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Transcript - Affordable, Responsible Loans for the Military: Programs and Prototypes

The meeting convened at 8:00 a.m., on the Third Floor of the L. William Seidman Center at 3501 North Fairfax Drive, Arlington, Virginia, Sandra L. Thompson, Moderator, presiding.


SHEILA C. BAIRChairperson
KELVIN BOSTONKeynote Speaker









Table Of Contents

  1. Opening Remarks
  2. Panel Presentations:
  3. Keynote Speaker:
  4. Panel Presentation:

(8:06 a.m.)

MODERATOR THOMPSON: Good morning and welcome to the FDIC's conference on affordable, responsible loans for the military.

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 dealt with.

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 military.

It is my privilege and pleasure to introduce the Chairman of the FDIC, Sheila Bair.


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 today.

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 needs.

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 financial cushion.

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 mainstream market.

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 streamlined underwriting.

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 Committee.

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 this afternoon.

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 mainstream.

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 participating.

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 given.

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 situation now.

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 being.

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 average worker.

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 -- capital.

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 people.

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 this.

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 investment.

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 lunacy.

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 growth.

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 eyes?"


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 transaction costs.

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 there, too.

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 everybody's model.

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 problem.

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 or Mississippi.

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 factor.

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 fees.

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 reinforce.

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 shared.

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 significant paycheck.

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 military installations.

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 needs.

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 Advocate General.

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 members.

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 opening remarks.

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 presented.

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 practices.

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 occasion.

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 Award recipient.

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.

Thank you.


MR. DREIBELBIS: Thank you, Ege.

Let me see -- do we have a slide? There we go. Actually got it working. That's great.

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 business.

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- post ATMs.

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 opportunity.

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 housing.

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 credit.

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 make mistakes.

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 time.

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 sometimes.

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 sort.

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 again.

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 markets.

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 good credit.

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 individual groups.

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 plan.

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 overdrawn again.

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 approve.

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 again.

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 single.

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.

Thank you.


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 something.

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 partnership.

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 their superior.

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 counseling.

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 leadership.

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 entire term.

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 life.

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.

Thank you.

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 panel.

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 honorable way.

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 specially-designated ones.

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,, 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 understand.

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 environment.

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 sale"?

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 available credit.

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 the year.

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 you have.


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 different.

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 months.

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 month.

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 period.

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 fallen into.

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 accounts.

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 important element.

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 responses.

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 stubborn.

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 percent.

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 help.

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 improvement.

MODERATOR THOMPSON: Okay. Anyone else?

(No response.)

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 the account.

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. Okay. Questions?

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 lenders.

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 question.

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 military?

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 greater community.

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 well.

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 customer population.

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 world.

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 at home.

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 and women.

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 communication.

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 D.C.


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 Anderson.

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 quality rating?

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 do pay.

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 economy potential.

But I do want to know how your regulators treat them, because we want to be able to not upset our regulators.

Thank you.


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 consumer.

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 experience.

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 it to.


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 you.

MS. SNYDER: On our --

MR. MOORE: That's approval to turn down.

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 account.

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 civilian.

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 alternative sources.

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 small picture.

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 portfolio?

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 the program.


So as much of that information that you could share with us as possible would be appreciated.

Thank you.

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 vehicle loan.

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 deposit side.

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 some writeoffs.

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 customer.

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.


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 continuum.

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 affected.

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 everybody knows.

MS. McDANIEL: Great. I understand that. Thank you.


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 well.

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 product.

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 paying overdrafts.

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 paying those.

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 financial ability.

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 them.

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 might have.

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 organization.

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 Association.

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 officer.

He is here today to speak on a number of alternative programs developed to respond to predatory and other high-cost types of lending.

And with that, I'd like to start the discussion with Mr. Hood.

MR. HOOD: Great. Thank you, Sandra.

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 weakest community.

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 college.

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 American dream.

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 unions.

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.

How many?


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 today.

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 professionalism.

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 predatory lending.

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 effectively.

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 or medicine.

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 payday lending.

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 savings accounts.

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 well.

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 basis.

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 communities.

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 your leadership.

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 America safe.

Thank you.


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 season --


-- 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. Okay?

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 three-week loan.

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 understand it.

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 alternative.

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 organization.

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 it. Okay?

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, right?

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?

(No response.)

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 change.

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 obscene profit-making.


