the front desk
documentation of what I say today. And, Judy,
you'll be happy to know that I've done that,
because just in case there's a disconnect
between what I say here today and what the
examiner says when they go into your bank, you
might want to have that.
And, actually, we've had it out
there for quite a long time. In fact, Bob
McCrae, you're an examiner for the FDIC. Yes,
just nod. Thank you.
And you certainly are going to do
what we say today.
PARTICIPANT: Thank you.
MR. MOONEY: Yes. Bob McCrae,
ladies and gentlemen, one of our examiners.
The main point I want to make here
is that in our question and answer guidance we
clarify that there are types of lending
activities that may warrant favorable
And Rodney -- and it very much
related to the point that Rod Hood made this
morning that many of these loans should --
recommending that they be affordable, that
they have an asset-building component, and
that they involve some type of financial
In our interagency CRA guidance,
we cover all of those points. We say that
providing loan programs that include financial
education about how to avoid lending
activities that may be abusive or otherwise
unsuitable, receives favorable consideration.
On point to this afternoon's
discussions and this morning's discussions, we
say that establishing loan programs that
provide small, unsecured consumer loans, in a
safe and sound manner -- that is, with regard
to the borrower's ability to repay, and with
reasonable terms. That receives favorable
And we say that that is a lending-
related activity. And I can tell you that we
look at lending-related activities in all of
the different tests. If you're a small bank,
it's considered in the lending test. If
you're an intermediate sized bank, between
$250- and $1 billion in assets, it is also
considered in the lending test.
It very clearly is considered
under the lending test of large banks, and it
will receive favorable consideration.
Anything we say here today, though, if you're
developing a program, I would caution you to
check with your regulatory agency to make sure
that all of the components conform with their
expectations in the regulations.
But I think that's all I have to
say about CRA, and we'll take questions later.
We are very concerned also that
we've been providing a lot of guidance over
the years relative to managing these programs
in a safe and sound manner. I don't know
anyone in Washington who knows more about risk
management policies and procedures and the
application of existing guidelines than Serena
Owens, our Chief of Risk Management Policy at
So, Serena, I'm going to ask you,
what in our small loan guidance, and what in
our discussions this morning, should the
audience be aware of?
MS. OWENS: Well, thank you, Bob.
You're really too kind. But for those of you
that don't know me, I'm Serena Owens. I'm the
Chief of Safety and Soundness Exam Policy at
And the discussion has been great
this morning. I think that we established
early on with Chairman Bair's remarks, and
then Congressman Frank, that the need for
small dollar affordable loans are out there.
It is out there. And with the military
banking panel, and the credit union panel,
that immediately preceded us, I think we've
established that these loans can be made. And
they can be made in a profitable fashion as
And for those of you that are
bankers out there, you've also probably
accepted the fact that this is the right thing
to do. It serves the community that you're
located in. And unlike Jim Blaine's credit
union, it may not be the most profitable loan
that you make in the institution, but you've
accepted the fact that you're not necessarily
going to make oceans of money on a small
dollar loan program, you know, with a 36
percent APR or less.
But what -- that lingering doubt
in your mind is, what about the backseat
drivers that show up on my doorstep about
every 12 to 18 months in the form of the
examiners? Particularly, the safety and
soundness examiners that are going to come in
and say, "What were you thinking?"
Well, ladies and gentlemen, meet
the backseat driver. That would be me. And
in particular, we are aware that some
institutions may think that, well, the
examiners are going to come in, and they're
going to interpret this as a subprime lending
program. And we have an abundance of guidance
out in the regulatory community about the
regulatory expectations with respect to
subprime lending programs.
Those are very high risk lending
programs that require additional monitoring,
and also additional capital, and they do take
on a whole lot of regulatory scrutiny when
examiners come into the institutions.
But because you're used to me as
the examiner saying no all the time, I thought
I'd flip the discussion on its head and talk
about what affordable, small dollar lending
programs are not. And the first thing that
they're not is they're not generally going to
be considered a subprime lending program.
Because these are affordable
loans, they were not -- they are not typically
going to be programs that target subprime
borrowers, and some of the borrowers that
you're going to lend to in these programs --
no question about it -- they are probably
going to be subprime borrowers.
But when we crafted the subprime
lending, the expanded guidance for subprime
lending programs has been out almost six years
now, we looked at -- there's a difference
between the subprime borrower and making
exception loans to that borrower, and a
program that targets these individuals. And
that is the word that's used in the guidance
And we think that probably most of
the affordable small dollar programs out there
are going to follow -- fall under the volume
threshold that the subprime lending guidance
defines as a subprime lending program. If you
have a program that targets subprime borrowers
but is less than 25 percent of your capital,
it doesn't qualify under the guidance as a
subprime lending program.
And it doesn't necessarily warrant
the additional regulatory scrutiny as well as
the additional capital of one and a half to
three times as a starting point, the capital
that you would need on such a program.
MR. MOONEY: So it's excluded from
MS. OWENS: Yes.
MR. MOONEY: -- requirement, and
examiners are --
MS. OWENS: Yes.
MR. MOONEY: -- aware of that and
will not question that.
MS. OWENS: Yes. And when we
crafted the guidance, we used the word
"target." And, you know, when we are crafting
interagency guidance, we're full of self-
importance and we debate about the choice of
words sort of like congressional staff debates
over the choice of words in legislation.
And in this case, it turned out to
be quite prophetic, because subprime lenders
do target -- paint a target right on the
wallets of some subprime borrowers. And that
has concerned us over the years, and so we
But what we did understand but
didn't write in the guidance is we know that
subprime lenders are targeting those
borrowers, they are chasing after the rate.
They are wanting to make loans, risky loans,
that are insanely profitable, because, as
Congressman Frank mentioned this morning, we
make the borrowers -- the poor borrowers that
pay subsidize the poor borrowers that don't.
And that has typically been the business model
for subprime lending programs in the past.
But we don't anticipate that
institutions are going to specialize
necessarily in this type of loan. That's not
what we're looking for. We're looking for --
these are your customers. They deposit money
in your institution, and it may constitute the
majority of the individuals that you have.
But you can make a lot of $500 loans for 25
percent or less of your capital, two percent
of your balance sheet footings.
So in the majority of the cases,
we think that the subprime guidance would
probably not apply.
Now, you might ask me, well,
Serena, what about payday lending? Because
didn't you make an exception to the 25 percent
threshold for payday lending? And the answer
is, yes, we did, but affordable small dollar
loans, as we've talked about and have
encouraged in the guidance that -- the
proposed guidance that we released on Monday
of this week, wouldn't qualify as payday loans
You know, why are these not payday
loans? Well, payday loans are structured in a
way that it almost makes it impossible for the
borrower to pay those loans back. The two-
week aspect of a payday loan, actually from a
banker standpoint, works quite well.
When bankers structure loans, they
want to structure them to maximize the
potential that they're going to get repaid.
That's why in the commercial lending arena you
don't structure a crop loan to come due on
June 1st, unless you're from Texas like I'm
from and crops have come in May.
You don't structure a small retail
lender that has a shop on Main Street for his
loan to come due on December 1st, because
that's the time of the year when that business
owner needs their cash the most, and --
MR. MOONEY: I did when I was in
MS. OWENS: Oh, you are a hard
But for wage earners, you want to
structure payments when people have money. So
a two-week loan for people that are paid
biweekly is not necessarily a bad thing. But
in the payday lending structure, the whole
thing was due, and for people of modest means
$500 is a big chunk of their paycheck. And
the fact that it was due and payable in full
every two weeks meant that borrowers are
encouraged to roll those loans over.
The other thing that concerned us
about payday loans is the reliance, and in
many cases the over reliance, on third-party
vendors to provide this service to customers
that weren't the bank's customers, but were
other banks' customers. When you get a third
party vendor involved -- and I'm not saying
that you couldn't do that -- but two things
First of all, you have somebody
else that needs to get paid, and so the cost
of the product goes up, because the third
party vendor has to get paid. But also, the
institutions that are actually the lender in
that transaction often cede control of the
product and the underwriting standards to that
third party vendor. And that concerned us
greatly in some cases.
It becomes an issue of volume and
numbers, and, again, we're talking about
lending to your customers that have a need for
small dollar programs. We're not talking
about a volume business here. So for those
two reasons, what we're talking about with
affordable small loan programs that we're
encouraging in our draft guidance wouldn't be
subprime or payday loans.
So, and with that --
MR. MOONEY: So they're a good
thing. It's a good thing.
MS. OWENS: Yes. Absolutely, it's
a good thing. And what I can tell you about
subprime lending is I still get a lot of calls
in Washington from people in the field. They
call me up and say, "Well, I've got such-and-
such a situation. Do I have a subprime
lender?" And I'll either say yes or no. And
this program, the answer is no.
MR. MOONEY: Robert, could you
begin your remarks -- thank you, Serena --
with introducing and telling us a little bit
about what you -- Robert is our counsel, one
of our counsels in the Legal Division of the
FDIC. But he also has another career in the
military, and please tell us about that.
MR. LEE: Thanks, Bob.
I wasn't going to talk about that.
MR. MOONEY: Well, please do,
though. Thank you.
MR. LEE: I'm a reservist. I'm a
JAG reservist. I've been a JAG reservist for
the last 23 years. I'm set to deploy in
January, so I'll be here for another six or
MR. MOONEY: We're going to miss
MR. LEE: And then I'll be
checking out sites elsewhere for a few months,
hopefully not more than a few months, but
hopefully just a few months.
Thank you very much.
Vice Chairman Gruenberg, Director
Curry, General, guests, I'm here to talk about
pretty much the big elephant that's in the
middle of the room, and that's the recently-
enacted Nelson -- Talent-Nelson amendment
dealing with additional protections to
military service members and their dependents
concerning consumer credit.
It's a real interesting statute,
and really comes at the heels of a DoD study
talking about predatory lending that came out
in August of 2006. If you haven't seen it,
you should probably download it and read it,
because it talks in great detail about the
issues that DoD sees. You'll hear more about
that in the afternoon panel, but the statute
pretty much tracks a number of the
recommendations made in that study.
But pretty much the major impact
is -- from that is the amount that payday
lending hurts military readiness, hurts morale
obviously, hurts the costs -- increases the
costs of fielding an all-volunteer force.
The amendment goes into effect
1 October 2007. It will apply to extensions
of consumer credit after that date, so it
doesn't apply right now. DoD is tasked with
issuing regulations to implement the statute.
DoD is consulting with the different banking
regulators -- NCUA, the Federal Trade
Commission, and Department of the Treasury --
on how best to implement that -- a lot of
latitude given to DoD.
Under the statute, both the terms
"creditor" as well as "consumer credit" are
terms to be defined by DoD. There is some
guidance that's in the statute, but DoD can
add additional criterion that must be met in
order to be a creditor, and at the same time
additional criterion as to what may be needed
for -- to be defined as consumer credit.
I think we're going to be real
busy for the next nine months. With the thing
being effective 1 October 2007, and a
regulation out there at that time, you would
think you have to backdate several months, and
so you should be seeing a lot of that, seeing
a great deal of information probably in the
next six months -- I mean, probably -- I'm
guessing, but sometime in the summertime.
Okay. What does the law do? On
its face it says it prohibits creditors from
charging in excess of 36 percent APR for
consumer credit they extend to covered
members. "Creditor" means a person in the
business of extending credit, plus, as I said,
any additional criterion.
"Consumer credit" has the meaning
defined by DoD in its implementing regulation.
It does have two specific exclusions. It
excludes residential mortgages, and it also
excludes loans gotten in the course of buying
a car or buying something -- some other
personal -- piece of personal property, so I
guess a hi-fi or stereo, refrigerator, things
Under that -- under this Talent
amendment, APR is defined to include all fees
and charges, and that includes charges for
credit insurance, as well as ancillary
products in connection with the credit
transaction, although in the DoD -- in the
statute it provides that DoD in its regulation
will also define what's the maximum amount
allowable of all -- allowable amount of all
fees, as well as the type of fee. So we'll
have to see what that may be.
Okay. There are a number of other
requirements. The statute requires creditors
to give both written and oral notice to the
member or the dependent before issuing the
notice. So, I mean, I guess that may be an
issue if it's some kind of an internet type of
thing or something where it's not a face-to-
face type of situation.
The notice must contain the APR,
Truth in Lending Act disclosures, and a
description of the payment obligation, what
you have to do in order to fulfill the
There are a number of limitations.
It provides on the face that a creditor can't
extend credit to a member or a dependent where
the same creditor rolls over or renews or
refinances or consolidates the consumer's loan
with proceeds of other credit extended to the
You can't require the member or
dependent to waive rights, to include any
rights of recourse under -- they may have
under the Servicemember Civil Relief Act. And
that's kind of interesting because the
Servicemember Civil Relief Act, in Section
517, actually has a provision that allows for
waiver of rights. And so we'll have to see
how that interplay may work.
A creditor can't require the
member to submit to arbitration, can't impose
onerous legal notice provisions in the case of
a dispute over the loan. You have to allow
the member or the dependent to prepay the
credits. In other words, you can't penalize
the person for trying to pay off the loan
You can't use a check or other
method of access to a deposit, savings, or
other account, as security, as a pledge for
the loan. And, lastly, you can't require as a
condition of the loan that the member repay by
Now, a lot of this stuff we're
going to know more when DoD comes out with
their implementing regulation -- as I
indicated, what a creditor means, what
consumer credit means, what fees we're talking
about, what's the maximum amount of fees, the
types of fees. A lot of this is the unknown,
but certainly we'll get clear as the next year
comes on -- goes on.
Who is covered? The statute
provides it's active duty service members
under orders for at least 30 days. It also
indicates that it covers active duty Guard and
Reserve personnel, but it doesn't explain more
what that may mean. So we'll have to look for
DoD to provide us more guidance whether or not
-- I assume that wouldn't mean, you know,
Guardsmen or reservists who pull a weekend
drill for two days. I mean, I don't know. I
don't know. That's certainly up to DoD as
they see fit to interpret that.
