Underbanking in the United States

by Ibe Alozie

This article discusses underbanking (and its nexus to poverty) in American households, steps that the Bureau of Consumer Financial Protection (CFPB) has taken to mitigate the effects of underbanking, and recent changes at the CFPB that increase the likelihood that the CFPB will be less active in mitigating the effects of underbanking. To learn more about underbanking, check out From Paper to Electronic: Food Stamps, Social Security, and the Changing Functionality of Government Benefits, by Sarah Carrier, available on Westlaw and LexisNexis.

A household is considered “underbanked” when it has an account at an insured institution or bank but still uses alternative financial systems or services outside of the banking system.[1] Rather than going through the traditional banking system, these households use money orders, cash checking, auto title loans, or pawn shop loans, among others, to meet their financial needs.[2]  While 68% of households in the United States are fully banked, a 2015 survey by the Federal Deposit Insurance Company (FDIC) found that 19.9% of households in the United States—approximately 24.5 million households—are underbanked.[3]

The survey further demonstrated that underbanked rates were significantly higher among lower-income, less-educated, Black and Hispanic households.[4] For example, 24.8% of households with an annual income of less than $15,000 were underbanked, while only 13.4% of households with an annual income of at least $75,000 were underbanked.[5] Households with no high school diploma had a similarly disproportionate rate of underbanking when compared to those with a college degree.[6] Black and Hispanic families were approximately twice as likely as white families to be characterized as underbanked.[7]

Because of the critical role that banks play in the American economy,[8] underbanking has two serious effects that disproportionately affect lower-income communities: (1) underbanked populations resort to alternative financial services that can place these populations into “dangerous debt cycles,”[9] and (2) the lack of banking options for underbanked populations makes them more prone to engaging with financial service providers that abuse consumers with questionable lending practices.[10] Both of these outcomes are at least in part the result of abusive lending practices from financial services.

The Consumer Financial Protection Bureau (CFPB) has been active in addressing abusive lending practices.[11] Targeting the problem of populations entering into dangerous debt cycles as a result of underbanking, the CFPB issued a rule[12] that requires lenders to strictly vet customers for their ability to repay loans.[13] By requiring lenders to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations, and by regulating the ability of lenders to debit borrowers on high-interest loans, balloon payment loans, and short term loans, this rule effectively prevents lenders from taking advantage of underbanked communities.[14] Most importantly, the regulation decreases the chance that underbanked individuals will enter into “long-term debt traps” that keep them living in poverty.[15]

In an effort to prohibit lenders from abusing consumers due to their lack of financial options, the CFPB issued another rule that requires companies offering prepaid services to be more transparent about their practices and more responsive to customer complaints.[16] By requiring disclosure and responsiveness, the CFPB’s rule reduces the likelihood that underbanked communities, who depend on prepaid services, will be surprised by high and frequent fees for everyday activity like loading money, using an ATM, and checking their balance.[17] Armed with this knowledge, consumers will have greater awareness of company practices, and avoid entering into relationships with abusive lenders.

Recent changes in leadership at the CFPB will likely decrease the agency’s ability to oversee abusive lending practices and mitigate the negative impacts of underbanking. After the resignation of the former Director of the CFPB Richard Cordray, the Trump administration named Mick Mulvaney as the Acting Director of the CFPB.[18] Mulvaney, who also serves as the current head of the Office of Management and Budget, believes that the CFPB exceeded its authority under Cordray’s leadership.[19]

Accordingly, Mulvaney has taken financial, structural and regulatory steps to limit the CFPB’s oversight of abusive lending practices, and the CFPB’s larger efforts to mitigate the negative impact of underbanking.[20] First, Mulvaney requested zero dollars for the CFPB’s operating funds for the first quarter of 2018.[21]  Less funding will reduce the CFPB resources that would be used to regulate consumer-related abuses. Second, Mulvaney has reorganized the CFPB in a way that moves enforcement divisions into offices that lack enforcement roles and capabilities.[22] Reducing the amount of offices with enforcement capability, in matters related to payday lending, will also decrease the ability of the agency to mitigate the aforementioned impacts of underbanking. Finally, Mulvaney has delayed the implementation of a number of agency rules, particularly a rule that would have forced transparency onto prepaid services companies.[23] By delaying the implementation of rules that would address abusive lending practices and other negative impacts of underbanking, these actions directly reduce the ability of the CFPB to mitigate the negative impacts of underbanking.

[1] This article discusses household trends in reference to data from the 2015 FDIC National Survey. Please note that “for characteristics that vary at the person-level, such as race, age, education, and employment, the characteristics of the owner or renter of the home (i.e., ‘householder’) are used to represent the household. For convenience, abbreviated language is used when referring to certain household characteristics. For example, the term ‘white household’ refers to a household in which the householder has been identified as white, non-black, non-Hispanic, and non-Asian.” Fed. Deposit Ins. Co., 2015 FDIC National Survey of Unbanked and Underbanked Households: Executive Summary 2 n.4 (2015)

[2] Catherine Martin Christopher, Mobile Banking: The Answer for the Unbanked in America?, 65 Cath. U. L. Rev. 221, 222–24 (2016).

