Chairman Leach, Ranking Member LaFalce, members of the Committee, my name is Joseph S. Bracewell, and I am chairman and CEO of Century National Bank, a $220 million community bank based here in the Nation's Capital. I also serve on the Board of Directors of the Independent Community Bankers of America (ICBA)¹, as well as ICBA's Federal Legislation Committee, and it is on behalf of the ICBA that I appear before you today. Thank you for the opportunity to present the views of our nation's community bankers.

Mr. Chairman, serving the needs of our communities is something community bankers know something about. If we did not serve the needs of our communities, most community bankers would not long survive. We believe this is one of the characteristics that distinguishes a community bank from institutions that have a regional, national or international focus.

The legislation that is the subject of this hearing, H.R. 4490, the First Accounts Act of 2000, is intended to provide incentives to banks and credit unions to do what community bankers already do. Community banks strive to ensure that all members of their communities have access and cost-efficient availability to basic financial services. In my testimony today, I will describe some of the characteristics of a community bank that help us to compete in a market increasingly dominated by financial conglomerates.

I would first like to make some general comments about H.R. 4490. Then, I will try to answer the questions posed in your letter of invitation. Finally, I intend to describe to you the manner in which community banks reach deeply into their communities to extend their services, and share with you some data from a recent banker survey ICBA conducted on this subject.

Mr. Chairman and Mr. LaFalce, we appreciate your desire to bridge the financial divide between the "banked" and the "unbanked" through the introduction of H.R. 4490. This is a commendable goal, particularly as instances of predatory lending, check-cashing scams, "cash leasing" schemes and other fraudulent activities are brought to light. Clearly, as a nation, the more quickly we can move vulnerable consumers away from the financial underworld and into the light of legitimate regulated financial providers, the more quickly we can rid our nation of these abuses.

We also applaud your efforts to require the Treasury Secretary to establish programs to provide financial education to low-and moderate-income areas, for clearly something along these lines should be done. Indeed, in this regard, the ICBA has teamed-up with the Wall Street Journal to sponsor a program that partners community banks with local high schools to teach students the basic and not-so basic points of finance. This program will help them become more financially-literate adults. I will describe this program in more detail later in my testimony.

Predatory lending practices and check-cashing scams are repugnant to all of us and should not be tolerated. However, the answer to these problems does not lie in new government mandates. The answer lies in the stricter enforcement of laws already on the books.

As a trade association that exclusively represents community financial institutions, we do not believe that government intervention is needed or desired to encourage community bankers to make banking affordable for everyone in their communities. Nor do we need a mandate to provide financial products that meet the needs of everyone in their communities. And while $30 million a year can buy a lot of incentives, as I shall illustrate, many community bankers already provide basic banking services in their communities.

First, Mr. Chairman, I would like to make several comments on the bill.

The "findings" section of the bill states that "many low- and moderate-income persons lack adequate access to basic financial services." We have found that not to be the case in many of the Main Street communities served by ICBA member banks. In a survey we conducted among our leadership bankers, every one of them offered some form of "basic banking" such as free or low-cost checking accounts for people in their communities.

At my bank, we offer a checking product that is affordable to almost everyone. For a flat $4 monthly fee, Century National Bank offers a checking account with no minimum balance, unlimited ATM usage, and customers can write up to 10 checks a month. There is a nominal charge for additional checks, but with unlimited ATM access, most customers can stay below the 10 check limit.

Other bankers responding to the ICBA survey offered similar free or minimal cost products, some with absolutely no strings attached. And the few that had qualifications reported that they were minimal, such as agreeing to have checks truncated (returning images of the checks rather than the checks themselves) or having payroll checks direct-deposited.

A second area of concern in the bill, Mr. Chairman, is the broad powers and discretion granted to the Treasury Department. For example, the bill requires that the Treasury establish programs to support and promote the expansion of access to financial services in low- and moderate-income areas, the development of new financial products and services to meet their needs, financial education programs for low-and moderate-income individuals, and "such other activities and projects the Secretary may determine are consistent with the purposes of this Act" (emphasis added). Similarly, under the powers and authorities section of the bill, the Treasury is granted authority to mandate "other financial services deemed appropriate by the Secretary to meet the needs of service areas or service populations" (emphasis added). This is a very broad and potentially dangerous grant of authority.