Dependents means spouses, kids, as
well as folks that are supported by more than
50 percent by a service member for the last
half year. One of the things I suppose we'll
have to think about in the regulation -- and
I'm thinking as I'm talking out here -- is how
you identify who is a covered member.
And that is something that has
been noted in a number of the articles that
have come out since issuance of the new law,
which is, you know, unless a person is
actually wearing a uniform, how does one know?
And even if you're wearing a uniform, you
could buy that at Sonny's Surplus?
MR. MOONEY: Robert, related to
that, someone asked me a question at the
break. Is it true/rumor that the military
issues IDs to dependents? And someone in the
room would know whether or not at what age
they start issuing those IDs.
MR. LEE: Age 10, I believe, is
where you're permitted to get an ID in your
own right. And that certainly shows -- leaks
some indicia of some relations -- nexus to the
military. but as a reservist, that may not
necessarily be enough, because if you're going
to be on active duty -- that reservist floats
in and out of active duty status. But the
current addition of the ID card doesn't say
this guy is on active duty, or he's on -- he's
a reservist. It just shows your rank and your
branch of service.
Under the Servicemember Civil
Relief Act, the provision that deals with --
the most common -- the most well-known one,
the one that talks about the six percent
reduction, has now -- in this iteration has an
affirmative requirement that the person show
-- make a request to get a rate reduction for
the six percent, and as well as show a copy of
And so that would perhaps cover a
hole that I see, because just by the mere
presentation of a card you don't necessarily
know if that person is on duty or not. A set
of orders would do that.
MR. MOONEY: Thank you.
MR. LEE: Okay. Consequences,
criminal sanctions. This is interesting.
Fines, up to a year and -- up to a year of
jail time for knowing violations. It also
includes the potential for punitive and
consequential damages. It provides that if
the loan agreement, the credit agreement, is
violative of the statute, that the agreement
is void from the start.
As I said, again, operative dates
-- goes into effect 1 October 2007, which
means regs will have to be out several months
beforehand, at least for comment, notice and
comment. And a number of things will come
forth from DoD.
We're just starting. The
regulators have talked amongst each other
informally, and will be setting up meetings
with DoD to talk more about what we think may
be -- may be good insight as to how this
regulation should be crafted. And, again, it
should be a lot of business from now until
October of next year.
MR. MOONEY: Robert, thank you.
And Godspeed to you and others who are being
I never feel comfortable
discussing complex regulations like Reg E and
Truth in Lending, etcetera. And we thought we
would go to the source. We're honored to have
here today Ky Tran-Trong, a senior attorney
from the Division of Consumer and Community
Affairs for the Board of Governors of the
Federal Reserve System.
And, Ky, thank you so much for
MR. TRAN-TRONG: Sure. Thanks,
Bob. I'm not necessarily comfortable either
about talking about complex regs, but --
-- April and Deirdre were kind
enough to ask me to speak to you today, so I'd
like to thank them and the rest of the FDIC
for having me.
I'm going to actually just focus
on -- actually, I need a clicker. Plus or
Anyhow, I'm just going to talk
about the compulsory use prohibition in the
Electronic Fund Transfer Act, and also as
implemented under Regulation E. Just quick
background about what the Electronic Fund
Transfer Act is, it provides a basic framework
for the rights, responsibilities, and
liabilities of consumers that engage in
electronic fund transfer services and for the
financial institutions that offer these
Examples of the rights and
responsibilities that are provided are
consumer disclosures, limitations on liability
for unauthorized transfers, error resolution
rights, and, of course, the restriction on
compulsory use of EFTs in certain instances.
Some example of electronic fund
transfers or EFTs that are covered include
debit transactions at a point of sale, ATM
transfers, electronic bill payments, and
transactions that occur over the automated
clearinghouse or ACH network.
So the statutory prohibition in
the EFTA in Section 913 on compulsory use is
pretty straightforward. It says that no
person can condition the extension of credit
to a consumer on such consumer's repayment by
means of preauthorized EFTs, and no person can
require a consumer to establish an account for
receipt of EFTs with a particular financial
institution as a condition of employment or
receipt of a government benefit. For purposes
of this morning's session, I'm just going to
focus on the first prong.
It's important to note that the
scope of the compulsory use provision for
extensions of credit only applies to
preauthorized electronic funds transfers,
which are defined under both the statute and
the regulation as electronic funds transfers
that are authorized in advance to recur at
substantially regular intervals.
So, for example, a creditor can't
require as a condition of providing a loan
that's payable in, for example, four monthly
installments that the consumer agreed to
direct debits to repay that loan. And there
is an exception that I'll talk about if the
creditor offers the consumer a cost incentive
to pay by EFT.
But because the scope only applies
to preauthorized electronic funds transfers,
implicit is that a financial institution could
still require payment by electronic means if
the loan is going to be repaid in, for
example, single installment.
I spoke with Jim Blaine a couple
of days ago asking questions about his
program, because I didn't want to torpedo it
-- at the conference today. And
because his program requires repayment of the
payday loan substitute on the next payday, you
don't get into the recurring EFT issue.
Just to provide some background on
how this got into the Electronic Funds
Transfer Act, many of the Electronic Funds
Transfer Act's consumer protection provisions
came from the recommendations in the 1977
report by the National Commission on
Electronic Funds Transfers, and the report, in
general, recognized that the emergence of
electronic funds transfer systems had a
potential to provide consumers considerable
benefit in the form of convenience, lower
costs, increased security, and more efficient
But there was some concern that,
because these electronic transactions were not
covered by existing state laws for -- on
checks or federal consumer protections with
respect to credit card transactions, they were
concerned that the lack of consumer
protections could undermine public confidence
in electronic funds transfer payment systems.
And so their key recommendation to
the Congress was to enact an EFT bill of
rights, which provided a number of consumer
protections, including consumer disclosures
and error resolution rights. Also among these
rights, the Commission believed that it would
be critical that consumers would have the
freedom to choose among different payment
alternatives, and that any attempts to
restrict that choice should be prohibited.
In particular, consumer
representatives on the Commission were
concerned that, given the costs of putting in
these electronic fund transfer systems,
financial institutions might try to recoup
that cost by compelling or forcing consumers
to agree to repayment by electronic debits as
a condition to extending loans.
Interestingly -- actually, I went
too early, but interestingly, although the
Commission did believe that consumer choice
for one-time purchase transactions is also
important, it concluded that it was
unnecessary to enact legislation requiring
merchants to accept payment through whatever
payment mechanism, including check cash and
EFT, but they felt that the merchants that
only required payment by unpopular payment
methods would quickly go out of business, so
they thought that the market would be
sufficient to protect consumer choice at the
point of sale.
So the legislative history for the
EFTA indicates that the Congress also shared
the Commission's concerns about compulsory
use, and they wanted to assure that the EFT
develops in an environment of free choice for
the consumer, and so Section 913 provides that
a creditor may not condition any extension of
credit on a consumer's agreement to repay by
automatic EFT means.
But there is some discussion in a
Senate Banking report that indicated that
Congress didn't believe that this prohibition
should be absolute, and specifically the
report said that Section 913 would not
prohibit a creditor from offering a lower APR
to consumers who repay by electronic funds
So, that is, a financial
institution could offer consumers a cost
incentive to pay their loans by electronic
So as I said, Regulation E
implements the Electronic Funds Transfer Act,
and the provision on compulsory use can be
found in Section 205.10(e). Specifically,
paragraph (e)(1) deals with extension of
credit and says that no financial institution
or other person can condition an extension of
credit to a consumer on the consumer's
repayment by preauthorized EFTs, and there is
an exception for credit extended under an
overdraft credit plan or to maintain a
specified minimum balance in a consumer's
There are a couple of exceptions.
Consistent with the statement by Congress
that there should be exception for cost
incentives, creditors can offer a cost-related
incentive, such as a reduced APR, to encourage
consumers to choose an automatic repayment
feature, so long as this program with the
automatic feature is not the only loan program
that's offered by the creditor for the type of
So, for example, the staff
commentary says that mortgage plans that call
for preauthorized biweekly payments that are
debited from a consumer's account do not
violate the compulsory use prohibition,
because presumably these plans would reduce
the consumer's overall finance charge.
I should also note that this
exception is not limited to cost incentives
with respect to mortgage loans, but would
apply to cost incentives for any type of loan
One last note on this. The
consumer has to be -- has to qualify for both
the options that are offered by the creditor.
So you can't have two different programs, but
the consumer only qualifies for one, such that
the only choice they really have is the
program that requires electronic funds
There is also an exception for
credit extended in connection with overdraft
credit plans, and to maintain specified
minimum balances. As I mentioned, the Board
adopted this exception in 1981 out of concern
that without this exception financial
institutions would not offer overdraft credit
plans, and they also saw that consumers would
likely benefit from the exception because
they'd have fewer charges for returned items.
Staff commentary clarifies that a
financial institution can require the
automatic payment of overdraft credit plan,
even if the overdraft extension is charged to
an open end account that the consumer can
access in ways other than by overdraft, since
the institution would have difficulty being
able to tell the difference whether the plan
was accessed because they overdrew their
account or whether they accessed it by other
So some final thoughts. Again,
lenders can't condition extensions of credit
on repayment by the consumer by preauthorized
debits, unless they are offering the customer
a cost incentive to do so. If the consumer
does agree to repay the loan by preauthorized
debits, there is a separate requirement for
obtaining the consumer's signed, written
authorization, in the case of preauthorized
And the terms of the authorization
must be clear and readily understandable to
the consumer, and a copy of this authorization
must be provided to the consumer.
And, lastly, compulsory use
prohibition, again, only applies to repayment
by preauthorized EFTs. And so a creditor
could require a consumer to repay a loan by
electronic funds transfer, if the consumer is
going to be required to repay the loan in a
single payment or installment.
MR. MOONEY: Thank you, Ky. Well
done. Now you know why I didn't want to talk
about Reg E.
So thank you for coming here.
So to recap, the first question,
does it count under CRA? It counts, and the
guidance will be at the registration table
waiting for you. Do you need -- which you can
show to the examiners when they come in.
The second question, do you need
additional -- are there any additional capital
requirements? Generally, no. Any of these
loans which might be subprime are probably
going to fall under the capital percentage.
Will you encounter payday loan
underwriting problems that we've all addressed
over the last few years? No.
Talent-Nelson amendment -- DoD,
thank you. They'll be working it out, and it
will be effective in October. Details to come
Reg E -- generally, you cannot
condition extension of credit to repay by EFT,
but there are important exceptions. And thank
you, Ky, for explaining those to us.
Now, I'm sure we're bubbling over
with questions. So what questions do you
PARTICIPANT: There was a lot of
talk in the prior panels about the importance
-- this is probably for Mr. Lee -- for the
importance of these programs of direct deposit
as well as using savings accounts and
promoting savings accounts, and perhaps using
them as a security deposit.
And then, here we've heard that
same thing, but the -- for the -- and then,
those notions are reflected in the FDIC's
proposed guidelines. And that would be okay
for civilians, but under -- as Mr. Lee
described, under the Talent amendment, those
provisions would be prohibited, because it
prohibits -- it makes it unlawful, not that
you can't require it, it makes it unlawful to
use a check or other method of access to a
deposit, savings, or other financial account.
Banks are going to be -- banks and
credit unions will be continuing to offer
those programs. Is the FDIC perhaps
considering suggesting to the DoD that maybe
regulated depository institutions should be
MR. MOONEY: Thank you, ABA.
That's a wonderful question. We are
discussing at the moment what we will
communicate to DoD. We are mindful that there
may be certain requirements of the Talent
amendment that have unintended consequences,
and we certainly want to address those.
I think in our discussions with
military banks today we're aware that that is
going to be an issue for DoD and the banking
agencies to consider. And we -- I thank you
for highlighting it, because it is important.
PARTICIPANT: Lunch time.
MS. OWENS: No, there's a question
MR. MOONEY: We have two. Yes,
MR. CALHOUN: If I could just
follow up to that last question. I think it's
important, as that specific issue is framed on
that section of Talent-Nelson, that it is not
an absolute prohibition on the use of
It says, I think importantly, that
it may not be used as security for the
obligation. It doesn't say that it cannot be
used as a payment method or otherwise with the
obligation. And I think when you read it in
the context of the DoD report, one of the --
two of the primary areas that we're focused on
in the DoD report was the use of both car
titles and of the live check of payday for
very expensive lending where, in essence, both
of those types of security devices gave the
lender, in effect, a lien on the borrower's
It gave the lender the power to
totally disrupt that borrower's life by either
taking away the transportation they normally
would be dependent upon to get to a job, or,
in the case with the live check, being able to
deposit it repeatedly and essentially shut
down their financial account.
So I do think there are issues to
look at there to make sure there are not
unintended consequences, but I didn't want to
leave the impression that Talent-Nelson
included an absolute prohibition there
regarding those payment methods. It's only
directed -- I think the language specifically
says "as security for the loan," and that
that's important to keep in context.
MR. MOONEY: Well, that's
interesting. And do you care to identify
MR. CALHOUN: Certainly. I'm Mike
Calhoun with the Center for Responsible
MR. MOONEY: Thank you.
And we are also talking about a
savings component, whether or not there is a
-- it's held as security, it's terribly
MR. REPLOTTIS: Daniel Replottis,
Bank of Guam. If my question seems
disjointed, I blame it on jetlag.
MR. MOONEY: Yes. I understand.
You came a long way. Thank you.
MR. REPLOTTIS: A long way. I
guess being on the legal side, I'm looking at
the calculation of the annual percentage rate.
Will it be done similar to Truth in Lending,
or do we have to keep calculating that every
time we hit a late fee -- let's say it's
rolled over, there's a late fee, or whatever,
in terms of -- I guess, when do you calculate
it? At the outset of the loan?
