Emory Law Journal

How the Poor Got Cut Out of Banking
Mehrsa Baradaran Assistant Professor, University of Georgia Law School. The author thanks Arthur Wilmarth, Erik Gerding, Julie Hill, Kristin Johnson, Peter Conti-Brown, Fred Gedicks, David Moore, Usha Rodriguez, and Jared Bybee for their helpful comments on earlier versions of this draft. The author would also like to thank Brad Lowe, Tim Nally, Danny Brimhall, Jonathan Love, and Seth Atkisson for their invaluable research support. All errors are solely those of the author.

Abstract

The United States currently has two banking systems—one for the rich, one for the poor. 1The label poor is judgment-laden, paternalistic, and an inadequate description of the relevant group of people who are affected by the changes involved in banking. This group includes no-income, low-income, and middle-income individuals who are financially vulnerable in many ways. Poverty is not just about low wages and may not be a permanent condition, and those who are poor do not share common traits. This Article attempts to describe circumstances that affect those that have fewer financial resources and less access relative to others in society. These individuals are often low-income individuals—sometimes minorities or immigrants and sometimes less educated than their more wealthy counterparts—but no single one of these traits is the defining trait of the poor. Although the terms poor, underprivileged, and low-income do not accurately capture this group and have unintended negative connotations, I will use these labels interchangeably throughout the Article.It was not always this way. In the past, the U.S. government has enlisted certain banking institutions to serve the needs of the poor and offer low-cost credit to enable low-income Americans to escape poverty. Credit unions, savings and loans, and Morris Banks are three prominent examples of government-supported institutions with a specific focus of helping the low-income. Unfortunately, these institutions are no longer fulfilling their missions, and high-cost, usurious, and sometimes predatory check cashers and payday lenders have quickly filled the void. These fringe banks do not provide the poor with useful credit and further bury them in debt.

This Article tracks the neglected history of government-sponsored institutions designed to offer credit to the indigent and explains how each abandoned its initial purpose. In doing so, the Article highlights the shifts in modern banking that rapidly increased competition among banks and caused homogenization in form. Alternative banking institutions could not survive deregulation and were forced to assimilate and operate like mainstream banks, with heightened profits as their sole objective. The poor were the victims.

This Article proposes the reestablishment of government-sponsored banks to serve the poor. Options include redesigning existing government measures and a novel proposal to use the existing Postal Service branches to offer low-cost, short-term credit to the low-income. Such proposals have strong historic roots and could offer credit services to millions of Americans.

Introduction

Poverty in the United States is rising while economic mobility is declining. A complex variety of factors and circumstances cause poverty, making its alleviation a difficult puzzle for even the most committed policy makers. Pernicious poverty implicates every facet of society and the legal structure, but most obviously, poverty is about money—the lack of it, the inability to make it grow, and the inability to borrow it. Low-income individuals have unique financial needs and challenges and cannot be offered banking services as though they are simply rich people with less money. It is on this front that the U.S. banking system is failing the poor.

A recent study found that over half the population of the United States would not be able to access $2,000 in thirty days to respond to an emergency. 2 An Examination of the Availability of Credit for Consumers: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Fin. Servs., 112th Cong. 141 n.1 (2011) [hereinafter The Availability of Credit Hearing] (citing Annamaria Lusardi et al., Financially Fragile Households: Evidence and Implications (Nat’l Bureau of Econ. Research, Working Paper No. 17072, 2011)) (statement of Robert W. Mooney, Deputy Director, Consumer Protection and Community Affairs). Further, approximately one-in-four households in the United States (28.3%) are “unbanked”—meaning they have no formal relationship with a bank—or “underbanked”—meaning they do not have access to incremental credit. 3Susan Burhouse & Yazmin Osaki, FDIC, 2011 FDIC National Survey of Unbanked and Underbanked Households 4 (2012). Thus, they must rely on payday lenders, check cashers, or other fringe banking institutions to meet their short-term credit needs. These lenders are often usurious, sometimes predatory, and almost always much worse for low-income individuals than the services offered by traditional banks to their customers.