Mr. Chairman, it seems to me that these broad powers and authorities are an open invitation for Treasury to mandate actions to carry out the particular social goals of the Administration in power, regardless of political affiliation. For example, what in the bill would prevent Treasury from requiring all banks to provide free check-cashing services for the entire population? What would prevent Treasury from requiring financial institutions to issue ATM cards to anyone? Or requiring banks to open accounts for anyone, regardless of the risk-control measures they may employ at account opening (such as an approval process through Telecheck to see if the applicant is a habitual check bouncer)? Or to absorb the entire cost of no-frills accounts, rather than permitting the institution to pass a reasonable fee, such as the $4 a month that I charge, back to the consumers?

I think you will agree, Mr. Chairman, that these are not desirable goals. But under H.R. 4490, they would be within the power of the Treasury to mandate.

We would encourage the Committee to re-think granting any Administration such a blank check.

On the other hand, Mr. Chairman, we believe the requirement that the Treasury establish programs to expand financial literacy among low- and moderate-income people is an excellent idea. An educated population is much less likely to fall victim to the perpetrators of credit fraud schemes. And education could serve to bring new customers into the banking system, where activities are properly supervised.

Many community banks already offer educational programs in their communities. As an example, the ICBA sponsors a program for community bankers in cooperation with the Wall Street Journal to improve financial literacy in our nation's classrooms. Under this program, an ICBA member bank partners with a local high school to provide a turnkey program for teachers to help teach teenagers with information on everything from the dangers of credit card debt to how to read stock portfolios. As part of the Wall Street Journal Classroom Edition program, the schools receive a monthly student newspaper with stories taken from the Wall Street Journal. Teachers receive a set of eight instructional videos to help students reinforce the topics. And teachers also receive a teacher's guide, complete with lesson plans, quizzes and tests. They also receive a subscription to the daily Wall Street Journal to help keep the topics current and fresh.

This year alone, community banks are helping some 3,000 students at more than 100 high schools through sponsorship programs. This program, which costs bankers $280 a year, supplements the school's business, economics and personal finance curriculum, and sharpens students' financial skills through an integrated curriculum that is fun and effective.

This program is certainly not the full answer, but it is a start. Programs like this can supplement and complement Treasury's efforts to increase financial literacy in our communities.

Mr. Chairman, your letter of invitation posed several questions. The first asked how prevalent basic banking services are in the marketplace today, and what is the role of the public and private sectors to expand such services.

Again, I can only speak for the communities served by community banks, but on the basis of our survey, it would appear that virtually every community bank that responded offers some type of basic free or low-cost banking service. The types of basic banking services offered include free checking with no strings attached, to basic checking with no minimum balance and 10 checks per month for a flat fee of $2.50, to special accounts for senior citizens and those who need ATM cards to access their government payments. Many banks also provide financial education programs to help educate the members of the community on basic financial services.

One bank - which offers a free basic checking service - went even further and worked out an arrangement with a factory in its suburban community. The factory provides transportation to and from work for its employees from the inner city. This banker agreed to cash payroll checks for these employees with no fee or other strings attached as a public service.

Mr. Chairman, we believe strongly that in our communities and market areas, competitive pressures are moving the private sector to provide more and more services that low- and moderate-income people require or desire.

As one banker noted in responding to our survey, many communities served by community banks are primarily low- and moderate-income communities. This banker said he did not have special programs geared for low- and moderate-income people because ". . . our entire market area encompasses areas of low to middle income areas and we market to the entire county, which is considered our market area."

Also, there will always be a small segment of the population that prefers not to deal with financial institutions. Should the Government force these people to open bank accounts? I don't think so. Should they be made aware of the financial services that are available to them? Of course. But once they are exposed to the financial options available to them, the ultimate choice should be theirs. In a free society, people have the right to choose, even if it is not in their best interest. And that's the way it should be.

The second question asked if we believe a program such as First Accounts would help in decreasing the ranks of the unbanked. In areas where there may be significant concentrations of low- and moderate-income people, a financial literacy campaign could be helpful in providing education on the benefits of banking services. This should extend to both deposit and lending programs.

In a recent hearing on predatory lending, Treasury Under Secretary Gary Gensler estimated that some 15 to 35 percent of subprime borrowers might qualify for prime rate loans.² These subprime borrowers are typically low- and moderate-income individuals who are the primary targets of predatory lenders. To the extent that some of the subprime borrowers could be moved into prime lending programs through a First Accounts educational program, that would be a positive outcome. However, most community banks already offer a variety of basic banking products and services, so in our view, mandating new products and services on community financial institutions would simply add to an already oppressive regulatory burden.