MR. MOONEY: Are you talking about
MR. REPLOTTIS: The Talent
MR. MOONEY: Yes. Well, that's
probably a detail that we would need to
clarify. And I don't believe we've got into
the weeds that deeply.
MR. LEE: No. That's going to be
something, I would assume, in the regulation.
MR. MOONEY: But we're aware of --
as is everyone -- that there might be a
difference in the statute versus the current
regulations. But I'm not -- it's premature
for me to discuss. Thank you.
MR. SAELI: Jeff Saeli with
Columbus Bank and Trust. And just a couple of
questions for Mr. Lee and Ky there. The first
one -- with respect to identification of
military consumers, we've gone over this at
length, and I know we're talking specifically
about low-cost programs, and the Talent
amendment is kind of secondary.
But, first, the measures you
identified -- identification card and so forth
-- are wonderful, if the customer offers them.
What we're concerned about is when a customer
either inadvertently or deliberately conceals
their affiliation with the military. Whose
responsibility is it going to be to identify
whether or not somebody is protected under
Secondly, as we scan through
specifically limitations 1 and 5, which talk
about rolling over credit or renewing credit
and the use of financial instruments as
security, these apply not just to these sort
of payday lenders that we're trying to
overcome here, but they apply in general to
consumer lending and have broad-ranging
impacts in that regard.
And I've heard you say, sir, that
you're going to talk to DoD about how to
implement that, and I guess I'm just looking
for some reassurance that those are going to
be addressed, because they affect a broad
range of very good customers as well as some
of the more marginal customers.
MR. MOONEY: You've laid it on the
table. It's an issue that will be addressed,
and we have -- most of the banking agencies
have the right people here to hear that.
Anything else? Robert?
MR. LEE: No. But, clearly, the
ID issue is something that we'll work with DoD
as to whose obligation it is to establish that
the customer is covered or not covered. But
that's not otherwise listed in the statute.
So I would assume it's going to be addressed
in the regulation.
As for 1 and 5, yes, I mean, this
isn't -- I mean, this may have been driven by
the DoD predatory lending report, but the
statute doesn't distinguish and just limit --
I mean, it limits it to military members and
their dependents, but I can see it impacting
the larger community.
MR. MOONEY: I think another
question over here.
MR. BATE: Yes, I'm Paul Bate from
UNQUA Bank. In reference to the question they
had back there, wouldn't it be okay to simply
have that as a check box on the application
without violating ACOA or anything like that,
asking if their -- what their military status
is to cover the banks?
MR. MOONEY: Good question, and I
can't answer that.
I don't know. But I'll be honest
with you. When I get a question like that
from a bank, and I get many, I research ACOA
and Reg B very carefully. And I check with
But there were a lot of issues
relative to that. Would everyone have to put
a checkbox on their applications to ask
everyone whether or not -- you know, what
their status is? There were a lot of related
questions, but voluntary information is
generally not prohibited.
But I don't believe that that
involves a prohibited basis, but it's
something that I would prefer it doesn't --
thank you, I know. But it's something that I
-- we would want to carefully consider. And I
think we'd want to issue guidance on that
largely through the Federal Reserve that
implements Reg B.
MR. LEE: One additional thing is
the statute, in terms of the sanctions, it
talks about punishment if it's a knowing
violation. And if somebody is lying to you,
and you as -- I mean, you as an institution
don't know that, I mean, it's -- I can't see
-- I mean, I can see it being difficult to
fulfill that element. That would suggest --
that would lead to potential liability.
MR. MOONEY: Okay. I think we
have one more question before lunch.
MR. ADCOCK: I'm David Adcock with
BankCorp South. And I wanted to echo the same
-- the last two comments, and particularly in
the context of the Guard and Reserve, where
you have service members being activated,
going in and out of the service, their status
is unclear, their orders cover long periods of
time for which they may or may not actually be
The notification to the banks is
to -- at what point do they qualify, and for
how long? All of those are very important
issues, and most of what we've talked about
today has been for active members, active
service members. But the Guard and Reserve
are a major component in the remainder of
consumer lending. And they're out there, and
it's primarily what we see in the questions
relating to this.
Also, with credit cards, the fees
for using an ATM, would that be an onerous
charge if the advance were significantly
small? Those are the questions that need to
be worked out and need guidance as you work
through that process.
MR. MOONEY: Thank you. And we
want to hear more about that during the
breakout sessions this afternoon.
We are going to take our
affordable, small loan guidance, using that
broken out into three breakout groups. And
please join one of them, and we'll talk about
that this afternoon. We want to explore
details such as this to develop a template
that may be considered.
Well, thank you. Sandra?
MODERATOR THOMPSON: Thank you,
Bob. We do have a very full agenda today.
I'd like to adjourn for lunch, which is next
door at 12:00 noon. And right after lunch, at
1:15, we will be starting with our panel that
includes representatives from the Department
Thank you all. I think it has
been a very interesting morning, and we look
forward to the afternoon.
(Whereupon, at 11:57 a.m., the proceedings in
the foregoing matter recessed for
MR. BOSTON: Consult not your
fears, but your hopes and your dreams. Don't
think about what -- your frustration, but
about your unfulfilled potential. And don't
worry about what you have tried and failed at,
but consider what is still possible for you to
Pope John XXIII said these words
many, many years ago. Still, they are fitting
as we begin this dialogue on how we can create
small dollar loans for military families. My
friends, when you're going through this
process today, don't think about your fears.
Think about your hopes and your dreams. Don't
think about your frustrations; think about
your unfulfilled potential.
And don't think about or worry
about what you have tried and failed in, but
consider what is still possible for you and
your organization to achieve.
Now, in the spirit of joy and
unlimited possibilities, I need you to repeat
after me. Rich at last.
ALL: Rich at last.
MR. BOSTON: Rich at last.
ALL: Rich at last.
MR. BOSTON: Thank God, almighty.
ALL: Thank God, almighty.
MR. BOSTON: I'm rich.
ALL: I'm rich.
MR. BOSTON: At last.
ALL: At last.
MR. BOSTON: Now, I know I'm in a
room full of bankers.
But I think we can do better than
that. Let's try this again. Rich at last.
ALL: Rich at last.
MR. BOSTON: Rich at last.
ALL: Rich at last.
MR. BOSTON: Thank God, almighty.
ALL: Thank God, almighty.
MR. BOSTON: I'm rich.
ALL: I'm rich.
MR. BOSTON: At last.
ALL: At last.
MR. BOSTON: Give yourselves a
round of applause.
I want to say good afternoon to
Chairwoman Bair, Vice Chairman of the Board
Martin Gruenberg, staff members of the FDIC,
honorary guests, fellow panelists, government
leaders, banking representatives, business
leaders, ladies, gentlemen, and my beloved
brothers and sisters all.
It is indeed an honor for me to be
here, and I want to thank Chairwoman Bair and
the organizers of this historic event for
allowing me to be with you on this day. You
have to understand that I am overwhelmed to be
in your presence.
To me, each and every one of you
represents a financial freedom fighter, and I
am honored to be here with you, and to have
this opportunity to share a few thoughts this
afternoon on the topic from fear to freedom.
From fear to freedom.
Now, before I begin my remarks,
there is an announcement that must be made.
It's sad that it seems like always whenever we
come to an event like this there is always an
announcement that must be made, but that's how
Evidently someone in this room has
lost a roll of $100 bills wrapped in a rubber
band. Wow. Will this person please see me
after the program?
Because we have found your rubber
Now, don't ask me what happened to
the money, but we have found your rubber band.
Now, my friends at the FDIC have told me that
the next time make sure you put your money in
an insured FDIC account. Okay? And that way
you won't have that problem.
But anyway, let me move on. From
fear to freedom. From fear to freedom. My
friends, my primary purpose here this
afternoon is to help you understand that for
military families you are the gatekeepers to
the American dream. For military families,
you are the gatekeepers to the American dream.
Recently, John Wiley & Sons
published my newest book entitled "Who's
Afraid to be a Millionaire?" And I wrote this
book to help all Americans understand how to
take the emotional journey from financial fear
to financial freedom. The book points out
that today all Americans live in an age of
financial anxiety. Today, for instance,
Americans must make more complex financial
decisions than their parents or grandparents
ever had to make.
Today, many Americans worry about
how they will pay for their children's college
education, retire with financial dignity, and
survive a natural disaster, a terrorist
attack, a corporate restructuring, or economic
Many Americans today are anxious
about trying to access the American dream
while our country must cope with a trade
deficit, an income deficit, and a savings
deficit. But I don't have to tell those
gathered in this room about financial fear. I
don't have to explain the stress caused by
living in a time of financial anxiety to you,
because you provide financial services to
If there's one thing you
understand, it is economic stress. Many of
you deal with this each and every day in your
work. And also, to protect your own
household's economic stability, many of you
have already had to take the emotional journey
from fear to freedom.
Taking this journey has helped you
understand that indeed you are the captain of
your financial ship, and the master of your
Now, I want you to repeat this
after me. I am --
ALL: I am --
MR. BOSTON: -- the captain --
ALL: -- the captain --
MR. BOSTON: -- of my financial
ALL: -- of my financial ship.
MR. BOSTON: And the master --
ALL: And the master --
MR. BOSTON: -- of my economic
ALL: -- of my economic destiny.
MR. BOSTON: Now I want you to say
it like you really, really mean it.
I am --
ALL: I am --
MR. BOSTON: -- the captain --
ALL: -- the captain --
MR. BOSTON: -- of my financial
ALL: -- of my financial ship.
MR. BOSTON: And the master --
ALL: And the master --
MR. BOSTON: -- of my economic
ALL: -- of my economic destiny.
MR. BOSTON: Now give yourselves a
round of applause.
You see, my friends, ultimately
all of us are indeed the captains of our
financial ships. But far too many Americans
still do not understand this responsibility.
And it's for this reason that we must help our
fellow Americans take this journey from fear
Know, my friends, that sometimes
the very people you want to help are going to
reject your assistance. The very people that
you want to help are going to reject your
assistance. Know, too, that this rejection
will not -- will be the result of fear and not
indifference. It will be the result of fear
and not ignorance, and it will be the result
of fear and not lack of ambition.
I was really taken this morning by
the remarks of Congressman Barney Frank.
Earlier he mentioned that the major problem
was that fear is keeping many people from
entering your institutions. Fear.
You see, fear is a major reason
why many people today never reach their
financial goals. Fear of home ownership keeps
people renting apartments when they should be
buying homes. Fear of making financial
decisions contribute to people putting aside
their financial dreams. And fear of living in
an uncertain economy keeps people from taking
advantage of once-in-a-lifetime economic
You see, we must help people take
this journey. And this especially true for
our brave men and women who are serving in the
Armed Forces today. Our fighting military
members know how to shoot a rifle, survive in
the wilderness, and fight in hand-to-hand
combat. Still, as recent surveys suggest, and
studies suggest, our military fighting members
are not financially prepared to meet the
economic challenges of the 21st century.
Too many of them do not know how
to manage their credit, survive financial
hardships, or fight off predatory lenders.
And as a result, too many of our young
military households today are investing needed
capital in large SUVs instead of buying small
And why is this so? It is so, my
friends, because people fear what they do not
understand. And it is a sad fact today that
many Americans do not understand how to manage
their credit, how to buy a home, or how to
make basic financial decisions. To me, it's
all about ways and means, and if you don't
know the way, then you will not have the
But, again, when we're helping,
when we're reaching people who even rejected
our assistance, it's important for us to
understand that sometimes the person is
rejecting you because of the fear that has
been instilled in them by someone else. You
see, we all have to deal with something I call
second-hand stress. And second-hand stress is
what you get from somebody else. It is a fear
that a family member or a friend or even a co-
worker has instilled in you.
And, my friends, we all must be
concerned with second-hand stress, because
second-hand stress can be as hazardous to your
economic health as second-hand smoke can be to
your physical health. And I know this to be
case because I've had to deal with it in my
When I started my business many,
many years ago, the first person I called was
my mother. I was so excited, and I called my
mother, and I said, "Mom, I'm going to have my
own business." And I heard this long, loud
silence on the other end of the phone. And
then my mother spoke. She said, "Baby, what
you doing going into bidness (phonetic)?"
"You're not a bidnessman
(phonetic). You don't know nothing about
bidness (phonetic), ain't been in bidness
(phonetic), ain't got no bidness (phonetic)
being in bidness (phonetic)."
That's how my Momma talks. And
for a long time I thought she was right,
because I lost so much money those first
couple of years.
And during those times I would
have these nightmares, and in my nightmares my
mother would be chasing me around the room --
-- demanding the money back that
she gave me for college. And she would be
saying, "You're not a bidnessman (phonetic),
you're not a bidnessman (phonetic), you're not
a bidnessman (phonetic)."
And then, it's interesting, you
know, in time we got things turned around.
And a few years ago my mother had a birthday
and I was so busy I just sent her a check.
And she called me and she said, "Baby, you're
such a good bidnessman (phonetic)."
But, my friends, that was almost
10 years after she instilled her fear of
entrepreneurship in me.
It took me a long time to realize
that fear was one of the things that I had to
deal with if I wanted to become a successful
entrepreneur. But what I want to share with
you today is that many Americans have not gone
through this process, and so we are still
trying to cope with the fear that others have
instilled in us. And your job is to
understand this, so you can help people cope
with second-hand fear.
Now, the other thing we must deal
with today is to let people know that, indeed,
they use this program. This is why I'm so
excited, because we can use this small dollar
loan program as a way to help Americans begin
to cope with their financial fears. We can
use this program to first address some of the
short-term anxieties, financial anxieties,
that these people are dealing with.