Many scholars and policy makers agree that fringe banks have high costs for the poor 4 See, e.g., John P. Caskey, Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor 7 (1994). and further dislocate them from traditional banking institutions by preventing them from building up a credit history. 5 See, e.g., Michael S. Barr, Banking the Poor, 21 Yale J. on Reg. 121, 124 (2004). Many have advocated regulating such institutions or even banning them. 6 See, e.g., 10 U.S.C. § 987 (2006); N.C. Gen. Stat. § 53-276 (2006); Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. Rev. 855, 858–60 (2007); Paige Marta Skiba, Regulation of Payday Loans: Misguided?, 69 Wash. & Lee L. Rev. 1023, 1043 (2012) (stating that fourteen states completely ban payday loans); Scott A. Hefner, Note, Payday Lending in North Carolina: Now You See It, Now You Don’t, 11 N.C. Banking Inst. 263, 285–87 (2007). Proposals include technical regulatory changes aimed at usurious rates, 7Pearl Chin, Note, Payday Loans: The Case for Federal Legislation, 2004 U. Ill. L. Rev. 723, 744. increased disclosure, 8Mary Spector, Taming the Beast: Payday Loans, Regulatory Efforts, and Unintended Consequences, 57 DePaul L. Rev. 961, 978–79 (2008). and other consumer protection measures. 9 See, e.g., Barr, supra note 5, at 129; Brian M. McCall, Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury, 30 Cardozo L. Rev. 549, 551 (2008); Benjamin D. Faller, Note, Payday Loan Solutions: Slaying the Hydra (and Keeping It Dead), 59 Case W. Res. L. Rev. 125, 126 (2008). Rather than joining the chorus of scholars looking to improve payday lending and check-cashing institutions, this Article takes a more fundamental approach: it seeks to examine the gaping hole that these services are currently filling.

Throughout most of U.S. history, the credit needs of the poor were met by banking institutions specifically created and designed to appeal to them. Credit unions were a populist innovation designed to give the poor control, choice, and ownership over their money, with the protection of federal insurance. 10 See infra Part II.A and accompanying notes. The Savings and Loan (S&L) was created to enable middle- and working-class homeownership. 11 See infra Part II.B and accompanying notes. Each of these institutions was designed as a cooperative: their defining features were common ownership and forbearance of profit. 12 See infra Part II.A–B. In contrast, the little-known Morris Bank was a for-profit banking venture aimed at the “democratization of credit,” which was envisioned as giving the poor access to small loans. 13 See infra Part II.C. Credit unions, S&Ls, and Morris Banks operated outside of mainstream banking and used innovative structures and products to meet the unique needs of the poor. Each of these banks was born of necessity, eventually supported by the government, and expanded across the country. Each then drifted from its initial mission.

The drift resulted in part from deregulation. Before the 1980s, the federal and state governments tightly controlled banking by limiting the activities banks could perform. 14Edward L. Symons, Jr., The United States Banking System, 19 Brook. J. Int’l L. 1, 11–12 (1993). Due to changes in both capital markets and political ideologies, banks began to expand their reach and activities. 15 See id. at 15. The banking sector quickly grew in size and scope and lobbied successfully for decreased government regulation. 16 See, e.g., Robert W. Dixon, Note, The Gramm-Leach-Bliley Financial Modernization Act: Why Reform in the Financial Services Industry Was Necessary and the Act’s Projected Effects on Community Banking, 49 Drake L. Rev. 671, 680 (2001). Credit unions, S&Ls, and Morris Banks were caught up in the deregulatory atmosphere of the 1980s and started to compete with mainstream banks for business and customers. 17Lee B. David, Comment, Banking—Mergers—Is Commercial Banking Still a Distinct Line of Commerce?, 57 Tul. L. Rev. 958, 970–79 (1983). This led to a convergent evolution in banking. The banking framework homogenized, leaving little room for variation in institutional or regulatory design. 18Fred E. Case, Deregulation: Invitation to Disaster in the S&L Industry, 59 Fordham L. Rev. S93, S94 (1991); see also Helen A. Garten, Regulatory Growing Pains: A Perspective on Bank Regulation in a Deregulatory Age, 57 Fordham L. Rev. 501, 528–29, 533, 540 (1989). As a result, banks operating outside of the dominant banking model struggled to survive.

