The 3rd meeting of the Poverty Task Force was held on Monday, November 16, 2009, at 1:00 PM, in Room 149 of the Capitol Annex. Senator Brandon Smith, Chair, called the meeting to order at 1:11 PM, and the secretary called the roll.
Present were:
Members: Senator Brandon Smith, Co-Chair; Senators Gerald A. Neal and Johnny Ray Turner; Representatives Linda Belcher, Leslie Combs, C. B. Embry Jr., Kelly Flood, Jim Glenn, Keith Hall, Richard Henderson, Mary Lou Marzian, Reginald Meeks, Fred Nesler, Kent Stevens, Ken Upchurch, Alecia Webb-Edgington, and Addia Wuchner.
Guests: Luke W. Reynolds, Chief, Outreach & Program Development Section, Federal Deposit Insurance Corporation (FDIC); Kelly May, Kentucky Jump$tart Coalition for Personal Financial Literacy®, Public Information Officer, Kentucky Department of Financial Institutions; Gerry F. Roll, Executive Director, Community Foundation of Hazard & Perry County; and Penny Young, Homeless and Housing Coalition of Kentucky.
LRC Staff: DeeAnn Mansfield, Lou DiBiase, Amanda Dunn, Mustapha Jammeh, Carlos Lopes, Gina Rigsby, and John Scott.
A motion to approve the October 26, 2009 minutes was made by Representative Nesler, seconded by Representative Webb-Edgington, and approved by voice vote.
Luke W. Reynolds, Chief, Outreach & Program Development Section, Federal Deposit Insurance Corporation (FDIC), testified about the Small-dollar Loan Pilot Program. The FDIC small-dollar loan pilot program was designed to demonstrate the role that affordable small dollar loans can play in replacing high-cost financial products as part of a bank business plan to reach out to underserved communities. A successful small-dollar loan program can help an institution achieve positive outcomes and help integrate underserved communities into the financial mainstream. The guidelines address product development, affordability, and underwriting. Safe and sound small-dollar loan programs that comply with consumer protection laws will not be criticized by FDIC examiners. In fact, small-dollar lending program can earn an institution positive consideration under the Community Reinvestment Act (CRA). The FDIC small-dollar loan guidelines are: (1) loan amounts up to $1,000; (2) payment periods that extend beyond a single paycheck; (3) APRs below 36 percent; (4) low or no origination fees; (5) no prepayment penalties; (6) streamlined underwriting; (7) prompt loan application processing; (8) automatic savings component; and (9) access to financial education. The payday lending industry has been estimated to generate more than $28 billion in loans per year, but the APRs on these loans often exceed 390 percent. In February 2008, 31 banks were selected to participate in the Small-dollar Loan (SDL) Pilot Program. The two-year case study investigates how banks can profitably offer small-dollar products as an alternative to high cost financial products. Data will be collected quarterly from the first quarter of 2008 through the fourth quarter of 2009. Results from the first year are available in an FDIC quarterly article, The FDIC’s Small-Dollar Loan Pilot Program: A Case Study after One Year, located at http:www.fdic.gov/smalldollarloans. He stated that the national data is useful for Kentucky. The minimum credit score for small-dollar loans is 500 and allows individuals to build a good credit history. If the process to apply for a small-dollar loan is too cumbersome or long, people will go somewhere else such as payday lending institutions for loans.
Senator Smith asked how many of the 31 banks participating in the small-dollar loan pilot program were in Kentucky, and Mr. Reynolds said two. Mr. Reynolds stated that all the data from the participating institutions is submitted and aggregated for confidentiality reasons. There have been 24,000 loans made since the pilot began. Senator Smith asked if the 24,000 loans were just for Kentucky or all 31 banks, and Mr. Reynolds stated that the loans were for all the banks. Senator Smith asked if people in Kentucky were using the small-dollar loans, and Mr. Reynolds said that, again, because of confidentiality reasons, he would have to get permission from Kentucky banks to give this information. Senator Smith asked if people are finding out about the small-dollar loans and has there been a push to incorporate more banks that want to participate in the program. Mr. Reynolds said there has been an increased interest in banks outside of the program nationally who have started to make small-dollar loans.