But we can also use this program
as a way to start engaging these people in
financial education programs at your
And I'm assuming that all of you
know about the Money Smart Program from the
FDIC. This is a great way to match these two
things together, and this will help these same
individuals begin to take the journey from
fear to freedom, because the reality is that
each and every one of us must do this for
This is something that nobody else
can do for you, and we have to help the men
and women who take advantage of this program
understand how to use this program to begin
the journey from financial fear to financial
And again, you see, because like
so many Americans, we all want the benefits of
living in this great society. We all want to
live the American dream, but we don't want to
do what's necessary to really get the American
And this reminds me of a time when
this seriously ill man sent his wife to get
the results of his medical examination. And
the wife got there, and the doctor said, "Yes,
your husband is seriously ill, but he's going
to be okay. He just needs to know that you
cherish the ground that he walks on, so you
must quit your job and be at your husband's
beck and call 24 hours a day. You must cook
him three meals and a snack every day. You
must bathe him twice a day, and make love to
him at least three times a day. Do these
things," the doctor said, "and your husband
will be okay in a few years."
-- when the wife returned home,
her husband was waiting right by the door.
And as soon as the wife walked, in the husband
said, "Baby, what did the doctor say?" And
the wife started crying, and with tears in her
eyes she said, "Baby, the doctor said that
you're going to die."
Well, this type of
miscommunication occurs when you let someone
else do something for you that you know you
should be doing for yourself, like taking this
journey from fear to freedom. You see, my
friends, we must help other people understand
that they must take this journey.
But, more importantly, you must
also help them understand that while they must
take this journey, yes, they're going to have
some challenges, but indeed they can become
financially successful. And one of the myths
that we have to help our military families
understand is that indeed if you commit
yourself to the military for a long time, you
can become financially successful.
We do know that the average income
in our military family's household is not as
large as we would like it, but we also know
that we have millionaires who have served in
the military. And this is one of the reasons
why we do the Moneywise in the Military
Program, and I'm going to talk to you about it
in a few minutes.
But it's interesting -- we
recently had our program at Walter Reed
installation here in Washington, D.C., and
during our program I talked about millionaires
being in the room, and, again, mind you, we
had 350 military personnel gathered for an
all-day session on money management with me
and the nonprofit partners that we have that
go around to military installations.
And so we talked about
millionaires in the room, and, again, we have
people who are just beginning their military
career, and we've had people who have been in
the military for 20 and 30 years. But it's
interesting, several of the millionaires in
the room, millionaires in the military, came
up to me and thanked me for making that
But they also wanted some advice
on their portfolio.
And so they shared with me what
they were doing, and indeed they had a couple
homes -- one in D.C., and, of course, they had
one where they were previously stationed.
They had investments, and, of course, they had
their pension. But the most rewarding thing
was to indeed see that, at least the two
people that came up to me, their net worth
exceeded $1 million.
So we have to help people
understand that if they take this journey,
they can become financially successful.
Now, the other thing I found it
very interesting -- and that I like about this
program that we're talking about today --
Barney Frank, and I think also Chairman Bair,
have kind of said something that I think is
important. They both have mentioned that
today many people think that banks are only
for the wealthy in the society. That banks
are only for the wealthy in this society.
We can use this program, this
small dollar loan program, to remind all
Americans that banks are for them, regardless
of their income, regardless of their net
worth, regardless of their race, or their
gender, that banks are for them.
And this is why I'm so excited
about being here, and I hope you get excited
about what you're about to do. And I want to
bring this down, because I know I'm talking to
bankers, and I've had discussions with bankers
before. And I remember one time I was in
Detroit, and we were presenting a hotel
project, and we went through all of the good
social benefits of why this program was going
to be -- this hotel was going to be good for
the city of Detroit.
And afterwards a banker looked at
me and said, "Kelvin, that sounds interesting,
but, you know, the only thing that we're
interested in is the bottom line." You know,
what is this going to mean for us? And this
is what is so exciting about what you're
talking about today. Not only is it going to
provide a good economic and social benefit for
those who need it, but it's also going to
provide a good return for your institution.
Today, we've got to keep this in
mind. Payday lending is a billion dollar
industry, and many of you are not
participating in it. So when you get back
home, don't think about the obstacles; think
about the opportunity that this program
Also, think about the fact that
recently Mohammed Yumis -- and I probably am
messing his last name up -- but anyway, he is
the recent recipient of the Nobel Peace Prize
for his efforts to help the poor in India
begin to save and build businesses.
And how did he do it? With micro
loans, with small loans. But he, again,
proved that helping these particular
individuals with small loans can build a
financially sound institution while at the
same time improving the lives of those that
need the services the most. So we've got to
help people take this journey from fear to
Rudolph -- Mayor Giuliani once
said that courage is knowing how to manage
fear. My friends, we must show not only the
people we want to serve, but when you get back
home you're going to have to serve those
people who you want to really get involved in
this program and your organization how to deal
with their fear, because, you know, I don't
know if the bank president is here, but you
know he needs to be here.
And if he's not, you're going to
have to convince him that this is a good
program besides your CRA. And you're going to
have to deal with his fears. And, again, the
best way to do that is to help them see the
opportunity and not the obstacle.
But overall, in helping people
deal with their fears, there's three things --
and this is the reason why I'm happy to make
sure that each and every one of you get a copy
of this book today. I wanted to thank you for
just being here. I wanted to thank you for
having the courage to come and talk about this
program, because there are many banks who do
not have the same commitment that you have.
But when you look at this book, we
actually outline three things that you can use
to help your bank officials, to help the
people you want to serve, and even help your
family members deal with their financial
fears. And basically, it boils down to this:
you want to help people use knowledge to
understand their fears, you want to help
people take action, so that they can overcome
their fears, and, finally, you want to remind
people to have faith, so that they can replace
Use knowledge -- use knowledge to
help people manage their fears. See,
knowledge is the key. And today we're so
happy to live in this credit-oriented society,
but at the same time we must understand, if
you don't know how to -- if you don't have the
knowledge to use your credit effectively,
you're going to be taken advantage of in this
And it's interesting, because
credit has changed everything in our society
today. Credit has even changed the way --
well, it has changed my love life, to be quite
honest with you. No, I'm single, and there
was a time I thought a beautiful woman was a
lady who had a figure of 35, 25, 35. Today, I
think a lady is beautiful if she has a credit
score of 800.
Things just change. You know what
But I just want to give you an
idea of how, you know, credit has changed
everything in our society. And while you must
be an informed consumer when it comes to
managing your credit, we believe that
education is important, and that's why we have
the Moneywise television program, and that's
why we have something we call Moneywise in the
Military, which is visiting military
installations all over the country.
And I want to make sure that I
take a minute here to thank Leslie Arnst, the
Deputy Undersecretary of Defense for Military,
Community, and Family Policies, because they
have helped us assemble a great team. We have
over 15 nonprofit partners, including the
FDIC, and we spend all day helping families --
military families -- understand how to manage
their money effectively.
We're excited. We've already
visited Walter Reed. I'm going to be in San
Antonio in February. We've had a great
meeting recently in San Antonio where now
they're inviting -- they've invited me to go
to the Pentagon. I'm going to be in Europe
with this program, and even on Navy ships.
And I'm going to tell you, I'm excited about
this tour, because it's going to give us an
opportunity, again, to help our military
families take this journey from fear to
freedom. You see?
But as we -- what we're basically
doing is using the knowledge that we have,
with our TV products and with our financial
education tools, to reach out and help people
take this journey from fear to freedom. We
want to invite each and every one of you to
As we visit your cities, please
come. Be one of our panelists. Be one of our
sponsors. This gives you an opportunity to
let people know about not only this new
program you have, but all the other services
that you provide to military families. We
want everybody to know that, again, banks are
for everyone. Banks are for everyone.
And we also want people to know
that they must use knowledge to overcome their
fears. We have to promote the Money Smart
Program on our military bases. We have to let
people know that banks are engaged in
The other thing we want to do, as
I said, to take -- help people take action to
reduce their fears. The action we want people
to take is to join up and sign and participate
in the Money Smart Program, and the good thing
is that they can do this online. That no
matter where they're stationed around the
world, they can still access the Money Smart
So we use knowledge to help people
overcome their fears, we've given people
action that they can take to help them reduce
their fear, and the last thing that I think is
so important is to help people understand that
they must have faith and use faith as a way to
replace their fears.
Now, recently our country
dedicated a new memorial for the U.S. Air
Force and for the United States Marine Corps.
Both of these monuments are beautiful and
deserving. And I know that one day we're
going to dedicate a memorial to the brave men
and women who fought in the first war of the
And while we must remember those
who have given the ultimate sacrifice, I think
it's important that we also remember those who
are still with us. I think it's still
important for us to also honor those who are
fighting and serving in our military today.
And I think the greatest living memorial that
we can give to our military personnel is the
opportunity to access the American dream. The
opportunity to access the American dream.
And I think this is important
because this is really what our men and women
are doing. They are really fighting to
protect the dream. And so it's our
responsibility to help them access this dream.
And to me, that's what you do every day. To
me, your work is about more than giving people
access to financial services. It's not just
giving people access to financial services.
What you're really doing is giving
people access to the American dream. And you
are doing this, again, because you are the
gatekeepers to the American dream for many
Now, the work that you are doing
is important, because it helps people access
this dream. And this is what I really want to
bring home. Your work is helping people buy
homes. Your work is helping people secure
their educations. Your work is making sure
that people get the type of life that they
really want to have, financially speaking.
They can't do it without you. But
you must understand the important role you are
playing in people's lives. You can remind
households to use knowledge, action, and faith
to reduce their fears and to access their
dreams. And you can do this, again, because
you are the gatekeepers to the dream.
And this is so important, my
friends, because in recent times many
Americans have lost faith in our government.
Many people have lost faith in us because they
don't agree with the war. They have not -- as
Barney Frank talked about earlier -- been
rewarded economically. And, again, a lot of
us were disenchanted with what happened in our
government response to Katrina.
My friends, we can use this
program, we can use this opportunity to help
people to remind people that they must have
faith in the American dream. And this is very
important, because I believe that, going
forward, as a society we have a lot of
economic challenges that we must face.
You know that Americans today
don't know how they're going to pay for their
retirements. You're probably concerned about
how you're going to pay for your own
retirement. We also understand that right now
we have a lot of hard, tough decisions that we
must make, collectively and individually.
And for this reason, we must be
sure that we have faith in our economic
democracy, because ultimately that's what is
going to get us through the hard times, and
the most difficult and challenging times that
I think, and many others think, are coming.
Now, I don't know what you do, but
let me share with you what I do when I
sometime worry about our society. What I do
is I remember our forefathers. I remember the
courage I believe it took for them to look at
the struggling democracy called America and
have the nerve, the audacity, to print on our
currency at that time the words "In God We
Trust." In God We Trust.
Think about it. There's only 8 or
13 counties at the time. We didn't have a
Federal Reserve back them. They were trying
to get things started and organized. They
didn't know where the money was coming from.
They were in a war with Britain.
And yet they had the nerve and the
courage to put on their currency the words "In
God We Trust." A tradition that we continue
to this day.
How can these words remind us and
help us as we deal with our modern economic
circumstances? In God We Trust.
Let me use a poem to answer this
question. "Today, American military
households need so much, but ain't it good to
know that in God we trust. Yes, we need
credit education and financial services to
grow, but ain't it good to know that we have
some place to go.
"So when you try to love and
share, and others return your love with
despair, don't be discouraged, no that
somewhere someone cares. And when you try to
succeed, never ever give up. Go regroup, if
you have to. Cry, confide in a friend, if you
must. But always remember that in God we
"Yes, our military households need
so much, but ain't it good to know -- I mean,
ain't it good to know -- that in God we
My friends, we must remind others
to have faith in the American dream. You can
help people manage their financial fears. You
can use this program to help people use
knowledge to understand their fears, to take
action to reduce their fears, and to have
faith to replace their fears.
Now, I understand that the
challenge that I've given you will require
sacrifice, and in doing so let me remind you
of these words written by W.E.B. DuBois. It
was a prayer that he said many, many years
ago, which simply reads, "Give us grace, oh
God, to dare to do the deed which we know
cries to be done. Let us not hesitate because
of ease or the words of men's mouths, our own
"But they call. These mighty
causes are calling us, but they call with the
voices that mean work, sacrifice, and maybe
death. Mercifully grant us, oh God, the
spirit of Esther, that we may say I will go
unto the King, and, if I perish, then I will
The journey from fear to freedom
will require time, energy, and, yes,
sacrifice. But we all must take this journey,
so that we all can enjoy the life that we want
President John F. Kennedy wrote
the words, "We cannot let our fears hold us
from pursuing our hopes." My friends, don't
let fear keep you from pursuing your hopes
about the opportunity that these new loan
When you leave this meeting,
consult not your fears but your hopes and your
dreams. Think not about your frustrations,
but about your unfulfilled potential, and
worry not about what you have tried and failed
in, but only consider what is still possible
for you to achieve.
Thank you very much.
MODERATOR THOMPSON: Okay. Thank
you very much, Mr. Boston.
I guess we will reconvene in the
next room, the room next door, at 1:15. We
have a few minutes for a break.
(Whereupon, the proceedings in the foregoing
matter went off the record at 1:08
p.m. and went back on the record
at 1:21 p.m.)
MODERATOR THOMPSON: Okay. We
have a pretty full afternoon, and I'd like to
introduce the next panel by first
acknowledging the Department of Defense's role
in issuing the report on predatory lending
practices directed at the Armed Forces and
The report has contributed greatly
to our understanding of the prevalence of
predatory lenders and the often severe
consequences suffered by service members --
Bob, would you please?
The report that was issued by the
Department of Defense contributed greatly to
our understanding of the prevalence of
predatory lenders and the often severe
consequences suffered by service members and
families that turn to these lenders. It is a
loud and clear call to action for the
regulators and the banking industry.
I'd like to introduce our
panelists. Colonel Marcus Beauregard is
retired U.S. Air Force. He was a Program
Analyst in the Department of Defense, State
Liaison Office. He currently works in the
Office of the Deputy Undersecretary of Defense
for Military, Community, and Family Policy.
