WASHINGTON (12/3/09)—Sen. Herb Kohl (D-Wis.) on Wednesday introduced legislation aimed at increasing access to mainstream financial institutions by encouraging credit unions and community banks to provide low-level loans to low- and moderate-income Americans. The legislation, known as the Safe Affordable Loan Act, would “mitigate some of the risk associated with offering small dollar loans” by allowing financial institutions to recover as much as 60% of a lost loan through a to-be-created central loan-loss reserve fund. To be granted access to the fund, financial institutions would be required to offer loans that are under $2,500 in value, with “reasonable” interest rates. The loans must also be free of prepayment penalties, with repayment periods of over 60 days. The proposal applies primarily to community development financial institutions, but other credit unions may be able to apply. A Federal Deposit Insurance Corp. (FDIC) study has found that 21 million U.S. households, or 17.9%, reported that they have checking or savings accounts but use “nonbank money orders, nonbank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or refund anticipation loans at least once in the past five years.” Kohl said that the FDIC survey results were “not surprising,” as low-income Americans have “typically been left out of mainstream financial services for a variety of reasons.” “Without better access to banks or credit unions, consumers will continue to rely on other financial services which might be quicker, but often carry larger financial consequences,” he added. According to the FDIC survey, nine million U.S. households, or 7.7%, do not currently have a checking or savings account. In total, the FDIC found that one in four U.S. households are either unbanked or underbanked, with a disproportionately high number of those households being comprised of minorities or low-income citizens. The FDIC survey, which is conducted by the U.S. Bureau of the Census on the FDIC’s behalf, is the first to collect information on unbanked and underbanked households and the first to provide estimates of the national, regional, state and metropolitan distribution of these households. In a statement accompanying the release, FDIC Chairman Sheila Bair said that “better understanding” unbanked and underbanked households will help the FDIC be “better positioned” to help them take “an important first step toward achieving financial security--the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on affordable terms." FDIC Vice Chairman Martin Gruenberg said the survey "breaks new ground in the effort to expand access to basic financial services" and "will provide the information base for future efforts to address the financial services needs of unbanked and underbanked households in the U.S." Households with income under $30,000 account for 71% of unbanked households, with the amount of unbanked households declining “considerably” as household income increases. Under 1% of households with yearly income of $75,000 or higher are unbanked, according to the survey. Households with yearly incomes of $30,000 to $50,000 were almost as likely as lower-income households to be underbanked, the survey found. A similar FDIC survey, published in February, found that the majority of financial institutions were aware of opportunities to serve unbanked and underbanked individuals in their area, but admitted that more could be done to serve these individuals. Additional data from the survey, including state-by-state and regional breakdowns of the data, can be found at the link.