Mr. Chairman, Ranking Member LaFalce, members of the committee: Thank you for the opportunity to testify before you on the important topic of access to affordable financial services at federally-insured financial institutions. My testimony today is on behalf of the U.S. Public Interest Research Group (U.S. PIRG) as well as New York PIRG.¹

Since account deregulation in the 1980's, bank fees have skyrocketed, as shown by consumer group, government and independent studies. Service fee income has contributed greatly to ongoing record bank profits. Unfortunately, the latest analyses estimate that one-quarter of lower-income Americans, or at least 11 million families², do not have bank accounts. In response, two states, New Jersey (1992) and New York (1994), have enacted broad laws requiring banks to offer low cost lifeline accounts to any consumer. Several other states, including Illinois, Vermont, and Massachusetts, have passed laws including some low cost banking requirements. Other states require variants, including laws requiring banks to offer low or no-cost accounts for teenagers and/or senior citizens (so-called 18/65 accounts).

In our view, more states might have followed New Jersey and New York's leadership in the early 1990's except that aggressive preemption by the Office of the Comptroller of the Currency (OCC) has chilled other states from following the lifeline banking model. National banks in New Jersey, led by First Union, are beginning to ignore that state's law, despite enforcement attempts by state regulators. In the absence of either strong state laws or national laws encouraging or requiring banks to offer affordable accounts, the check cashing industry has flourished, growing from fewer than 2,000 stores in the 1980's to about 7,000 stores in the 1990's. Cashing checks at high-cost check cashers is no alternative to joining the federally-insured financial system, with its opportunities for asset growth.

We believe that both bills offer some meritorious provisions. Congress should require that federally insured financial institutions offer full service low cost basic checking accounts, as HR 4584 would provide. Further, HR 4584 should be amended to require the provision of low cost savings accounts to encourage increases in the savings rate. In addition, the administration's First Accounts proposal, HR 4490 would encourage the deployment of First Accounts, similar to Electronic Transaction Accounts (ETA) now offered to federal benefits recipients as well as deployment of savings accounts. While the electronic ETA accounts are extremely limited in the number of transactions offered, they do offer the advantage of avoidance of bounced check fees. We believe that modifications to the First Account to make it more of a hybrid between the ETA account and the LaFalce Affordable Transaction Account may be the way to go. However, we believe that taxpayer-insured banks do not need the additional subsidies inferred by the proposal to do so.

However, merely establishing a requirement that banks offer lower-cost accounts, whether checking or electronic, is not enough. Actions must be taken to investigate and regulate other bank practices that contribute to the problem. High bounced check fees, exacerbated by overly long checkhold policies, pose problems. Further, Congress needs to reinstate the requirement that the Federal Reserve Board conduct a annual study of deposit account fees, since the bill passed by the House to reinstate the study, HR 3046, includes a drafting error and will not continue the study.

Since the advent of account deregulation in the 1980's, consumer and community groups and advocates in Congress have supported the premise that federally-insured banks ought to offer accounts that people can afford. Incredibly, no current federal law requires federally insured banks to offer low-cost bank accounts³. As both PIRG and the Federal Reserve Board have pointed out in recent studies, bank fees are rising, and are highest at bigger banks.⁴

Worse, the consumers who cannot afford bank accounts end up as customers of fringe bankers ranging from check cashers and pay day loan operators to rent-to-own stores, high cost mortgage lenders and pawn shops. These largely unregulated firms are notorious for charging egregious fees to cash checks or borrow money.⁵

Consumer and community groups have listened, ever since deregulation began in 1980, to the banks and their claims that lifeline bank regulation is unnecessary or burdensome. Over the years, the regulators have made numerous claims that banks will soon be offering low-cost accounts⁶ and the banks have made similar unsubstantiated claims that they already do. PIRG's bank studies have found little evidence that any significant number of banks offer or market true lifeline accounts, although a growing number offer the banker's alternative, no-frills accounts.