He is responsible for continuing the
Department of Defense financial readiness
Mr. Beauregard spent 27 years in
the U.S. Air Force, having had assignments as
a Squadron Commander, the Director of
Financial Management for Air Force Services,
and the Director of Policy in the Office of
the Secretary of Defense.
Our second panelist is Ms. Barbara
Thompson. She is the Director of the Office
of Family Policy and Children and Youth in the
Department of Defense. Ms. Thompson has over
23 years of experience working in military
child care, 17 years with the Air Force's
Family Members Program. Prior to serving as
Director for the Office of Family Policy, Ms.
Thompson had a special assignment coordinating
support programs for severely injured service
members and their families.
Our third panelist is Rear Admiral
Jan Cody Gaudio. Mr. Gaudio -- actually, Rear
Admiral Gaudio -- is the Executive Vice
President and the Chief Operating Officer of
the Navy Marine Corps Relief Society. Prior
to joining the Relief Society in 2005, he
served 34 years in the United States Navy and
commanded both at sea and shore.
His last command was as the 84th
Commandant of Naval District Washington,
headquartered at the historic Washington Navy
Yard in Southeast D.C.
And with that, I'd like to
introduce our panel.
COLONEL BEAUREGARD: Thank you. I
get the opportunity to start us off. And I
will be covering some of the demographic
information, some of the survey information
that we received, and really provide a
backdrop to what we see as a three-legged
approach to taking care of our service
members, which I think you will hear over and
And that's provide them education,
and you've heard several times that that's
important. Provide them affordable
alternatives -- the reason we're all here
today. And the other part, which was driven
partially by our DoD report, and that's to
have some limitations that protect our service
So what I'm going to cover today
is basically the research and findings of the
DoD report. That report was part of the
National Defense Authorization Act in 2006.
It was placed in there by Senator Dole and
asked for an assessment of the prevalence of
predatory loans for lending practices, the
effects of those predatory lending practices,
and then our strategies both for education and
then for dealing with the prevalence and
effects of those predatory loans.
And this is -- again, I won't make
this death by PowerPoint after lunch, so bear
with me. We'll go through this.
But I wanted to cover where we
came up with some of the information.
Determining the extent of predatory loans in
the Department of Defense is no easy
undertaking, because there is no single way of
defining it, and there is no single way of
determining how many people use these
We used input from our
installations and from the Defense Manpower
Data Center that does surveys on a regular
basis of our service members. We gained a lot
of information, a lot of understanding about
the industries themselves from the consumer
advocates that deal with this issue, the
Center for Responsible Lending, the Consumer
Federation of America, the National Consumer
Law Center, who are the primary providers of
information on the industry, and also from
academics that have studied this prominently
-- are Professors Peterson and Graves.
Peterson from the University of
Florida, Graves from the University of
California North Ridge, who did a -- just a
tremendous job gathering information not only
on the statutory aspects of payday lending
specifically, but also the prevalence of those
-- of payday lenders around major military
installations. And I'll just show you some of
the results that Dr. Graves gave us as an
update to their report that they provided in
And then, we also looked at
service actions. Basically, the answer to the
question, what are we doing about this issue
in terms of education, and also statutory
implementation, basically through the Armed
Forces Disciplinary Control Board, and then
what we had at the installation in terms of
I'm not going to talk so much
about the education portion, because Barbara
will be doing that, and Admiral Gaudio is here
as part of that effort in terms of
alternatives. But I'll show you what we came
up with in terms of our understanding,
especially the issue of prevalence and impact.
First of all, determining the use
of payday loans -- if we went strictly by what
we got out of the DMDC survey, it said it was
about five percent of the force. It's about
But what we found is that
typically -- and this is in talking with also
the consumer advocates that do this kind of
research -- it's typical to get an
undercounting of any kind of use of predatory
loans, particularly in the military where this
is not seen as a beneficial thing. It's
something that's frowned upon. And even
though it's a blind survey, people are
reluctant to say what they've done.
The CCRF -- that's Consumer Credit
Research Foundation. That's a foundation
funded by the association that supports payday
lenders. They did their own survey in 2006,
and they found that it was 13 percent of the
The Center for Responsible Lending
had done some research and analysis based on
information they obtained from the Stevens,
Incorporated reports of the industry, and
basically in terms of number of loans that are
provided, the amount of revenue that is
gained, and just an overall annual review of
the industry. And they came up with 19
We used the same kind of
calculation, refined the customer base a
little bit better than the macro information
that CRL had, and basically we came up with 17
percent of the force.
Now, since we came up with that
based on industry stats, we felt that that was
probably the best way of determining what
might be the number of people who actually use
payday loans. We also tried to estimate how
much was being used, how many loans and what
was the gross amount being borrowed.
Now, we went back to the DMDC
survey and took, again, the macro or the
average number that they determined from that
five percent using those loans. They said
that they're using about 4.6 loans per year,
and that they rolled them over twice.
Now, if you calculate that --
rolling over twice means that there's three
transaction costs for each loan. You come up
with about 13 -- approximately 13 transactions
for the loans that they took on an annual
The average amount borrowed was
not based on the rollovers or on the number of
transactions. That was straight average that
came out of the survey. The fee was basically
just taking $15 per hundred.
And so then we took the 17 percent
of the force times the amount that they said
they borrowed, and times the fees, and that's
how we came up with the $372 million borrowed,
and $167 million in fees annually.
This is some of the information
that was provided to us by Professor Graves
from the University of California North Ridge,
and for each one of the little yellow dots,
that's a payday lender. Each one of the red
dots is an unlicensed payday lender. And it
showed some of the concentration.
Now, the industry says, well,
you've taken, you know, an entire county and
looked at it, and so how do you refer that to
the military? Well, if you also look at what
we had around Fort Lewis and McChord Air Force
Base, and that line that you can see up from
the big green blob, that represents about 24
payday lenders within a very small area in
Lakewood. And so there is a tendency for
concentration, and we have a lot more examples
in the report.
The other thing we found is when
-- CFA did a lot of the research in terms of
the internet, and what was found on the
internet. Jeananne Fox, who is in the
audience today, did a lot of the initial
research in looking at these internet sites,
and there was a commonality in the ones that
were attracting the military.
They use a lot of military terms.
They ask for the LES, which is a leave and
earnings statement. They have military
symbols on their site. You know, a lot of
times they'll have "military" somewhere in
their name, or "Armed Forces," or something to
So that when we looked at
prevalence and the issue of marketing to the
military, you know, it became clear that while
marketing could be an issue of just proximity,
or it could be the use of familiar terms. In
any case, we saw that this was a way of
marketing very closely to the military.
One of the other things we did is
we collected about 3,300 case studies, and we
got these from either the personal financial
managers on the installation or legal
assistance officers who typically help service
members who find that they have problems with
some kind of commercial issue.
And so we had them document as
much as they could remember from their files
or from just their memory of cases that they
had seen in the last year as far as issues
with what were high-cost loans.
What we found is -- this is very
well documented, but -- and perhaps typical in
the amounts that were shown on the loans.
Many of the case studies that we received just
had very basic information. They had an
installment loan for so much, payday loan for
so much, but we didn't get the real sense of
the effect, of the consequences of those
In the ones that we documented in
the report, we had a full statement of what
went on. This one has to do with a title loan
where an individual used his wife's car for
collateral, lost it because he couldn't keep
up the payments, all he was paying was
essentially the amount -- the minimum amount,
not the principal but just the interest on
that loan. And when he lost the car after two
months, they still said, "You owe us 1,000
So he felt that he had nothing
else that he could offer at that point and
declared bankruptcy, ended up with some
disciplinary action as a consequence.
And I don't want to portray this
to be that all of them came out to be this
kind of a consequence, this is one of the ones
that said a full documentation, what happened
from beginning to end.
Here's another piece of very
interesting research, and we didn't do this
survey. This came from the Consumer Credit
Research Foundation, and it came out in June
of 2006. But we found it very interesting
what was said by both non-payday loan users
and payday loan users about some -- three very
Most people benefit from the use
of credit. Well, as you can see from the
responses, about three-fourths said yes,
regardless if you're a payday user or not.
And then, the next one it said -- they asked,
the government should limit the interest rates
that lenders can charge, even if it means your
people will be able to get credit.
Remarkably, still three-fourths either way
said, yes, that's a good idea.
And then, finally, there is too
much credit available today. And there's a
few less on the payday lending side, but still
you have that three-fourths/one-fourth split
in terms of the answer to that question.
So what we found was there's a
recognition from the standpoint of the
consumer. There's a recognition from the
standpoint of the commander and the command
element in terms of the amount of disruption
seen by the use of high-cost credit. And so
we saw that this was a clear validation that
there needed to be something done.
So what we found were some common
concerns, and they are listed in the report,
but I'll run through them very quickly. They
tend to offer products to inexperienced
service members, or just individuals with a
steady job that relates to a service member,
and somebody who had flawed credit. In other
words, somebody who didn't necessarily have
another option available at that time.
They tend to make the loans not on
the ability of the individual to repay the
loan. They market to the military through
familiarity, either through location or
through the use of a familiar vernacular.
They feature high interest rates.
The model makes -- it takes
advantage of the individual not necessarily
being able to repay the loan, but to have to
turn that loan over and over again, which is
where you get into the higher and higher
percentage or just the fees involved, and
start to equate towards that annual percentage
And then, we found that more often
than not they're looking for some kind of
exemption from other statutory rules that
limit the cost of credit, either by looking
for an exemption to the usury caps within the
states to have a carve-out for payday lending
practices, or looking to use other statutory
benefits to evade the state rules on the --
for small loans.
So those were the common things
that we saw as far as concerns. We found
other findings related to what we could do
about the issue of particularly payday loans,
that a lot of the things that had been
attempted at the state level in terms of
controls that were being provided to us as an
alternative to an overall cap, didn't seem to
have much impact on the consumer or the
protection of the consumer.
So we saw that one of the issues
was to have some kind of regulatory structure
that would limit the cost of credit. Apart
from that, like I said earlier, the Department
is tackling this issue through education and
outreach. I'll let Barbara cover that in more
And, certainly, as you've heard
today thus far, alternatives are critically
important. You know, we can do all the
education we want, but, as Mr. Blaine said,
the immediate problem needs to be answered.
And so those come down to the alternatives
that are available.
But I didn't want to leave you
with the idea that there's a -- that something
is not happening, that there isn't a movement
that has occurred as a result of all of this
visibility and effort to educate our service
members and provide them viable products.
And so I'm going to run through
some charts very quickly. I want to steal
everybody else's time, but just show you some
trends about what has happened. And we have
been tracking this since calendar year '02.
This chart shows basically how our junior
enlisted, E1 through E4s, would assess their
own financial condition.
And so it asks the question, which
of the following describe your financial
condition? And what we track is the bottom
two answers, numbers 4 and 5, which is tough
to make ends meet but keeping your head above
water, or in over your head.
And as you can see the lines --
and that tracks all the military services plus
an overall for DoD, the trend has been down.
It somewhat goes up and down over the years.
I'm not sure what the cyclical process is on
that. But the overall trend is still going
Even more remarkable -- and this
is probably closer to the issue of the use of
credit -- asking the same individuals about
their ability to pay their bills on time. And
as you can see, the line -- that we've gone
from where we were between 40 and 51 percent,
now we're all -- all the services are below 40
Some are almost down to 30
percent. And, basically, the E1 through E4s
are answering the question: in the last 12
months, did any of you have the following
happen to you or your wife? And so if they
bounced two checks, or failed to make a
monthly minimum payment on their credit card,
fell behind on rent or mortgage, were
pressured to pay a bill, had their phone or
internet cut off, had utilities cut off, had
some kind of possession repossessed, failed to
make a car payment, or obtained a payday loan,
they were in this category. So you can see
that the rates are going down.
One interesting side bar -- the
payday lending industry itself says that they
don't see other loans as being their -- as
basically the competition. They say their
basic competition is late payment fees and
overdraft fees, and other things of that
nature. And from that standpoint, they say
that they're a better deal.
And I won't try to categorize that
at all, but we put all of those on the same
ledger and say those are bad things.
Now, the good stuff -- savings
behavior. And we're looking at regular
savings behavior, behavior that is routine in
nature, where they're just making that
commitment upfront before they spend their
money on other things.
And this is a little hard to see,
but the first column is calendar year 2004,
all ranks, and then the second one is calendar
year 2006. And you can see all the bars are
bigger on the second one than on the first
one. The second two, it's calendar year '04
for the junior enlisted, and in calendar year
'06 for the junior enlisted.
And, again, all of them gone up.
All of the military services, each have seen
an increase in the level of savings. We see
that as really critical, and I'm sure Barbara
is going to have more to say about that.
Lastly, the trends on the high-
cost loans, payday loans, rent to buy, auto
title pawn, and tax refund anticipation loan.
These are ones that we have tried to look at
since 2004, and so, consequently, again, we
concentrated on them in 2006, so we could get
some longitudinal information.
Now, the way to read this one is
look at bar 1 against bar 2 in each case, and
you can see that the first bar is always
higher than the second bar. That's saying for
each of the categories, '04 through '06, rates
have gone down.
So there's more savings going on,
less use of high-cost loans, seeing people
spend or being able to adjust and take care of
the bills on time to a much greater extent,
and overall they're getting a much better
feeling of their financial condition. Maybe
more hope, more faith, less fear.
My last slide -- I just want to
leave that we see that the services are
steadily growing in their input towards the
education program, and also commanders'
attention. You know, when you have the Chief
of Naval Operations send out a message to all
sailors and the Commandant of Marine Corps
send out a message to all Marines saying pay
attention to your personal finances, it is
important to your readiness, that's a huge
change in culture. Extremely important.
