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Recent initiatives include the department’s request for information and new additions to the community development financial institution funding application.
The Treasury Department’s new initiatives to promote financial inclusion and responsible lending should benefit credit unions so long as the industry engages Treasury to express its views.
According to the World Bank, “[f]inancial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs—transactions, payments, savings, credit and insurance—delivered in a responsible and sustainable way.” The Financial Services and General Government Appropriations Act, 2023 (part of the Consolidated Appropriations Act, 2023) directed Treasury to develop a federal government strategy to improve financial inclusion. Two recent initiatives in this workstream include the Treasury’s “Request for Information on Financial Inclusion” and the Treasury Department Community Development Financial Institutions Fund’s new application requirements involving “responsible financing [ractices.”
Credit unions have always helped individuals of modest means by promoting thrift and access to credit on fair terms. According to the U.S. Congress, “[t]he American credit union movement began as a cooperative effort to serve the productive and provident credit needs of individuals of modest means. Credit unions continue to fulfill this public purpose.”
In fact, ordinary workers, farmers, tradespeople and other individuals originally started credit unions in the United States, Canada, Ireland, the Caribbean and most other jurisdictions because commercial banks would generally not do business with non-wealthy people. This reality remains true in many parts of the world, including much of Latin America, Africa, Asia and parts of Eastern Europe.
For example, World Council of Credit Unions, the global-level trade body and international development agency where I used to serve as SVP/advocacy and general counsel, is currently implementing a financial inclusion project working with credit unions in Ecuador and Peru, which the U.S. Agency for International Development has extended until 2026.
Request for Information for Financial Inclusion
Treasury’s Request for Information on Financial Inclusion is open for comment until Feb. 20, 2024. It seeks input on issues ranging from how the federal government should define the term “financial inclusion” to identifying barriers to financial inclusion to asking how to measure financial inclusion and promote it through public policy. While the Request for Information asks for input, rather than proposing specific policy initiatives, it is a preliminary step likely to result in one or more comprehensive financial inclusion proposals by the department later this year.
The Request for Information focuses primarily on promoting the inclusion of “low-income and low-wealth communities, Black, Indigenous, (and) People of Color or BIPOC communities, and women” and states that “[i]mproving inclusion in the financial system is a critical part of fostering financial security, expanding opportunities to build wealth, and closing the racial wealth gap.” It notes that “[i]n 2021, while only 2% of white households were unbanked, 11 percent of Black households were, and 9 percent of Hispanic households lacked bank accounts… Additionally, in 2021, 14.1 percent of households were ‘underbanked,’ meaning respondents had a bank account but had also used costly alternative financial services within the past year…”
Certification Requirement Changes and Responsible Financing Practices
The Treasury CDFI Fund’s recent updates to its certification criteria may provide insight into the financial inclusion initiatives Treasury is likely to propose following its analysis of the comments it receives in response to the Request for Information. This guidance defines “Responsible Financing Practices” as financial products and services that “are consistent with promoting community development” and “should not harm consumers, be affordable, be originated based upon an assessment of whether a borrower can pay back a loan, and have terms and conditions that are transparent and understandable to the borrower.”
The CDFI Fund’s guidance also lists what types of lending practices should not be considered responsible. These items include loans with interest rates above the rates the state allows for non-depository institutions (since credit unions and banks are typically exempt from this limit), most loans with finance charges above 36% APR, mortgages with upfront points and fees above 3%, selling off charged-off consumer or small business loans to debt buyers, and similar practices. The CDFI Fund further states that a CDFI will have to furnish an explanation if it does not underwrite loans to see if the borrower is able to repay it, offers mortgages with balloon payments or terms above 30 years, offers small-business loans at an APR above 36%, or “charges excessive overdraft and non-sufficient funds fees.” Existing CDFIs will need to meet the updated criteria by Dec. 20, 2024.
While it remains to be seen what the Treasury Department will propose in terms of promoting financial inclusion per se, the CDFI Fund is part of Treasury and its approach to Responsible Financing Practices is consistent with how most credit unions I’ve worked with over the past 20 years have always done business. Some details, however, may be overly restrictive.
Limiting CDFIs to only charging the state’s interest rate limits for non-depository institutions, for example, which can be as low as 6% a year, could limit underserved individuals’ access to credit, especially when inflation and credit unions’ cost of funds are high, as even a not-for-profit credit union cannot remain economically sustainable if it loses money.
Credit unions and their associations should be certain to comment in response to Treasury’s Request for Information on Financial Inclusion to help make sure that the agency has the information it needs to propose a robust and effective set of financial inclusion policies that will help credit unions continue to promote financial inclusion in their communities as they have always done.
Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.