Two states, New Jersey (effective 1992) and New York (passed 1994, effective 1995), require low-cost affordable lifeline bank accounts. As the preemption section below discusses, were it not for abusive OCC preemption policies, other states may have copied these important laws. The New Jersey and New York laws are modeled after various proposals championed by Senator Howard Metzenbaum and others throughout the 1980s and early 1990s. The bills require all banks to offer a low-cost account that provides approximately 8-10 checks or debits each month at a fee not to exceed $3/month. This fee structure is adequate to cover banks' reasonable costs, without gouging consumers, although we would prefer that fees be lower in any federal regulation. Restrictive opening balance requirements are prohibited. Neither state law requires any certification of need. As described below, controls also need to be placed on other fees, especially bounced check fees.

In 1998, HR 10 passed the House, with language requiring banks to offer lifeline accounts. That language was not and is not controversial. In questions-and-answers before this Committee, the provision's author, Rep. Maxine Waters, asked bank witnesses whether they supported lifeline banking, and those that were knowledgeable to respond gave answers such as these by Paul Polking, Nationsbank General Counsel: "We at Nationsbank have always supported HR 10, as you know, and included the lifeline banking provision" or of Stephen Bennett, General Counsel, Bank One: "We have supported HR 10, Representative Waters, and we have understood that support to extend to the lifeline banking amendment."⁷ In addition, Citibank strongly supported HR 10, as passed by the House, which included the lifeline provision.

Unfortunately, the Congress deemed it more important to enact the Financial Services Modernization Act as S. 900 in 1999 than to pass the lifeline provisions that the House passed in 1998. Nevertheless, we are encouraged that this hearing is being held. However, it will be more difficult for us to enact either HR 4584 or HR 4490 as a free-standing bill.

In 1996, seeking to encourage the development of electronic funds transfer, Congress enacted amendments to the Debt Collection Improvement Act of 1996. The law allows benefits recipients to receive their benefits electronically. Recipients without bank accounts can establish Electronic Transaction Accounts or ETAs. An ETA is a limited, checkless form of electronic account. According to its promotional materials, Treasury views ETAs as important bridge accounts to consumers seeking to open regular accounts. During hearings and comment periods on the proposed regulation, consumer, community and low-income advocates made a number of proposals for amendments to the rules. While some were implemented, many were not. In a troubling development, the ETA accounts established the notion of subsidizing banks with a fee for establishing each account. The First Accounts bill, while not describing a specific fee such as the ETA regulation does, does infer possible subsidies to banks. In our view, taxpayer-insured banks should provide affordable accounts without subsidies.

The limited data that exist to quantify the success of the two state lifeline laws suggest that the laws are generally successful but need more marketing and enforcement. In 1997, the New Jersey Banking Department estimated that 700,000 consumers had taken advantage of the New Jersey Checking Account law. In 1999, Chase Manhattan Bank estimates that it has 235,000 customers of its low-cost accounts, in New York, New Jersey and Connecticut combined.⁸ A study done by New York PIRG found that the banks in that state fail to promote the accounts. An additional problem with the accounts is that the regulation promulgated by the New York State Department of Banking allows banks to impose penalty fees on consumers who exceed transaction limits. For example, an account may have a $3 monthly fee and an 8 transaction limit. If 9 transactions clear through the bank during a statement cycle, regardless of when they were written, banks are allowed to charge the consumer as if he or she held a regular checking account, usually $9 or $9.50/month.⁹

In a troubling development, at least three national banks in New Jersey, including First Union, are ignoring the law, despite efforts by the New Jersey Banking Department to enforce the law. According to NYPIRG, the New York Banking Department has failed to require banks, either state or national, to affirmatively market basic banking accounts.

In 1999, banks had their ninth straight year of record profits. The $71.7 billion reported to the FDIC exceeded last year's record of $61.8 billion by 16%, or $9.9 billion. According to the FDIC, "continued strength in non-interest revenues, particularly fee income," is a critical part of commercial bank income. For example, non-interest income accounted for 44% of net operating revenues in the fourth quarter 1999.