We have lots of partners, like
Kelvin Boston, who are helping up with this
whole process. And I think the bottom line is
we're seeing that service members are
continuing to improve their behavior.
Establishing these statutory limits that we're
going to work through in terms of regulation
can only I think help that whole process.
MS. THOMPSON: Good afternoon,
everyone. Thank you all for coming and
thinking about our service members and how you
can support them. This is really a wonderful
As Marcus said, financial
readiness is the same as mission readiness for
the Department. That's why we place such a
high emphasis on the financial readiness of
our service members.
I'm here today to describe how the
Department reaches individuals and family
members to achieve financial stability. In
our larger society, we know that financial
challenges impact performance, relationships,
and marriages. It's no different for the
military, and that's why family programs are
involved in this initiative that Marcus
started, what, three years ago.
I want to just explain a little
bit where we deliver the services, and that's
our family centers. And each military
services, of course, has to have a different
name. Nothing is equal in our business.
If you go to an Army installation,
you would want to go to an Army Community
Service Center. If you go to a Navy
installation, you would want to go to a Fleet
and Family Support Center. If you're headed
to a Marine installation, you would go to
Marine Community Services. And, finally, our
Air Force calls their family centers Airmen
and Family Readiness Centers.
I just use the generic term
"family centers," and hopefully you can do
that, too, and not get lost if you ever visit
one of our places. But these centers are the
hub of the information and education and
outreach for financial readiness, and they
fall under the purview of the Family Policy
There are many avenues to take as
we look at changing the financial culture of
our military members and their families. And
I think that really is our focus, is how do we
change the culture. And we're seeing some
very good results from the start of our
financial readiness campaign. Those numbers
would not be going down unless it was working.
Our goals are to reduce the
stressors related to financial problems. We
recognize that the stress associated with out-
of-control debt can impact the performance of
service members and have a negative impact on
their family. We want to increase savings,
and that is really important, because it
motivates service members to control their
finances and live within their means.
We want to decrease dependence on
credit, especially unsecured debt, so that our
service members do not have to live from
paycheck to paycheck. That has to be a very
scary feeling. And we want to decrease the
prevalence of predatory practices. As Marcus
so eloquently told you about what the report
actually provided, the proof that this is
really an issue that faces our service members
But these protections take into
consideration the vulnerability of our service
members at a very difficult time of their life
when they turn to that as an avenue of relief.
Family centers are located at all
of our major military installations, and they
have our personal financial managers. These
are the people responsible to ensure financial
readiness of their units. One important step
is that their training and certification had
an impact on improving the stability of what
they offer our service members and their
They are the catalyst of changing
the financial culture of our military members.
Our acronym for the personal financial
managers are PFMs, and they have direct
contact with service members, leadership, and
family members. And they have to be really
the source of accurate, up-to-date information
to share with their audience.
And that's why our partnerships
with the different nonprofit organizations and
federal organizations has made such a
difference, because it increases their
knowledge base. But they provide educational
classes, they provide one-on-one counseling,
they got to academies, they go directly to the
units, and they also provide education
services when service members go to their
first location after basic training.
So the military services are
expected to provide information and
instruction to fulfill the needs of our
service members, so they reach this level of
financial stability. So we have a policy in
place that was done from the Department in
conjunction with the military services that
has guided our path, if you will, to find
But there is also an additional
source of information, and a GAO report was
published, 05-348, that summarizes what the
military services do. I will say this again:
they don't have the same name at the family
centers, neither do the military services
offer the same types of -- and lengths of
courses, but basically they all cover the same
topics that are mandated.
But this is what we're trying to
do. We're trying to ensure that service
members apply some very basic financial
competency to their everyday lives, and I
think, you know, Kelvin mentioned it. How do
they find the American dream? How do they do
these kinds of things if they don't have that
basic knowledge on making good choices?
In addition to the classes, the
financial readiness campaign partner
organizations conducted 1,300 classes reaching
over 60,000 service members and their
families, and these classes were primarily
provided by the staff at military banks and
credit unions located on military
installations. So these institutions are our
partners to outreach and provide education to
service members and their families.
Other organizations involved
include local credit counseling agencies,
state financial regulatory agencies, the
InCharge Institute, and the NASD Foundation.
The PFMs, along with our partners, also
distributed over 223,000 brochures and
pamphlets that, again, increases the knowledge
base of our service members and their
To assist the military services in
delivering financial messages, we have MOUs
with I think 26 different partners, and I'm
just going to talk a little bit about some of
the things that they've done for us over the
last couple of years.
The FDIC -- thank you very much
for hosting this, and for also providing Money
Smart. This curriculum and the Train the
Trainer Program is available to the military
services, and, I'll tell you, it's well used.
Defense Credit Union Council, as with the
AMBA members, provide education programs to
supplement programs offered by the military
services, and they are helping us with our
Military Saves campaign.
The Federal Reserve Board is
conducting a longitudinal study, and this
information is critical to us. As we look at
practice and we look at policy, we need to
have the information to back it up -- what we
do. But they're at Fort Bliss to
determine the effects of training on the
financial stability of families.
The FTC provides a lot of
materials on various topics about consumer
protection, and the Financial Literacy and
Education Commission has the money --
MyMoney.gov website that provides good
information to our families.
NASD has funded the military
awareness and education program. It has also
provided scholarships through NMFA for
military spouses to become financial advisors,
and to give back to their communities with
that new-found knowledge.
We'd like to thank Kelvin. I was
actually at the first Money Wise seminar at
Walter Reed. It was a huge success. It
reached, like you said, about 300 people,
young service members, severely injured
service members, and their families, and the
partners who were there at the booths also
provided outstanding information.
I think they liked it so much they
asked us to come back. So we'll see how we
can fit that into the schedule.
Like you said, San Antonio is on
the docket, and I didn't know about the Navy
ships but that sounds like an exciting venue.
Military Saves is our social marketing
campaign to persuade, motivate, and encourage
our military service members to start to save
and reduce debt. That's going to be held
across all military installations the last
week in February. We partner with America --
what is it called? America Saves campaigns.
MS. THOMPSON: So it's not
something that's outside of the community and
just for the military members. And I think
that's going to be a really exciting venue.
That we look at this as important as our CFFC
campaign, that it really attracts the
attention of every person at that
installation. We don't want to leave anybody
unturned, so 100 percent contact, so that they
know about this initiative.
The InCharge Institute provides
access to credit counseling and debt
management. They also help us with a magazine
called Military Money, and they work with the
National Military Family Association.
NASD, as I said, has provided the
scholarships to 200 spouses last year.
They're looking at providing another 200
scholarships this year. They have a
SaveandInvest.org website, and, again, great
information that not only helps the service
members expand their knowledge, but it helps
that PFM. When they are so strapped with
trying to provide the level of service that
they need for -- at an installation, it really
helps when you have a resource that you can
count on that you can share with people in
And last but not least, this is
our message. We really do feel that we will
fail in our mission when we have our service
members have bad credit, be in the throes of
bankruptcy, without emergency savings as they
go from location to location. We're really
worried about their retirement. We have a big
initiative to support their investment in
their thrift savings plan.
We want to make sure that they
have insurance, that they do not take --
participate in predatory loans, because it
impacts their security clearances, and we know
that does affect our mission's success.
Without your help, we cannot
achieve our mission's success goals, and we
really appreciate the time and effort that
you're spending today to think of avenues of
providing alternatives what our service
members may have to face when they're looking
at finding credit.
So thank you very much, and I'm
sure this is going to be a very productive
REAR ADMIRAL GAUDIO: Good
ALL: Good afternoon.
REAR ADMIRAL GAUDIO: Chairman
Bair, members of AMBA, and all of you here who
are concerned about our nation's military
readiness, and particularly the financial
wellness of our military members. We're
really honored to be part of this panel, and
to represent the military aid societies of
which Navy Marine Corps Relief is only one.
All of us are engaged at some level in what we
call financial readiness.
The Navy Marine Corps Relief
Society was founded in 1904 by Theodore
Roosevelt, and at that time we were chartered
to provide emergency financial assistance for
sailors, marines, and families, and that has
relatively -- although the focus of where we
provide that assistance has changed, the fact
that we provide it is unchanged.
As the Vice President and Chief
Operations Officer of the Society, I have
personally witnessed what I call a downward
spiral of debt suffered by our sailors,
marines, and their families who seek financial
assistance from predatory lenders.
We tend to see those that are
already in crisis, those on the downhill side
of the slippery slope. This industry that
claims it does not target our military is
lying. I challenge you to pick up any of the
commonly read Army, Air Force, Navy, Marine
Corps Times magazines. In the back of those
you will always find a large add under
financial services. In fact, it's one of the
few that's in color, because they pay a little
extra money to those magazines.
And those are organizations that
have company names that, as Marcus already
mentioned, use the term "military" and "Armed
Forces" and make claims such as, and I quote,
"U.S. military active duty personnel only" or
"installment loans for active military
personnel." So, clearly, they are not
targeting the military.
These lenders are focusing on the
young and the financially naive borrowers who
have bank accounts and steady jobs, because
those are the only two requirements to get a
payday loan. Their business model depends on
rolling the loans over repeatedly.
I have seen an estimate as high as
90 percent of the loans go to borrowers who
renew those loans five or more times each
year. And as you already heard in the recent
Defense Manpower and Data Center survey, which
actually was the smallest percentage of those
involved in predatory lending, they still
found that an average of 4.6 loans by each of
those service members in 2005, and they rolled
those loans over an average of two times.
This is the trend of predatory
lending. It's the rollover that counts.
Those that take predatory loans and pay them
off on time, we don't see. It's those that
get caught in this trap of rolling over and
debt that is no longer manageable.
Instead of solving what they
thought may have been a temporary cashflow
problems, these military families become
overwhelmed and financially destroyed when
they fall into payday debt spirals. In a
recent report, the Center of Responsible
Lending said that every year payday lenders
strip $4.2 billion in excess fees from
Americans -- now, this isn't just military --
"who think they are getting a two-week loan
and end up trapped in debt."
These loans carry triple-digit
interest rates that are typically over 400
percent APR. The resulting low morale and
preoccupation with personal financial
readiness has a direct negative impact on
I want to share, to put a personal
face on some of these, with you a couple of
stories. A 21-year old active duty sailor
from Virginia Beach with four dependents is
involved in payday loans for up to two years.
He started in March of 2004 by taking out
three payday loans to take his family to visit
his grandfather who was diagnosed with cancer.
By October 2005, he had four
payday loans totally $2,300. Doesn't seem
like a lot of money. Those loans cost him
$600 every month in interest and fees only.
To cover all this, plus the bounced checks
that were caused by the inability to pay his
other debts, he also borrowed from his Thrift
Savings Plan, and took out additional loans.
He routinely paid late charges on
his rent and car payments. It was at that
point that we saw him at the Society.
An E4 active duty sailor with a
wife and child in the Pacific Northwest was
assisted by the Society with a payment of
eight payday loans totally $5,250 in July of
2005. The service member took out two payday
loans to make a downpayment on a car. His two
loans grew to four, to six, and then to eight,
as he rolled them over and continued to make
up his budget deficit by taking out an
additional payday loan to pay the previous
His electricity was cut off, the
family had to go and live with relatives, his
car was repossessed and sold at auction, and
he currently still owes $12,000 on an
automobile. That's when we saw him.
An E6 active duty sailor requested
assistance in paying one month's mortgage,
$1,870 payment. The service member stated
that he got behind in his mortgage when his
wife's father became ill in Japan, and he had
to send her home to provide support.
At that time, he turned to payday
lenders. He took out a total of 10 payday
loans. During some months he needed two
payday loans to pay off the earlier loans. He
used his reenlistment bonus to pay off his
lenders and refinanced his house to pay off
all his other debts, but still required the
Society's assistance to catch up on a month's
In Jacksonville, Florida, an E5
active duty sailor and wife and three children
accumulated nine payday loans totally $5,405.
The interest rates on these various loans
varied from 121 percent to 421 percent.
Having no credit cards, this military couple
purchased furniture with their first $500
payday loan on the occasion of a permanent
change of station order.
There was a death in the family
followed by an ill relative. Each month they
rolled that loan over, paying the fees, and
taking out additional new loans. Finally,
they sought assistance from us at a cost of
$7,561, of which $2,156 were finance charges
on a principal of $5,405.
And, last, an active duty Marine,
E2, in California, accrued -- an E2 -- you
know how junior that is -- accrued 10 payday
loans for a total of $2,390. His finance
charge, again, each month was $422. And
that's when we saw him.
I can tell you -- I could go on
and on with service examples from -- that
include -- somewhere included in the recent
Department of Defense report on predatory
lending practices. And, again, Marcus has
covered some of that.
What's important for you to
understand is that these examples illustrate
what we see as an ever-growing problem. Since
August of 2001, the Society has assisted more
than 5,500 Navy and Marine Corps clients and
families that were victimized by predatory
lenders, and provided assistance in the amount
of $2,597,000 and some change.
We have developed a special
program that is focused particularly on this
predatory problem that has trapped our sailors
and marines in these high-cost loans. The
problem is more difficult to monitor and
control now that these loans have become even
more easy and accessible on the internet.
The websites that these predators
use are compelling. And, again, Marcus
highlighted that they're the neon signs of
today's world that beckon our soldiers,
sailors, airmen, and marines, at
establishments outside our military bases in
the old days to the internet today.
If you read the not-so-fine print
on some of these websites, you'll see that at
Check Mate you can borrow $150 for three days
with a finance charge equivalent to an APR of
At Northway Financial Corporation,
which, oh by the way, is licensed in the
Republic of Malta, you can borrow $700 at a
cost for your credit at a yearly rate of
758 percent APR. And all you have to do is
send them your Social Security Number and a
copy of your LES.
Those of you that know what
information is on a leave and earnings
statement, you can understand -- and you're
sending that to an organization you don't even
know who they are or where they are. But
that's what they want. They make it easy for
you. If you don't want to send them an LES,
you can just void a check and fax the check to
them. So now they have your check account,
they have your Social Security Number,
someplace in Malta maybe.
