Banking on the Future: A Plan to Strengthen NYC Families and Businesses

Introduction/Background In the United States, roughly 8.2 percent of all households have no bank or credit union accounts, and instead rely on check cashers and other "fringe" financial service providers to pay their bills and manage their daily lives.1 In New York State and New York City, the numbers are even worse. Statewide, 9.6 percent of households are unbanked, and a 2010 study by the Department of Consumer Affairs Office of Financial Empowerment (OFE) found that more than 825,000 adults in New York City 13 percent of all households do not have bank or credit union accounts, a huge impediment to these individuals personal financial security.2 In the city, the percentage of unbanked varies greatly between boroughs and communities. While Staten Island has an unbanked population of only 2 percent, the Bronx has an unbanked population of 29 percent, one of the highest rates in the country. Some neighborhoodsfrom Morris Heights, Bronx, to Ocean Hill, Brooklyn, to Washington Heights in Manhattanhave unbanked populations approaching or exceeding 50 percent. There is also an immense disparity in bank utilization along racial and class lines. Statewide, only 3 percent of Whites are unbanked, while 23 and 26 percent of Blacks and Hispanics, respectively, are unbanked.3 And while less than one percent of households earning more than $75,000 annually are unbanked, a whopping 30 percent of households earning less than $15,000 are. Crucially, the OFE study found that mere proximity to a bank or credit union is no guarantee that residents will open a bank account. Rather, the financial literacy of a

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http://www.fdic.gov/householdsurvey/. http://www.nyc.gov/html/dca/html/pr2010/pr_022510.shtml. 3 http://www.fdic.gov/householdsurvey/2012_unbankedreport_app_h-i.pdf.

particular individual is the greatest determining factor in whether he or she opens an account or not. Opening a bank account is a critical building block toward financial empowerment. New York City may be the beating heart of the worlds financial markets, but with nearly 1 million New Yorkers lacking a bank account, we are failing to truly provide the benefits of the banked economy to the working class and maximize the fiscal health and economic vitality of the city. The Comptroller plays a critical role in the Citys banking system, from advising on the financial health of the city, serving on the New York City Banking Commission, supporting the Banking Development District Program to working with religious institutions and community organizations to organize citywide conferences and seminars regarding financial literacy and financial products and services offered by banks. As Comptroller, Scott will use this authority, as well as the power of the bully pulpit, to bring banking and financial literacy to all New Yorkers. Specifically, Scott will: Expand Bank On Manhattan, which he pioneered as Manhattan Borough President, to link New Yorkers to affordable, safe checking accounts in their neighborhoods and promote financial well-being in the citys communities. Develop an innovative public-private partnership based on a model program in San Francisco that offers every student entering kindergarten in public schools a college savings account with the first deposit made by the City. Utilize the Comptrollers banking and fiscal advisory responsibilities deposits to promote banks with City deposits to provide additional lending to small businesses and assist New Yorkers struggling with foreclosure. Work with other City agencies, including the Department of Small Business Services, to bring critical workshops on financial literacy and business development to neighborhoods throughout the five boroughs.

Recommendations Expand Bank On Manhattan Citywide as Bank On NYC Bank On Manhattan is a public/private partnership, based on a national model that aims to help unbanked New Yorkers open low-cost, safe checking accounts and create opportunities for financial education in the community. Its nine financial partners offer a checking account with certain baseline features, including low fees, low minimum opening deposits and balances, overdraft protection, and more. During Scotts tenure as Borough President, the Bank On Manhattan program brought more than 12,000 low-income residents into the banked worldsaving each individual
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hundreds of dollars a year in check cashing fees and setting them on the road to financial security and promoting broader economic stability for the city.4 As Comptroller, Scott will make it his mission to transform Bank On Manhattan into Bank On NYChelping people in underbanked communities in all five boroughs. Start Financial Literacy Early with a Kindergarten to College Savings Plan Bank On Manhattan has done a tremendous job bringing the power of banking to working class people throughout New York City. The financial education component program of the program has also empowered over 30 organizations to host Bank On Manhattan financial education workshops that have reached more than 800 individuals in need, but we should not wait until people reach adulthood to introduce them to the core concepts of saving, financial planning, and account management. According to a 2010 study from the Center for Social Development at Washington University in St. Louis, children with a savings account are up to seven times more likely to attend college than children without an account.5 Moreover, many researchers believe that opening a savings account not only increases a childs chances of attending college by helping to reduce its cost, but also by making college a long-term goal for the child from day one. As Comptroller, Scott will work with the Mayor and the private sector to introduce Kids, Cash, and Collegea program modeled after San Franciscos groundbreaking Kindergarten to College plan that is the nations first universal college savings account program.6 KCC will provide every New York City student entering kindergarten in our public schools a college savings account of their own. In addition, the City (and potentially private sector sponsors) will provide the initial deposit of $50 to kick-start their path toward higher education and financial literacy.7 Scott has already demonstrated through Bank On Manhattan that such an approach can work everyone that attends a workshop and opens an account receives a $50 initial deposit from the program. In San Francisco, private donations from local nonprofits provide additional bonus payments for good saving behavior, including a match of up to the first $100 that a family places in its account.8
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An average household in Manhattan without a bank account will spend approximately $530 a year to cash their paychecks and pay their bills; see: http://bankonmanhattan.com/. 5 http://csd.wustl.edu/publications/documents/wp10-01.pdf. 6 http://www.k2csf.org/. 7 If resources allow, New York City should boost the initial deposit to $100 for low-income children who qualify for free or reduced lunch. In 2013, NYC DOE has approximately 70,000 kindergarten slots. KCCs annual cost would therefore begin at $3.5 million annually, with the cost expected to rise modestly as more students attend kindergarten. 8 http://www.governing.com/blogs/view/gov-why-san-francisco-gave-every-kindergartener-in-public-school-a-bankaccount.html.