In the Federal Deposit Insurance Corporation's quarterly reports on bank income and expenses, ATM surcharges and credit card fees are incorporated in the lump-sum category, "other non-interest income." Other service fees on checking accounts are incorporated in the category "Revenue from deposit account service fees." In 1989, service charges on deposits, including foreign fees, were $10.3 billion, rising to $21.6 billion in 1999. Other non

-interest income, including surcharges and credit card late fees, rose from $29.0 billion in 1989 to $91.4 billion in 1999. Bank Fee Strategy Since deregulation, banks have developed a 3-part strategy to raise fee income. (1) Increasing existing fees: PIRG's 1999 report, Big Banks, Bigger Fees," found a growing gap between fees charged by big and small banks. The results are paralleled by the Federal Reserve, which has

found that multi-state (big) banks charge "significantly higher" fees than locally owned banks. [Federal Reserve Board Annual Report To The Congress on Fees and Services of Depository Institutions, June 1999.]

(2) Inventing new fees: ATM surcharges, human teller fees, deposit-item-returned fees (charged to consumers or businesses who deposit someone else's bounced checks) and fees charged for calling computerized account computers are examples of other new fees. It is important to note that banks claim that consumers can easily find an account where they can avoid fees. If this were true, why is fee income up so sharply? One additional factor to understand is that account services have been unbundled. Your monthly service charge for checking pays for less. If you want your checks returned with your statement, pay a fee. If you want to talk to the bank, pay a fee. If you want to have an ATM card, pay a monthly rental fee, and then pay more to use it.

(3) Making it harder for consumers to avoid fees. Making it harder to avoid fees includes, for example, changing "average" balance requirements on checking accounts to "minimum daily balance" requirements, as well as raising those minimums dramatically.

Consumer groups [as well as the states and cities fighting to defend their bans on abusive ATM surcharges¹⁰], believe that local action should be allowed whenever it protects consumers better than federal law, or whenever there is no federal law, provided that there is no conflict between complying both with local laws and any federal law on the same subject matter. In this case, there is clearly no conflict, since no federal law requires lifeline accounts.

In general, the pattern and practice of the Office of the Comptroller of the Currency (OCC) to abuse its preemption authority has hindered the ability of the states to regulate ATM surcharges and other bank and credit card fees, ban usurious triple-digit payday lending,¹¹ or enact low-cost checking accounts. In 1992, the OCC preempted (held that national banks do not need to comply with it) a New Jersey Lifeline Banking law, despite the absence of any federal law explicitly requiring banks to provide lifeline banking accounts. Despite a regulatory petition filed in 1995 to overturn that preemption, no Comptroller has taken action to do so.¹² The existence of the New Jersey preemption determination (#92-572) has had a chilling effect on state legislative attempts to enact further lifeline laws or enact other pro-consumer laws. In an attempt to rein in what Congress called the OCC's "overly aggressive" preemption determinations, the 1994 Riegle-Neal Interstate Branching and Efficiency Act amended the NBA to require the OCC to both publish a notice and meet a higher standard before preempting state consumer and community reinvestment laws. Unfortunately, the OCC has attempted numerous end-runs around that law.¹³

Congress should require that all banks that receive federal deposit insurance be required to offer low cost basic checking and savings accounts based on the New York and New Jersey models. Ideally, the number of transactions should be increased to 12 per month at tellers, electronic transactions or checks.

Both the First Accounts proposal, HR 4490, and the Affordable Transaction Accounts proposal, HR 4584, offer positive ideas for encouraging the unbanked to open bank accounts. Ultimately, it may make the most sense to develop a hybrid committee print that takes the best features of each bill's proposals and incorporates them into a new bill. The public policy goals should be to first ensure that federally-insured institutions offer accounts that consumers can afford and second that these accounts serve as bridges to the full financial system, not merely as second-class bank accounts. Further, New York and New Jersey have served as laboratories of democracy and have demonstrated that banks can be required to offer low cost accounts without subsidies. There is no indication that these firms are at competitive disadvantages as a result of being required to offer low-cost accounts. We offer the following additional recommendations.