So you can see that this leads to
other problems. At ATMAdvance.com, you can
borrow $170 for two weeks, and the finance
charge is the equivalent of 460 percent APR.
At Cash Call, you can borrow -- this is a good
deal -- $5,000 at an interest rate of 59.85
percent APR, and if you make scheduled
payments on this $5,000 for 120 payments over
10 years, you'll end up repaying over $30,000.
This is a grim picture that I
think is brought into sharp focus by these
desperate military clients who come to the
military aid societies and ask for help. I
believe the Department of Defense does a
commendable job raising awareness and
educating our military families about the
perils of accepting financial assistance from
predatory lenders, education consisting of
effective personal financial management
training, and an intensive, sustained
publicity campaign can reduce the problem, as
we have seen, that results from predatory
But education alone is not enough.
The Navy Marine Corps Relief Society strongly
supported the recently-signed defense
authorization bill which put in -- which, when
put into effect in October 2007, will cap
interest rates and fees at 36 percent for our
It will also, we hope, eliminate
rollovers and the ability to use one payday
loan to pay off another. But still more needs
to be done to address the internet lenders.
Critical to our young military families is
access to alternative forms of short-term
loans offered by responsible lending
institutions, and that's what we're talking
about today. this is what has brought us all
My sincere thanks to FDIC and,
again, Chairman Bair, for focusing the
attention on this very important issue. It
affects the people's lives of our service
members. I see that up close and personal
every day. And in a time of war, when
ultimately the very military readiness that we
rely on to defend the freedom of the world, is
impacted by this predatory practice.
I appreciate the opportunity to
share my concerns with you, and certainly look
forward to your questions and further
MODERATOR THOMPSON: I think we
have a few questions.
MR. BATE: Hi. My name is Paul
Bate, and I'm from UNQUA Bank. We're located
in the Northwest.
The challenge we run into, or that
I run into, right now is is that where we're
located there aren't -- there are no bases of
any significance. But we have an incredibly
large Reserve and Guard population.
When I first got to the bank, just
to give you an idea of what I'm up against, I
-- we're best described as militarily
illiterate. When I first got there, I was
sent an e-mail by the CEO asking me if I could
send out an e-mail explaining what all the
different colored ID cards mean, because they
heard rumor that I had been in the military.
So my question I guess is: what
information do I have available to me that I
can use, so that I can go and convince my
board of directors that we need programs like
this? Because I have to be able to confront
them with data. And if I don't have that,
it's hard to convince a board of directors
that it's good just because it's the right
thing to do. I'd rather have actual data to
give to them.
COLONEL BEAUREGARD: For one, the
report is posted on DefenseLink.mil. If you
go to the page, you'll see the little button
for it, called Publications, it will be listed
in the publications that have come out. That
provides probably the best consolidated source
I would also use the
Peterson/Graves report that they accomplished,
and I think it was The Ohio Journal that
published it. But if you Google in
Peterson/Graves, that will come up, I'm almost
They did a 20-state review looking
at the most prominent areas, and I think
Washington State was certainly one of them.
Those would be two valuable
sources of information.
MS. THOMPSON: I'd like to add
something, too. I think it would be really
important -- each state has a family programs
coordinator, and I think when you -- and I can
-- if you e-mail me, I'd be happy to share who
that is in Washington State.
But that could lead the connection
to the Guard and Reserve units where you
actually can go there on a weekend or when
they have a drill weekend to talk about the
issues, how can we help you, we're here to
help you, those kinds of things, and actually
work with the family people to look at
financial readiness, that you can help them
with their education arm, if you would.
So my e-mail address is
barbara.thompson, T-H-O-M-P-S-O-N, @osd.mil.
And I'd be happy to share those Guard
REAR ADMIRAL GAUDIO: Well, I
would just add that the Society has offices in
Bangor and Whidbey Island, and in Everett, and
all of our directors at those three offices
would be more than willing to give you
specific information of the predatory
practices in the Washington area, what they're
seeing. And, again, I can speak with you
afterwards and give you my contact information
if you'd like to get in touch with them.
MS. THOMPSON: And there is one
other really important website. It's
www.militaryhomefront, all one word, .dod.mil,
and that is the official quality of life
portal. So information about the financial
readiness campaign is on that website, and the
partners and things like that.
PARTICIPANT: Thank you. I'd
really like to thank the panel for the
presentations. It was really exceptional. I
think the problems are military service people
are experiencing -- unfortunately, aren't
limited to the military service -- and I think
there are a lot of lessons to be learned from
the work that the military is doing to try to
keep our service people out of these
difficulties. That would be more broadly
But I'd like to ask -- it seems to
me a big part of the issue is keeping people
out of these payday loan or overdraft programs
to begin with. You know, I'd be interested in
your views on the issues of accessibility to
alternatives before they get into difficulty.
Is there a perception that insured
financial institutions, whether through banks
or thrifts or credit unions, don't offer
credit to meet their needs and that they are
only alternatives for the payday lenders, or
is it in part a marketing issue with the
payday lenders and others view them as a
marketing issue, and the insured institutions
don't. I'd be interested in your perceptions
REAR ADMIRAL GAUDIO: I think the
short answer to that, Martin, is yes. I think
it's all of those. I think there is a
perception by the service member that
traditional lending institutions won't help
them. I think there's a need to market those
initiatives, some of which we heard today,
better to our military families and service
members than we do today.
I also think -- and this probably
isn't fair, but I was one of those that had a
question we didn't -- we ran out of time. But
for those -- you know, for the panel that was
up here from the lending institutions that had
offered alternative programs, we have found
that when we talk to the service members this
generation -- and I'm now talking about this,
you know, 19- to 22-year old, you know, E1 to
E4, continually talks about speed and
And when you ask, but why did you
go to a predatory lender, and when you
understand -- I don't know how many of you
have experienced predatory lenders, but I
actually have. I've gone into several
offices. I have gotten to the point of having
to commit to the loan and then backed out, and
I've done the same thing on the internet.
But what's interesting to me is
they'll tell you that in 15 minutes they walk
out with the money when they walk into a
kiosk, and that's very true. I've done this
down in Corpus Christi, Texas, and I could
have walked out with $1,500 in less than 15
If you know what you're doing, and
you walk in with a check and your checking
account, and as a military member you have
your military ID card, and most enlisted
people have it and it has their end of
obligated service date on it, or, better yet,
their LES, their leave and earnings statement,
which also has that information on it, those
are the two things that as soon as that
lending agent can verify those two things,
you've got your money.
Yep, you've got a checking
account, and, yep, you get a steady paycheck.
That's all they care about, and you get your
money. So you've got to offer -- to some
degree, I challenge you to offer a product
that is very quick, that not only can -- can
it provide an alternative service, but gives
them the speed of service that they want and
are accustomed to in all of the other things
MS. THOMPSON: Go ahead.
COLONEL BEAUREGARD: One thing I
wanted to bring up from the report. We went
out to the installations and asked them about
their alternatives, and we asked the personal
financial managers, the people who are
responsible for the education. More often
than not, they referred to the Relief Society
as the alternative, even on those
installations where there was a very
prominent, very productive, alternative being
either offered by the credit union or the bank
So I think there is somewhat of a
communications and a marketing effort that can
still occur to get some of these programs
certainly to the people who can vector the
individual who most needs it to that bank or
that credit union, and very possibly for a lot
of the products a more overt marketing through
the command structure, so that they know
what's available, kind of like what Tinker has
MS. THOMPSON: I was just going to
add that I think, you know, there is an issue
of education, so they don't get there to begin
with. But I think we have to also think about
the stigma that to go to the aid society or to
go to the bank and have to go through all of
this rigmarole of why I need a loan and dah,
dah, dah, you know, they don't have to give
those reasons at a payday lender.
You know, so we want to get across
the idea that this is not a character flaw,
you know, because you're getting into economic
straits. You know, the idea is, how do we
help you not get there through education and
outreach? But I think that's the other thing
is not that it's just fast, that, you know,
that it is recognized that, you know, a lot of
people are in this same boat, and it's okay,
and we're going to try to help you get out of
MODERATOR THOMPSON: Okay. Any
CHAIRMAN BAIR: For the bankers in
the room, I hope you will carefully read our
guidelines that we handed out today and
provide -- we're giving 60 days' comments
before we finalize it.
But one of the things we tried to
address was the speed and convenience, the
competitive issue, basically under the
guidance if you have -- if the person is
already a customer of yours, and has a stable
employment, which obviously a member of the
military would, we're not going to be looking
further for underwriting.
We recognize that given the small
dollar loan amount, the fact that this is
going to be a very small but below 25 percent
of capital, and their subprime guidance will
be no special capital treatment, we're trying
to respond to some of those convenience
I have heard community bankers
tell me that some of the examiners they feel
require the same underwriting for a $300 loan
that we do for a $30,000 loan, and we don't
want to go there. We do want you to be able
to be competitive.
And to the comment earlier that
sometimes the policy people don't talk to
examinations people, this was very -- these
guidelines were done with a very active
engagement of a risk management examination
staff as well, because we want -- we want this
lending to be done in a safe and sound manner,
but we also want to do it in a way that's
responsive to the needs of the customer base
we're talking about.
And I think the guidelines try to
strike the right balance, but please do take a
look at it and give us your feedback.
MODERATOR THOMPSON: Well, you
heard it directly from our Chairman. I think
that certainly is a loud and clear call to us
as regulators and to the banking industry to
take care of this issue.
And I want to get started. I want
to bring Bob Mooney up here to talk about how
we're going to develop this product. And we
will be breaking up into different workgroups,
and Bob will give you the instructions,
because we really need to come to some
conclusions on this.
So with that, I'll turn it over to
MR. MOONEY: Thank you.
Please give thanks to our
wonderful panel from the Department of
Isn't it good to know that from
every level of the military, from non-
commissioned offices to Major Generals, and
over into the Department of Defense, that the
young men and women who serve us best are
being treated like family, like sons and
daughters. Isn't that good to know?
When we watch television tonight
and see them fighting for us, see them in
harm's way, at least we know they are in good
Now, the time has come -- and
we're only going to take an hour, just one
hour. The time has come for us to step up to
the plate to help out. What we will do this
afternoon is develop a small dollar loan,
affordable loan template.
We know that none of the bankers
in this room can make a decision today to
offer one product. We know that none of the
bankers in this room can do anything except go
back with an idea, with a recommendation. We
also know that when you come to a conference,
you want to go back with something useful.
That's what the template will do.
We're going to break the group up
into three separate workgroups of bankers to
discuss different aspects of a small dollar
affordable loan. Group 1 will talk about loan
features, interest rates, principal reduction,
and loan amounts. You'll discuss a range of
options that a bank can consider in developing
the product, and we've heard some examples
Group 2 will discuss underwriting.
We want to talk about underwriting criteria,
how to do it speedily, so that we can meet the
demand for quick loans, and perhaps use
technology to facilitate that and to
facilitate payments. We've heard some of
examples of that this afternoon, or this
morning, with mobile phones.
Group 3 will discuss ideas for
packaging, what financial education, what type
of savings components, whether club accounts
could be used to further make this an
attractive product and at the same time help
people get out of the cycle of debt, and
marketing programs that can be used to make
everyone aware in our military that these
alternative small dollar affordable loans are
So to facilitate that, I need your
help. I would like the bankers in the room to
just raise your hands, and keep your hands up.
Now, this is fun, but Bob can't
count over there, so I'm going to start over
here and I'm going to ask you to count off
one, two, three, one, two, three, one, two,
three. Bankers only now. No cheating. Yes.
(Whereupon, the bankers counted off as
MR. MOONEY: Thank you. Now,
those of you in the room who are not bankers,
let me call you the un-banked.
How does that feel?
You are welcome to stay here and
talk among yourselves. You are welcome to go
into a group and listen. But we want our
bankers who know how to develop products to
talk about these features.
So with that, thank you very much.
Department of Defense, once again, let's give
them a round of applause.
The National Association of
Military Banks in America, a round of
And I think you all know which
rooms we'll be going into -- 1, 2, and 3 --
and the folks outside will direct you.
Thank you. And we'll be back in
one hour, just one hour of your time. I guess
you have a 5-minute break, 10-minute break.
(Whereupon, the proceedings in the foregoing
matter went off the record at 2:24
p.m. and went back on the record
at 4:06 p.m.)
MODERATOR THOMPSON: Okay. Group
1 will report on the pros and cons of loan
features relating to affordability and
pricing, principal reduction, and loan
amounts, along with recommendations for these
to be used in a small loan template.
Group 2 will discus the pros and
cons of using different underwriting criteria,
and the use of technology.
Group 3 -- is the person who is
going to report out for Group 3 here? I see
the reporting out person for Group 1 walking
down the hall.
MR. MOONEY: I'm sitting down.
MODERATOR THOMPSON: Okay. Well,
thank you, Bob, because I'm getting ready to
turn this over to you to report out, so that
we can leave on time.
With that note, we will start with
our first report out. Robert Mooney, please
report out on the progress of Group 1.
MR. MOONEY: Thank you. I don't
know that I was elected to report out from
Group 1, but I was drafted.
In Group 1, and all of you in
Group 1 please raise your hands -- thank you.
And I need help reporting out. We were
looking at pricing and affordability, and we
were looking at features for pricing and
And Deirdre Foley or Pat Cashman,
please record the report out. Thank you.
Hello. Welcome. Jean Ann, good
to see you. Thank you for coming in. Kelvin.
We talked about affordability and
pricing. We had a long conversation over the
hour as to -- we were fortunate to have at
least four or five military banks in our
group. That wasn't planned. You all counted
off one, two, three. And other banks that
were considering offering small loan products.