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 problem.

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 families.

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 aspires.

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 very fast.

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 down $5.

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. All right?

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 literacy.

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 mispriced.

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 generation.

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 reasonable. Right?

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 percent.

MR. BLAINE: It's easy. Great management.


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 automated repayment.

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 same page.

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 implementation.

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 2005.

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 question.


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 approval.

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 important.

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 your part.

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 that.


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 it.


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.


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 consideration.

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 education.

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 consideration.

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 the FDIC.

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 the FDIC.

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 well.

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 is "targets."

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 that --


MR. MOONEY: -- requirement, and examiners are --


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 understand.

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 either.

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 banker.

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 happen.

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 eight weeks.

MR. MOONEY: We're going to miss you.

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 like that.

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 obligation.

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 same person.

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 early.

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 allotment.

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 their orders.

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 deployed.

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 joining us.

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 minus? Okay.

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 services.

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 services.

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 transfer.

So, that is, a financial institution could offer consumers a cost incentive to pay their loans by electronic debit.

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 account.

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 credit involved.

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 product.

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 transfer repayment.

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 means.

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 debits.

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 later.

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 have? Yes.

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 exempted?

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.

What else?

PARTICIPANT: Lunch time.


MS. OWENS: No, there's a question here.

MR. MOONEY: We have two. Yes, sir.

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 electronic transfers.

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 family.

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 yourself?

MR. CALHOUN: Certainly. I'm Mike Calhoun with the Center for Responsible Lending.

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 important.


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 Talent --

MR. REPLOTTIS: The Talent amendment, right.

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 this Act?

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 our departments.

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 deployed.

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 of Defense.

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 lunch.)

(12:33 p.m.)

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 achieve.

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 it goes.

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 band.


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 recession.

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 military households.

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 economic destiny.

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 ship.

ALL: -- of my financial ship.

MR. BOSTON: And the master --

ALL: And the master --

MR. BOSTON: -- of my economic destiny.

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 ship.

ALL: -- of my financial ship.

MR. BOSTON: And the master --

ALL: And the master --

MR. BOSTON: -- of my economic destiny.

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 to freedom.

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 opportunities.

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 condominiums.

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 means.

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 own situation.

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 institution.

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 ourselves.

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 freedom.

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 dream.

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."

Well --


-- 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 statement.

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 represents.

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 freedom.

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 their fears.

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 society.

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 I mean?


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 help us.

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 financial literacy.

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 Program.

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 21st century.

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 military families.

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 trust.

"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 trust."

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 lives.

"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 perish."

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 to enjoy.

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 programs represent.

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 their dependents.

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 campaign.

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 over again.

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 members.

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 products.

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 2005.

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 alternatives.

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 69,000 people.

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 enlisted force.

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 percent.

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 basis.

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 that extent.

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 loans.

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 bucks."

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 simple questions.

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 rate.

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 detail.

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 down.

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 percent.

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 venue.

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 Office.

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 and families.

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 families.

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 financial stability.

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 families.

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 -- 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 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 your classes.

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 day.


REAR ADMIRAL GAUDIO: Good afternoon.

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 military readiness.

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 ones.

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 mortgage payment.

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 3,220 percent.

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, 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 lending industry.

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 military members.

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 together.

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 discussion.

Thank you.


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 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 of information.

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 certain.

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, And I'd be happy to share those Guard representatives.

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,, 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 applicable.

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 on that.

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 convenience.

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 minutes.

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 they do.

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 or both.

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 done.

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 it.

MODERATOR THOMPSON: Okay. Any more questions?

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 arguments.

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 Bob.

MR. MOONEY: Thank you.

Please give thanks to our wonderful panel from the Department of Defense.


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 hands.

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 today.

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 available.

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. Thank you.

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 instructed.)

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 applause.


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 affordability.

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 it?

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 one.

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 back.

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, right?

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 their paycheck.

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 to.

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, that's it?

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 selling point.

What else, Mark? Anything?

(No response.)

Anyone in Group 1 want to add anything?

(No response.)

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 again?

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 so.

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 there.

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 else cleared.

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 profitability.

Bill Kane is our facilitator for Group 3.

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 my handwriting.

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 loan.

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 program.

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 training.

Any other comments from people in Group 3?

(No response.)

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 suggestions.

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 feedback.

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 adjourned.)

Last Updated 03/28/2007

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