Representative Webb-Edgington asked what characteristics were used to choose the 31 banks and what two banks in Kentucky and their locations participated in the pilot program. Mr. Reynolds stated they issued a call to institutions to submit an application to participate. The FDIC looked at the applications to ensure the institutions had met satisfactory regulatory compliance, two ratings for safety and soundness, at least two ratings for compliance, satisfactory CRA ratings, and no outstanding enforcement actions. They also looked at the size of the institution, geographic location, and age of the institution in order to select a representative sample of institutions. There were two banking institutions from Kentucky who submitted applications and met the regulatory criteria. He said that the pilot would end early next year. The two Kentucky banks are Kentucky Bank in Paris and Citizens Union Bank in Shelbyville. Citizens Union Bank in Shelbyville was used as case study in the bank survey.
Representative Glenn asked if both Kentucky banks were independent banks with multiple locations. Mr. Reynolds stated that Kentucky Bank has 16 branches and has $679 million in assets and Citizens Union Bank has 20 branches and has $634 million in assets.
Mr. Reynolds stated that the FDIC encourages institutions to have savings programs, but only six have mandatory savings programs. Consumers who have an immediate need for short-term credit are not always looking toward the future, and if the process to apply is too cumbersome or they are required to attend a financial education class, they will go elsewhere. Some institutions have been able to turn a profit on small-dollar loans.
Senator Smith asked if banks profit from late payments. Mr. Reynolds stated the profit usually comes from the interest rate and fee of actual costs such as a preparing a credit report or paperwork. Senator Smith asked if pay lender loan fees were higher or lower. Mr. Reynolds stated that the small-dollar loans average between 13 to 14 percent. The small-dollar loans make payments over more than a single pay period, so there is not an issue of a person having to come back the next pay period and get another loan to pay for fees.
Mr. Reynolds stated that it is important to look at the location where there is a need for small-dollar loans and partnerships such as with non-profits. Underwriting processes vary, but all are streamlined. The minimum requirements are proof of identification, address, proof of income, and credit report. The three business models that institutions use are community goodwill, small-dollar loans to make profits, and long-term relationships. In January 2009, a survey of the population through census was conducted to understand why people were banked or unbanked and to better understand who uses alternative financial service providers. The data will be released on December 2, 2009, and it will contain some Kentucky-specific data. There are potential technological platforms to facilitate small-dollar lending to explore what degree technology can expedite the underwriting process and help originate loans without having to sit down in front of a loan officer.
Representative Glenn asked if well established larger banks made small-dollar loans, and Mr. Reynolds stated that larger banks do not use the community-based lending model, but could.
Representative Henderson asked the FDIC had thought about presenting the small-dollar loan information to huge financial institutions that have multiple outlets across the state and present it as external community service, not necessarily to make money, but to help society. Mr. Reynolds stated they have talked to large institutions about the program. The small-dollar program is a community-based lending model and larger institutions tend not to use the same business model, but it is a program larger institutions could use.
Representative Henderson asked when the pilot program ends, data will be collected and a decision will be made to extend the program. Mr. Reynolds said that research and findings will be released from the program. On December 2, 2009, there is a Chairman’s Advisory Committee on Economic Inclusion and the Strategic Planning Subgroup will report findings about small-dollar loans and get recommendations and work internally to determine the next step, but at the minimum data will be released. Representative Henderson asked when the pilot program ends, will the banks discontinue the small-dollar loans. Mr. Reynolds stated that there is nothing to preclude them from continuing. Representative Henderson said that the payday lending industry is the only alternative for some individuals. Representative Henderson asked if the $28 billion figure in loans per year by the payday lending industry could be higher. Mr. Reynolds said that figures were not FDIC data and he could not validate all the methodology and it is a couple of years old. Representative Henderson asked if the figures could be worse because the economy was worse, but Mr. Reynolds said that he did not want to speculate on the amount.