Affordability and pricing was
something that we spent a good deal of time
on, and there was a consensus that these loans
may be somewhat profitable, may be a little
bit profitable by themselves, or will not be
profitable. Nevertheless, there was a
consensus that this type of loan, a small
dollar affordable loan for the military, is a
good start to a long-term multiple account
relationship. And it is the account
relationship which becomes profitable.
Therefore, the recommendation was
that an interest rate in the 12 to -- what was
PARTICIPANT: Eighteen percent.
MR. MOONEY: Eighteen percent
range -- Mark, thank you. You're the
facilitator, so you can co-facilitate with me.
Would be a range that a bank could discuss as
a possible feature in terms of price.
The determination was that it was
certainly affordable for someone in the
military, either as an emergency loan or as a
reconsolidation or the other term we used was
rescue loan. Please help us. And that was
The second was that it was clear
that for either loan -- the emergency loan or
the rescue loan -- there had to be a set
amortization period of less than a year pay
Interestingly, a banker who does
not offer this type of product posited that if
you were to make that rescue loan, or that
emergency loan which amortizes a credit line
attached to a checking account, but a closed
credit line, once that's paid off in, say,
four, five, or six, seven, eight months, that
an award or a reward be given to that
individual and give them an open-ended line of
credit for the $500 or the $1,000. Is that
right? Don, have I got that? I think that
was one suggestion.
Loan amounts -- the consensus was
that we're really talking about under $1,000,
MR. GILES: Yes, pretty much.
MR. MOONEY: For the most part.
It was also suggested that a feature of this
loan which would have great benefit would be
in some cases, not in all, you would require a
direct debit from a checking account or a
savings account. And most of these
individuals would voluntarily agree to that,
and voluntarily agree to direct deposit of
The benefit to the person in the
military is that when they're deployed they
don't have to worry about the loan being paid.
The benefit to the bank of this feature is
that they know that there will be repayment.
So it's a win-win all around.
The other is that we build a
savings component into this, because it has a
couple of advantages. The benefit to the
individual in the military, serviceman or -
women, is that they build savings. It acts as
a cushion. Should they have trouble making a
payment one month, they have something to go
The benefit to the institution is
whether or not it is strictly a secured loan,
and all of the issues that surround that, the
institution knows that ultimately there are
funds available to pay the loan outside of --
say, outside of earnings.
And those are the primary features
for the template that we would discuss, that
we would ask you to take back and discuss with
your bank to see if you would construct a loan
product that is a small dollar loan product
and affordable and something that -- now, the
other advantage to the savings component that
was discussed, the benefit for the bank, is
this vaulted multiple account relationship --
checking account, direct deposit, savings
account, online banking -- Don, thank you.
Don has pointed out that another
benefit to the bank for online banking is the
ease and the fact that they would be able to
get these payments directly. And that when
individual -- the convenience factor to the
serviceman or -woman is that they -- when
they're traveling, when they're fighting, when
they're deployed, they don't have to worry
about making payments. Very clear.
I mentioned that for 15 years I
haven't set foot in my bank, that I've had --
it's in Connecticut. And my paycheck goes
there, and I pay bills out of there, automatic
bill payment. And I don't need to be near
them, and that's true in situations if you're
looking to find vagabonds like me or help
people with their banking.
So, Don, what else? Essentially,
MR. GILES: Low fees/no fees.
MR. MOONEY: Oh, low fees/no fees.
Again, low fees/no fees, the profitability is
in the long term, and we believe that that was
mainly the direction that the military banks
went, and that if other banks were to sell
this to management that would be the major
What else, Mark? Anything?
Anyone in Group 1 want to add
All right. Group 1, thank you so
much. You were terrific.
Group 2. Hi.
MR. SALOUTOS: Group 2's focus was
on underwriting and automated processes, which
were very intertwined. And we said to start
with from the customer's perspective we wanted
everything to be quick and painless. I think
one of the speakers spoke about the fact that
what the consumer wants when they go to a
payday lender is basically cash with really
minimal questions in 15 minutes or less.
And for that to work, both of
these need to be relatively -- or actually
completely automated. So we -- on the
underwriting side, we talked about the fact --
I'm just going to lay some facts on the table.
There is risk. This is a lending decision.
There is no guaranteed repayment. There will
be losses, even though there is a military
member involved here.
Having said that, though, the fact
that there is direct deposit and clearly an
ongoing job this person is doing, there is
probably a lesser risk for those individuals.
Direct deposit, though, even though it does
guarantee that the -- you know, the person is
going to get paid into a checking account, I
guess we also uncover that it's fairly easy
for a service member to go online and change
their checking account from one bank to
another. So the direct deposit can, in fact
-- you can make a loan based upon a direct
deposit being there, but two weeks later it
might not be there.
We talked about, from an
underwriting perspective, the CIP and the fact
that for the most part if these are existing
accounts that's probably already done.
Otherwise, that is a necessary step that needs
to get done. And one of the ideas was that we
didn't decide on what needs to be addressed.
Is there a relaxed customer ID,
given that a person might be in the military?
Is that effectively saying if they're in the
military we've already -- somewhere along the
way someone has done that due diligence. Do
we need to do that same due diligence over
And our expectation in the end was
we probably do, because that's probably not
justification for us to miss that.
From an income -- or from an
information perspective, we talked about
having the leave and earnings statement. That
has projected time and service that would be
necessary, and it tells the time the person
has left to go in their current assignment.
But those would be pieces of information that
would be necessary for underwriting if we, in
fact, underwrite this way for a period of a
term debt of some form, maybe of 12 months or
Going back to automation, though,
we really want to make sure that everything is
as automated as possible. And the thing that
we need to keep in mind is these are, by
definition, small dollar loans. When you
apply 12 percent or 18 percent on $1,000, and
an average -- you know, an average value of
$500, and do the math for a year, you're
talking, you know, a few dollars, which you
have to work with from a profitability
perspective. And you've got to take credit
losses off of there, and then you've got to
take all of your processing costs off of
So if we're thinking in terms of,
you know, teller-based advances, teller-based
payments, coupon books, and stuff like that,
the math probably doesn't add up. Having said
that, though, there are a lot of ways you can
automate that, on the website potentially or
on ATM, where you'd be able to literally draw
the funds through maybe a pre-established type
relationship and repay them automatically,
either against the direct deposit or some
other way, shape, or form, if you went online
directly to do that.
But most likely it would be a case
where you needed to line up processing, so
that on the day of the direct deposit the
payment came out right away before anything
And I think that was basically it.
So, once again, automation was the key to
really make sure our costs were lower than
they had been before.
MS. OWENS: You are talking about
an established customer, so at the time that
you're opening an account you have to do some
customer ID and credit check, typically, so
that's what they're looking at.
I wanted to give a special thank-
you to Steve -- I forgot your last name,
Steve. Steve Saloutos. He was a very good
sport and talked about Group 2's report out
much better than I could, so give him a hand
if you would.
And thanks to -- thanks everybody,
the rest of Group 2. We had a great dialogue
and discussion about the terms and the
Bill Kane is our facilitator for
MR. KANE: Thank you. I've got
real big notes for real big ideas. Group 3 --
the first topic we were looking at is -- I can
read them from there, if you want to hold them
up, so everybody else -- at least the people
in the first couple rows might be able to read
Okay. Our first thing we were
looking at was the savings component to a loan
program. And one of the things discussed in
the -- I think during our panel was the
prospect of a loan, a holdback, to take five
percent of the loan disbursement, put that
into a savings account.
And we thought, well, gee, that's
real nice, if you like paying -- we were
thinking, well, if it's a $1,000 loan, and you
put $50 in, you're paying interest on $1,000
at 12 percent and earning five percent on your
$50. Boy, from a banker's standpoint, let's
put 100 percent into the savings account.
So what we thought -- in addition
to perhaps a loan proceeds holdback setting up
a monthly or a sweep account where if you had
direct deposit a percentage of your deposit,
of your paycheck, would go over to a savings
account. So there would be a sweep from your
checking account over to your savings account
on every payday.
The benefits there is that the
sweep would continue after the loan pays off.
So the borrower is being -- you know, being
encouraged to save every paycheck, not just
when he takes out a loan.
The advantage, of course, is that
the customer isn't paying interest on the
amount that's going into a savings, like it
does with a loan holdback.
The other feature we were thinking
is to put a hold on the savings account until
the loan is paid. Okay. With that sort of
scenario, at least when the loan is paid the
customer has got something that perhaps he
doesn't have to borrow again. He can go to
the savings or he can get a savings secured
And, of course, as everybody
knows, your prospects of repayment are much
better if you've got a savings account, if
you've got a deposit relationship with the
borrower. Okay? Next page, please.
Another interesting idea was that
when you set up that sweep that's going to go
on every payday from checking to savings, you
would have one percentage perhaps while the
loan was outstanding.
Once the loan is outstanding -- or
once the -- I'm sorry, once the loan is paid
off, you could increase the percentage of that
sweep. Okay? So the customer doesn't have
the loan payment anymore. He might be able to
afford to put more money into a savings
account once the loan is paid off. All right?
That was a short one, yes.
Problems we have that need to be
addressed is the legality. Can direct deposit
be required in conjunction with a loan? Some
say that's going to have to be addressed. The
same thing goes with forced savings. Can you
force a customer, a loan customer, to set up a
savings account and require the sweeps?
And then, the third issue that we
saw from a legal standpoint is restricting
access to the savings account. Can you put a
hold on that account while the loan is
outstanding, and say that there will be no
withdrawals from that account? Okay.
And so that's -- there are
incentives that you could do to encourage the
customer to set up the sweep account. You
could have matching deposits, some kind of a
matching, and of course a higher rate on the
savings accounts. Okay?
The second thing we're looking at
is financial education. Everybody agreed it
has got to start early. You can't -- it's got
to start before they get into the payday
loans, before they get into that circle of
debt that they can't get out of.
And then, we start getting into,
well, who does the education? And the vast
majority of people thought it should start
with -- if it's in the military, start with
basic training. That's where you've got the
people. This might be the first time that for
a young person going into the service that
they've got a job, that they've got a steady
paycheck, that they have to start managing the
money. Plus, it's going to be more effective
if a person in authority is requiring that the
training be done.
Other sources -- bank personnel
gets into problems as far as having the
resources to do the training, and then when do
you do the training? Do you do the training
-- do you give the training every time a new
customer comes into the bank for the loan?
Whereas with basic training you've got a large
group, you can do it as part of a structured
We know that there is web-based
training over the internet. The FDIC Money
Smart Program is one source for a web-based
program. And we're thinking there has to be
some kind of proof that the education was
done, that the customer completed the process.
And one of the people in the group
was talking about a program that's run through
the community. I don't know if it was through
the city or through the county where when they
completed the training they brought in a
certificate, and then the certificate could be
redeemed for a deposit in the bank. So the
bank might make a $50 deposit as seed money
when the -- when they had completed the
Any other comments from people in
Thank you for your participation.
MR. MOONEY: Okay. Bill, thank
you. That was terrific. Group 3, thank you.
Groups 1, 2, and 3, you were all great.
To conclude, before I turn it over
to Sandra, let me say that we will prepare
this template that we've discussed. We will
disseminate it through our website. We will
e-mail to each and every one of you tomorrow.
And we hope -- how many here -- a
show of hands -- are likely to take the
template and bring the discussion to
management to at least carefully explore a
military loan product like this? Thank you.
Thank you. Thank you so much.
MODERATOR THOMPSON: What a
positive way to end this conference. I mean,
that was the goal, to try to find some
solutions. And, certainly, taking this issue
to the industry, getting input from the people
that have to produce these alternatives, is
just incredible. And to see that show of
hands is -- it's really overwhelming.
I do have just a couple of
administrative things that I'd like to go over
with you. One, we have a survey. It's a very
short survey, seven questions, yes/no, and
then a space for you to write whatever you
want. We want to find out if you all thought
this conference was useful, if you had any
I know a couple of people asked in
the hall if we were going to do this next
year, so I would consider that to be a
positive outcome. But if you could just take
a few moments to fill out the survey and give
it to the people that will be outside the room
before we leave, I'd greatly appreciate it.
I also want to take the time to
thank, again, the military banks, the
Association of the Military Banks of America,
all of the panelists, all of the participants
that have just worked diligently to address
this very important issue.
We are just very excited about the
opportunities that this challenge presents,
and are looking forward to you guys writing us
back and telling us about your products. So
it is really a testament to the commitment
that you all have to solve this problem. So,
again, I want to say thank-you to the bankers
and all of the participants today who took
time out to come to Washington to participate
in this event.
I would like to acknowledge to
people that I drove absolutely crazy for the
past month or so, but especially in the past
week, the people at the FDIC that have worked
diligently on this conference -- Bob Mooney in
particular, Deirdre. I hate calling names,
because you always forget someone. But
Deirdre Foley, Pat Cashman, those are the
people that are in our division.
There are people in the other
divisions, DOA, that set this room up and make
all this -- all the work that they have done
is really transparent, and you only really
find out what they've done is when something
doesn't work. So everything worked very well.
I'd like to thank Mike Bartell and
the DIT people, and all the people that worked
diligently to put this conference together. I
think it was a great success.
And we look forward to your
CHAIRPERSON BAIR: Sandra, thank
you for all of your work.
I just, in concluding, if you do
plan to offer a product, please let us know --
FDIC staff may be making follow-up calls with
you, too. I'd like to be able to provide
further technical assistance and help. I'm
actually willing to call boards of directors
and other senior management, if you think it
would be helpful, to explain to people why
this is needed and encourage them.
We'd like to track your progress.
If you launch a successful model, we want to
be able to get information out, so other banks
can replicate it. So, please, let's have
ongoing communication about this.
And, again, thank you so much,
especially our colleagues from Guam. Thank
you so much for traveling here and spending
the day with us. I thought that was very,
very helpful. Thank you.
(Whereupon, at 4:29 p.m., the proceedings in
the foregoing matter were