The market’s answer to banking for the poor—fringe banking—is unacceptable. What we have today are two forms of banks—regulated mainstream banks that seek maximum profit for their shareholders by serving the needs of the wealthy and middle class, and unregulated fringe banks that seek maximum profits for their shareholders by taking advantage of the needs of the poor. What is missing from the American banking landscape for the first time in generations is a government-sponsored bank whose main purpose is to meet the needs of the poor. Rather than relegating the poor to fringe banks, policy makers must carve out a place for banks that serve the poor and enable them to survive and thrive. This charge has deep historic roots in U.S. banking. 19 See infra Part I.

Since the inception of bank chartering in the United States until the last few decades, there existed an understanding that banks were “affected with a public interest.” 20Schaake v. Dolley, 118 P. 80, 83 (Kan. 1911) (internal quotation marks omitted). Chartered by the state and supported by the public fisc, they were embodied with a “public nature.” 21 Id. It is this vision of banks as public trustees that has disappeared. Yet, banks are still in many ways state-sponsored and state-supported institutions. 22 See Joe Adler, Frequently Asked Questions: Nationalize or Not? Hard to Define, Harder to Answer, Am. Banker (N.Y.), Feb. 20, 2009, at 1. Banks still rely heavily on public subsidies and public bailouts, yet they have been relieved of their obligation to meet certain public needs. 23 Id. To be clear, mainstream banks should not be forced to meet the needs of the poor. Nor should the needs of the poor be outsourced to them.

Turning to banking history for insight, this Article proposes a few options to meet the needs of the poor that go beyond merely regulating the current private institutions that are “serving” these individuals. First, the Article explores a few existing programs that can be redesigned in order to more adequately serve the needs of the poor. The Article examines the shortcomings of legislative efforts and self-help movements by the poor and illustrates how these efforts can be strengthened. The second proposal calls on the federal government to engage in a large-scale effort to provide low-cost credit to the poor using the Postal Service branch network. The Postal Service has been enlisted before in efforts to serve the poor, and it provides efficiencies due to economies of scale. 24 See infra Part IV.D. The Postal Service would offer check cashing and other routine and low-risk financial transactions to the poor at an interest rate that accurately reflects the risk of credit.

Part I of this Article describes the current landscape of low-income banking, and specifically why the poor need access to banks and the damaging alternatives that have taken the place of mainstream institutions in poor communities. Part II outlines the creation, development, and eventual demise of three institutions aimed at meeting the needs of the poor: the credit union, the S&L, and the Morris Bank. Part III then examines why these institutions have changed and why no alternatives have replaced them. The Article illuminates the larger political and social shifts as well as the resulting regulatory changes that have led banks away from serving communities and toward seeking higher profits. Part IV reviews the deficiencies in ongoing efforts to enlist mainstream banks in serving the poor, as well as legislation intended to remedy the problem of access without escaping the modern market model of banking. This Part then makes some specific recommendations that are rooted outside the mainstream banking framework and allow alternative banking institutions to properly meet the needs of the poor.