The third question, like the previous question, asks whether or not the First Accounts program would be of assistance to people who do not write enough checks to open a bank account or simply don't like dealing with banks, perhaps due to cultural differences or experiences in other countries. As I stated earlier, to the extent that a financial literacy educational campaign could help inform people of the benefits of a bank or help move vulnerable consumers into the legitimate regulated lending market, that would be a positive result. However, the Committee should recognize that there are always going to be people who will not do business with banks, and it will be difficult to move this group into the mainstream financial world.

The fourth question asks why the number of households with some kind of transaction account has been on the rise. We would like to think that community bank outreach has been a positive influence. Certainly, the strong economy has led more people to open bank accounts to protect their savings and facilitate investing. And banks have been conducting their own outreach programs with community groups across the country.

Finally, Mr. Chairman, I would like to provide some information that may be helpful in explaining why community banks are generally able to meet the needs of low- and moderate-income people in their communities.

Community banks are by their very nature community-oriented. To explain why, it may be helpful to look at the demographics of the community banking industry. The mean (or average) size of an ICBA member bank is around $108 million in assets, and the median size (the point at which there are an equal number of larger and smaller banks) is $63 million in assets. The range of ICBA members is quite wide, ranging from tiny Hometown Building & Loan Association in Montgomeryville, Pennsylvania, which has $1.2 million in reported assets, to Central Carolina Bank and Trust in Durham, which has $6.252 billion in assets.

These banks are located predominantly in small towns and rural areas. Sixty percent of ICBA member banks are located in rural areas, 27% are in suburban areas, and only 13% are in urban areas. And most are in small communities. Forty-two percent of ICBA member banks are located in communities with populations of 2,500 or less. Sixty-eight percent are in towns of 10,000 or less. By contrast, only 13 percent are located in cities larger than 50,000. And many of these, like my own, are located in definable communities.

These demographics may help to explain why community bankers have excellent lending records in their communities. Most are in smaller markets, which means there is no margin for cherry-picking, or just going after the high-balance customers. Most bankers serve a variety of functions in their communities. Many serve on school boards, are active in their churches, and volunteer their time with civic groups like the Rotary, Lions and Kiwanis Clubs. So the bankers generally know the people they do business with, and the people in the communities know the bankers.

Thus, community bankers are more apt to make character loans that might get turned down under a credit scoring screen at other institutions. And they are more likely to have programs like Christmas Club Accounts, geared towards their low- and moderate-income customers. Generally, there is much less consumer resistance to opening an account, and a greater amount of trust, in an institution that is run by someone known and respected in the community. This is called "relationship banking," and it in large measure is what distinguishes a community bank from one that deals in a wider geographic market, and what enables us to compete in a market increasingly dominated by financial conglomerates.

Mr. Chairman, in order to be as responsive as possible to the Committee, the ICBA conducted a fax survey of ICBA leadership bankers (officers and committee members) to get a better feel for the level of basic banking services they offer. While the results may not be scientifically valid since a relatively small sample of the population was surveyed and the turn-around time was very quick, they are nonetheless instructive. Every single banker who responded offered some form of free or low-cost checking account. Every one, without exception. Some offered programs specifically geared for lower-income people, including senior citizen accounts and special programs for students. Many offered Electronic Transfer Accounts (ETAs) to recipients of Federal benefits, and they indicated that this program is generally working well.

Not surprisingly, the overwhelming majority felt that H.R. 4490 was not necessary to achieve the goals of reaching the low- and moderate-income market.

In summary, Mr. Chairman, while we applaud the goals of your legislation, we do not feel it is necessary to achieve its stated goals in the communities and markets served by community banks, since most already offer free or low-cost basic banking services. Clearly, however, there are significant benefits to be gained from a financial literacy program targeted not only at the unbanked, but the under-banked as well. We commend you for this initiative and pledge to work with you to advance its goals.

Thank you for this opportunity to present the views of our nation's community bankers. I would be happy to respond to any questions you may have.

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1. ICBA is the primary voice for the nation’s community banks, representing 5,500 institutions at nearly 16,700 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. ICBA's members hold more than $491 billion in insured deposits, $589 billion in assets and more than $344 billion in loans for consumers, small businesses and farms. They employ nearly 232,000 citizens in the communities they serve. For more information, visit www.icba.org.

2. Testimony of Under Secretary of the Treasury for Domestic Finance Gary Gensler before the Full House Committee on Banking and Financial Services, May 24, 2000, on predatory lending practices.