Students and their families are encouraged to add money to the account, which can only be used for educational purposes, such as textbooks or tuition, once the child is enrolled in college or an equivalent post-secondary program.9 Of course, it is not enough to simply hand over an account to a child. There needs to be meaningful follow-up to teach the principles of financial literacy. In San Francisco, the curriculum now includes coursework that incorporates the savings accounts. In developing the program for New York City, the Comptroller and Mayor must work closely with the DOE to similarly integrate the accounts into the educational experience of students. By starting our students on the path to financial literacy and college planning early, we will ensure that they grow up with higher education in their sights and have the skills and knowledge needed to navigate the complex world of banking, contributing to economic growth for the city. Utilize the Comptrollers Banking Fiscal Advisory Responsibilities to Promote Qualified Banks Providing Additional Lending to Small Business and Assist New Yorkers Struggling with Foreclosure Along with the Mayor and the Commissioner of Finance, the Comptroller is a member of the NYC Banking Commission.10 The Commission has three main responsibilities: 1. Approving banks as NYC Designated Banks, which are the only banks that can hold City deposits. 2. Issuing recommendations to the City Council concerning interest rates for the early and late payment of real estate taxes and water and sewer rents. 3. Managing the Citys Banking Development District (BDD) Programa program of the New York State Department of Financial Services that is designed to encourage and assist banks in opening branches in traditionally underserved neighborhoods. As of May 2013, there are 25 designated banks that can accept deposits from the City of New York.11 These banks range from community banks, like the Flushing Bank in Queens, to the worlds largest banks, including Bank of America and Citibank. As Comptroller, Scott will promote additional lending by banks to small business and assist New Yorkers struggling with foreclosure.

If a student chooses not to pursue education after high school, the account dissolves when the student turns 25, with personal savings returning to the account holder and matching funds returning to the program. 10 http://www.nyc.gov/html/dof/html/about/banking.shtml. 11 http://www.nyc.gov/html/dof/downloads/pdf/treasury/Banking%20Commission/designated_bank_list.pdf.

A survey of small business owners in the Tri-State area by the Federal Reserve Bank of New York found that nearly 60 percent of small business loan applications were for microloans of less than $100,000.12 The denial rate for firms seeking microloans was higher than for those seeking larger amounts. Overall, two-thirds of credit applications were denied. As a result, despite the efforts of the Department of Small Business Services (NYC Business Solutions), Accion, and others, access to capital remains a widespread challengeeven for profitable firms. Despite tremendous efforts by advocates like the Center for New York City Neighborhoods, Neighborhood Housing Services of NYC, and Legal Services NYC, many New Yorkers are still struggling with foreclosure. As Forbes reported, while a healthy market usually has 1 percent of homes in foreclosure, New York State currently has 5 percent in foreclosure and the New York City region now has one of the countrys highest foreclosure rates.13 The City already uses its cash on hand to incentivize banks to open branches in underserved neighborhoods through the BDD program. The program encourages banks to locate in Banking Development Districtsareas that the New York State Banking Department has designated as under-bankedby awarding $5 to $10 million dollars in subsidized deposits from the City.14 These deposits lower the financial risk that the branch may incur when opening in underserved communities that are often comprised of low and moderate-income households. Over the past decade, the BDD program has allowed the City to leverage its funds in a responsible manner to promote community development and the availability of community banking services. According to the State Department of Finance, of the 38 BDDs established in New York State as of 2011, 26 were in New York City, with multiple locations in all five boroughs.15 By building on the success of BDD, we can promote additional City deposits in banks that do more to help New York Citys small business owners and families and that fully meet all fiduciary criteria and collateral requirements. Such a policy would help families and businesses struggling with the possibility of foreclosure in all five boroughs while strengthening the fiscal health of the city. Comptrollers Financial Literacy Program

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http://www.newyorkfed.org/smallbusiness/2012/. http://www.forbes.com/sites/morganbrennan/2012/12/01/the-foreclosure-crisis-isnt-over-just-yet/; http://www.rew-online.com/2013/06/26/new-york-new-jersey-emerge-as-foreclosure-leaders/. 14 http://www.dfs.ny.gov/banking/bddreview.pdf; Additional incentives are also available in certain circumstances, including: providing a bank with help identifying commercial space for the branch; reducing a branchs real property taxes (pursuant to section 485f of the Real Property Tax law); facilitating the development of relationships with community groups in the BDD area, which is often instrument in securing depositors for the branch; and qualifying the bank for Community Reinvestment Act (CRA) credit. 15 http://www.dfs.ny.gov/banking/bddapp.htm.

The Commercial Banking Division of the Comptrollers Office has partnered with religious institutions and community organizations to organize citywide conferences and seminars regarding financial literacy and financial products and services offered by banks. These conferences and seminars inform community residents of the many options available to them regarding banking products and services and also help mitigate potential predatory lending practices. The participation of our citys leaders and community organizations has been instrumental in providing affordable housing, educational opportunities, small business development and job growth throughout New York City. As Comptroller, Scott will commit to working with other City agencies, including the Department of Small Business Services, to bring critical workshops on financial literacy and business development to neighborhoods throughout the five boroughs. New Yorkers shouldnt have to come to Lower Manhattan to receive the support they need.