Bounced checks: Research conducted by or for consumer and community groups suggests that several other problems need to be solved to address problems of the unbanked. First, while many consumers may not open bank accounts due to monthly service fees and high balance requirements, other factors, especially account opening credit report requirements (e.g., Chexsystems) and bounced check fees also play an important role in limiting access. Further, check availability rules under the Expedited Funds Availability Act (Regulation CC) exacerbate the high check fees. As noted above, New York's rule allowing banks to impose high fees if too many checks clear in a statement cycle may also reduce demand for these accounts.

• We urge the committee to consider shortening the local checkhold under Regulation CC from 2 business days to 1, as a way to reduce bounced check fees. Second, the committee should investigate whether bounced check fees, as high as $35 in some markets, are designed to deter bounced check activity or designed to increase fee income. If the latter, as we suspect, the committee should also consider capping bounced check fees.

Encourage Savings Accounts: Research by Professor John Caskey of Swarthmore College for the Consumer Federation of America suggests at least three changes to the financial system to encourage savings by low-income consumers. First, increase household budget education. Second, publicize asset limits for government transfer programs, so that potential savers can understand that the limits are higher than they believe. Third, encourage banks to offer low-cost savings accounts with a mechanism for using money orders as a way to avoid bounced check fees¹⁴.

• We urge the committee to modify both the Affordable Transactions and First Accounts proposals to encourage development of basic checking accounts with a savings account feature. (First Accounts offers support for Savings Accounts.)

Expand the First Accounts concept: The First Accounts proposal is built on the ETA model, which has had limited success. Only about 500 banks are offering these ETA accounts, which allow only 4 electronic transactions per month without additional fees. The balance of the public may be using electronic deposits at check cashing stores instead of opening ETAs at insured banks. The First Accounts program should not be allowed to expand the loopholes in the ETA program that encourage relationships between banks and check cashing stores. First Accounts banks should not be subsidized by taxpayers as ETA banks are.

• We encourage the committee to beef up the First Accounts proposal to make it more attractive and more of a bridge to a full service account. Require that banks develop a mechanism so that consumers can use electronic transfers to pay their bills and therefore avoid bounced checks. Further, clarify that First Accounts have full Regulation E liability protection, as ETA accounts do not.

We strongly support legislation (as offered in previous markups by Representatives Sanders and Waters) to reinstate and extend a requirement that the Federal Reserve Board conduct an annual study of bank fees, since bank fees continue to rise and are an important reason that lifeline accounts are needed. Further research on bank fee patterns is also critical to track changes in the marketplace under FSMA. Unfortunately, it is our view that HR 3046 (Leach-LaFalce), the bill the committee and the House have already enacted to cure this problem, includes a drafting error and does not actually reinstate the bank fee survey on an ongoing basis.

Although both PIRG and Federal Reserve studies have documented that a small number of banks offer free checking accounts (16-17% in PIRG studies) and that some banks offer electronic transaction accounts (no human teller transactions) similar to First Accounts, a significant number of consumers, at least 11 million families, are unbanked. There are important public policy reasons for the Congress to require banks to provide low-cost banking accounts, as HR 4584 would provide, or to encourage them, as HR 4490 would do. We look forward to working with the committee to enact legislation to ensure that more Americans have access to accounts at federally insured banks.

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1. U.S. PIRG serves as the national lobbying office for state Public Interest Research Groups. NYPIRG and other state PIRGs are non-profit, non-partisan consumer and environmental advocacy groups active around the country.

14. Caskey et al, "Beyond Cash and Carry: Financial Savings, Financial Services and Low Income Households In Two Communities," Consumer Federation of America, December 1997.