[3] Fed. Deposit Ins. Co., 2015 FDIC National Survey of Unbanked and Underbanked Households: Executive Summary 13 (2015).

[4] Id. at 14, 16.

[5] Id. at 16.

[6] Id.

[7] Id.

[8] See Vincent Di Lorenzo, Public Confidence and the Banking System: The Policy Basis for Continued Separation of Commercial and Investment Banking, 35 Am. U. L. Rev. 653, 654 (1986) (“Banking institutions perform three essential activities in the nation’s economy. First, they function as depositories for savings and trust funds and for liquid assets; second, they act as payments intermediaries for consumers and businesses; and third, they channel deposited funds into the credit markets to meet the credit needs of businesses and consumers.”); Martin J. Gruenberg, Chairman, Fed. Deposit Ins. Co., Remarks by Martin J. Gruenberg on Financial Inclusion, Expanding Economic Opportunity, and the Local Initiatives Support Corporation (Nov. 7, 2017) (“In the United States, a relationship with an insured financial institution is a stepping stone to households’ full participation in the economy. Establishing a banking relationship and setting financial goals are critical steps toward financial well-being. Something as basic as an insured deposit account gives households the ability to safely deposit income, make payments toward monthly obligations such as rent or a mortgage, and engage in convenient daily transactions, such as buying groceries or more durable household goods. Bank accounts also come with important consumer protections, such as those that limit consumer liability in the event of unauthorized transfers. In addition, a banking relationship can help families to save, establish credit histories, and obtain credit on fair and favorable terms. When delivered with attention to the needs of consumers, this bundle of services and products can help families manage their finances and achieve their goals.”).

[9] Gillian B. White, The Millions of Americans Without Bank Accounts, Atlantic (Oct. 20, 2016), https://www.theatlantic.com/business/archive/2016/10/fdic-underbanked-cfpb/504881/.

[10] CFPB Takes Steps to Improve Checking Account Access, Consumer Fin. Prot. Bureau (Feb. 3, 2016), https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-steps-to-improve-checking-account-access/.

[11] See, e.g., 12 C.F.R. § 1041 (2018); 12 C.F.R. § 1005 (2018); 12 C.F.R. § 1026 (2018).

[12] 12 C.F.R. § 1041.

[13] CFPB Finalizes Rule To Stop Payday Debt Traps, Consumer Fin. Prot. Bureau (Oct. 5, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finalizes-rule-stop-payday-debt-traps/.

[14] Id.

[15] Id.

[16] 12 C.F.R. §§ 1005, 1026.

[17] Gillian B. White, The New Rules of Digital Cash, Atlantic (Oct. 5, 2016), https://www.theatlantic.com/business/archive/2016/10/cfpb-prepaid-venmo/503000/.

[18] Elizabeth Landers, White House Defends Mulvaney’s Appointment to CFPB, CNN (Nov. 25, 2017, 8:03 PM)), https://www.cnn.com/2017/11/25/politics/white-house-cfpb-mulvaney/index.html.

[19] See Alan Rappeport, Mick Mulvaney Calls for ‘Humility’ from Consumer Financial Protection Bureau, N.Y. Times (Jan. 23, 2018), https://www.nytimes.com/2018/01/23/us/politics/mick -mulvaney-consumer-financial-protection-bureau.html (noting that the agency will “no longer push the envelope when it comes to jurisdiction and scope”) (internal quotations omitted).

[20] See id. (“Mr. Mulvaney made clear that under his direction, the consumer bureau would be more reluctant to target companies without overwhelming evidence of wrongdoing and suggested that the effect on a business should be weighed more heavily when considering cracking down on potential consumer abuses.”).

[21] Michael Grunwald, Mulvaney Requests no Funding for Consumer Financial Protection Bureau, Politico (Jan. 18, 2018, 09:00 AM), https://www.politico.com/story/2018/01/18/mulvaney-funding-consumer-bureau-cordray-345495.

[22] Christopher J. Willis, Mulvaney reorganizes CFPB Office of Fair Lending, Consumer Fin. Monitor, Ballard Spahr Llp. (Feb. 1, 2018), https://www.consumerfinancemonitor.com/2018/02/01/mulvaney-reorganizes-cfpb-office-of-fair-lending/.

[23] Gillian B. White, Mick Mulvaney Is Quickly Deregulating the Financial Industry, Atlantic (Jan. 5, 2018), https://www.theatlantic.com/business/archive/2018/01/cfpb-gop-trump/549755/.