Representative Flood asked how the small-dollar loans are being spent. Mr. Reynolds said they are not tracking the money, but most are spent for consumer purposes. Representative Flood asked if the 31 banks received a tax credit for being in the pilot program. Mr. Reynolds said that legal and regulatory restraints preclude the FDIC from giving financial incentives.
Representative Embry asked what would be the bank’s incentive to continue in the program. Mr. Reynolds said that the small-dollar loans are more likely to be delinquent than all loans overall but the charge off-rate is consistent with all loans. The small-dollar loans are not as risky as someone would think. The reasons to continue would be the CRA, business development opportunities, short-term and long-term community goodwill.
Luke W. Reynolds, Chief, Outreach & Program Development Section, Federal Deposit Insurance Corporation (FDIC), testified about the Money Smart Program. Money Smart is FDIC’s free financial education curriculum. Approximately 1,400 organizations are members of the Money Smart Alliance. The reasons why money smart is unique is it is available in multiple media formats, available in multiple languages, has no licensing fee or copyright restrictions, is scalable for more sophisticated consumers, is designed for the un-banked and under banked, it has a flexible-a la carte approach, is easy to learn, and is easy to teach. FDIC’s role is to distribute the curriculum to potential instructors, provide technical assistance, possibly including linking sites interested in delivering financial education with potential instructors, train-the-trainer resources, and publications. Impact data can be collected through surveys, focus groups, interviews, observations, case studies, and tests of ability. Financial education can be a building block and make a difference.
Senator Smith asked if someone would have to pay for the curriculum and other resources, and Mr. Reynolds said that the curriculum is provided free of charge. Senator Smith asked if the FDIC provided training sources, and Mr. Reynolds said that they provide train-the-trainer workshops.
Kelly May, Kentucky Jump$tart Coalition for Personal Financial Literacy®, Public Information Officer, Kentucky Department of Financial Institutions, testified about the Kentucky Jump$tart Coalition for Personal Financial Literacy®. The coalition believes that all Kentuckians need to have the financial literacy necessary to make informed financial decisions and it seeks to improve money management skills throughout the lifecycle of Kentuckians. The benefits of joining the coalition is to network with others, find partners for initiatives, stay current on financial literacy news, learn about new curriculums and programs, utilize public relations opportunities, enjoy booth space at the teachers conference and summit, and be included in Jump$tart promotions. Kentucky lower and moderate income consumers are more likely to buy high-priced basic financial services than higher income households. Surveys show that few parents are teaching finances to their children.
Ms. May said that there are only three states that require a full class in financial literacy for students to graduates: Utah, Missouri, and Tennessee. Schools in Kentucky have the option to offer an elective in financial literacy. Kentucky is piloting a new Math class that is financial-literacy based that would be a fourth Math credit in 13 schools. Currently, the financial literacy elective does not count as one of the main math classes. Every other year, the Jump$tart Coalition surveys twelfth-grade students to test their knowledge of personal finance and get a better understanding of their experience with and attitudes about managing money. A classroom teacher in a course not related to finance, economics, consumer science, consumer math or business administers the multiple-choice test. At least ten schools have to participate to be included in the survey.
Ms. May stated that Kentucky Jump$tart petitions the Governor each year to have April declared Financial Literacy Month. A press release and web page list a calendar of financial literacy events offered by coalition partners in April. Jump$tart hosts a booth at the annual Career and Technical Education Summer Program for teachers. Kentucky coalition partners are welcome to display their financial literacy materials in the Jump$tart booth. Handouts also promote partner sessions on financial topics during the conference. The Jump$tart Clearinghouse provides a database of education materials for a range of grades and learning levels, including adults, and most of the materials are offered at no cost. Kentucky Jump$tart’s clearinghouse may be accessed at www.kyjumpstart.org/Clearinghouse.cfm. There is also a link to the national clearinghouse, which has nearly 700 different financial literacy items. Jump$tart is raising the public’s awareness that personal finance management is a fundamental life skill that needs to be taught to our nation’s youth. Jump$tart’s campaign targets the educational decision makers and communicators, such as government and administration officials, parents, educators, school board officials, personal finance media, and organizations represented as coalition members.
Ms. May said she would provide the task force with the ten schools that participated in the Jump$tart’s High School Financial Literacy Survey that Senator Smith requested.
Senator Smith asked what one thing legislators could do to make a difference. Ms. May said there is a clearinghouse with 15 curriculums and there are speakers that will go to speak on financial literacy anywhere. She said that increasing public awareness of the information available would be helpful. Coalition partners offer a broad range of services. Information on the coalition can be found at www.kyjumpstart.org. Mr. Reynolds recommended leveraging existing resources and avoiding creating them. Senator Smith said fostering a relationship, such as the Bank at School programs, between the legislative and executive branches and banks would be very beneficial.
Representative Glenn stated that in 2008, the Governor of Tennessee mandated that financial literacy be taught in schools statewide. He said that the United States needs to stop borrowing so much money overseas and start investing in our own businesses to help our tax base and employment base. Ms. May stated that if parents are not comfortable or able to teach children about finances, then it should be mandated in the schools.
Gerry F. Roll, Executive Director, Community Foundation of Hazard & Perry County, testified on rural development philanthropy. She stated that for decades, especially since the war on poverty started, there have been huge amounts of charity and large scale entitlement programs directed at Kentucky, particularly in Appalachia. Charity is good, and it generally keeps people from starving or living outside, but it does little for the long term improvement of the conditions that keep the state at the bottom of the lists that it does not want to be on. She compelled the task force to start shifting this learned culture of helplessness and hopelessness to a new dynamic of communities that focus on long-term strategies of education, employment, health, arts, and recreation. These are the things that make dynamic thriving economies where people want to live and raise their children. The Western Kentucky’s Future of Giving: Wealth Transfer Study 2009 Final Report conducted by Murray State University through the Office of Regional Stewardship and Outreach for 18 counties in Western Kentucky documents almost $6 billion in wealth that will transfer from one generation to the next within ten years. The problem is that the next generation will inherit this wealth, but many do not live in those counties or even in this state. If Kentucky is not set up to provide opportunities for families to consider leaving a portion of their estate or to provide a living legacy, this money will be lost forever.
Rural development philanthropy happens when community foundations and other community-based initiatives engage in convening, fundraising, endowment building, grant making, and other community building opportunities to strengthen and supplement the typical but limited resources provided through state and local general funds for education and other community services. Most importantly, it intentionally engages a broad range of community institutions and individuals, especially those historically not engaged in community building and economic development, in community and philanthropic endeavors, which will build stronger, healthier communities. Based on the study by Murray State University, if the 18 western Kentucky counties have the appropriate infrastructure for people to contribute to their communities, and reasonable incentives are created for them to make contributions, capturing five percent of the wealth that will be transferred would net $300 million in an endowment that could provide $15 million in additional resources to those counties. These resources would be there, regardless of the state budget, to supplement, create and innovate in the areas of education, health and welfare, and other efforts that build a strong community and strong economy.
In 2006, Iowa passed legislation to stimulate local endowment building. Each Iowa county has an endowment today, and they are growing exponentially. In Perry County, a philanthropy initiative was started last year. The community foundation is building an endowment, making grants, and working with the community to create ways to improve schools, the environment, health, housing, and the culture. All Kentuckians would benefit from legislation that provides incentives for people to leave a legacy to the community they grew up in. Governor Beshear recently appointed a Commission on Philanthropy who is willing to work to build a coordinated effort.
Representative Marzian asked where Hopkins County received the $283 million in assets. Ms. Roll said that she should contact Gina Winchester at Murray State University. Representative Marzian said that people will donate if they know it will be matched. One success has been the Brains for Bucks program.
There being no further business, the meeting was adjourned at 2:33 p.m.