I. Banking for the Poor: Needs and Barriers

Policy makers have always recognized that access to financial services and credit is a significant step toward individual economic advancement. 25 See Barr, supra note 5, at 134–41 (listing consequences of not having access to mainstream financial services); Stacie Carney & William G. Gale, Asset Accumulation Among Low-Income Households 22–23 (Feb. 2000) (unpublished manuscript), available at http://www.brookings.edu/views/papers/gale/19991130.pdf (finding households without bank accounts 43% less likely to have positive holdings of net financial assets); Lawrence H. Summers, U.S. Sec’y of Treasury, Remarks Before the U.S. Conference of Mayors (Jan. 28, 2000), available at http://www.treasury.gov/press-center/press-releases/Pages/ls356.aspx (describing individual access to financial services, and specifically bank accounts as the “basic passport to the broader economy”). Credit gives people the ability to absorb financial reversals, the means to start or expand a small business, and the capacity to build a financial safety cushion to withstand individual economic shocks. 26“Access to credit assures access to basic necessities for debtors who, because of un- or under-employment, lack an adequate income to pay for essentials like food, shelter, and medicine.” Regina Austin, Of Predatory Lending and the Democratization of Credit: Preserving the Social Safety Net of Informality in Small-Loan Transactions, 53 Am. U. L. Rev. 1217, 1227 (2004). Several studies have demonstrated that when poor communities are provided access to credit and other banking services, they thrive economically. 27 See Asli Demirgüç-Kunt et al., World Bank, Finance for All?: Policies and Pitfalls in Expanding Access 138 (2008) (concluding that “the bulk of the evidence suggests financial development and improved access to finance is likely not only to accelerate economic growth but also to reduce income inequality and poverty”); Barr, supra note 5, at 127; J. Wyatt Kendall, Note, Microfinance in Rural China: Government Initiatives to Encourage Participation by Foreign and Domestic Financial Institutions, 12 N.C. Banking Inst. 375, 377 (2008) (“Researchers have demonstrated that there is a strong, positive correlation between an individual’s access to traditional banking services and an individual’s well-being.”). Studies show that small-scale credit leads to increased income and savings among borrowers. 28 Demirgüç-Kunt et al., supra note 27, at 99; Lewis D. Solomon, Microenterprise: Human Reconstruction in America’s Inner Cities, 15 Harv. J.L. & Pub. Pol’y 191, 199 (1992). It is also true that barriers to credit significantly hamper the economic development of poor communities and individuals. 29 See Kendall, supra note 27, at 375 (“[P]eople with access to banking services live above the poverty line, whereas those without access to banking services live below the poverty line.”).

Access to credit is an important means by which the poor can overcome poverty. 30“Access to credit” is too broad a statement to be empirically measurable. The World Bank and various economists have studied this question without conclusive results as to what type of access is desirable among the poor. Anjali Kumar et al., Measuring Financial Access, in Building Inclusive Financial Systems: A Framework for Financial Access 7, 14–30 (Michael S. Barr et al. eds., 2007). This Article will not delve into this nuanced discussion; rather, it will start with the assumption that the low-income have less access to credit than others and that the credit they are given is not as good as the types of financial products given to the middle and upper classes. Numerous studies of credit options for the poor support these assumptions. See, e.g., Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. Pa. L. Rev. 1, 68–69 (2008) (explaining that the presence of payday loans and subprime mortgages in low-income neighborhoods is not surprising because they are designed to extend credit to borrowers who are denied access to traditional credit); Michael S. Barr, Credit Where It Counts: The Community Reinvestment Act and Its Critics, 80 N.Y.U. L. Rev. 513, 517, 553 (2005) (noting the connection between lower wealth and less access to credit); Kelly D. Edmiston, Could Restrictions on Payday Lending Hurt Consumers?, Econ. Rev., First Quarter 2011, at 63, 83, available at http://www.kc.frb.org/publicat/econrev/pdf/11q1Edmiston.pdf (showing that in the absence of payday lending consumers in low-income counties would have limited access to credit); Michael Klausner, Market Failure and Community Investment: A Market-Oriented Alternative to the Community Reinvestment Act, 143 U. Pa. L. Rev. 1561, 1571 (1995) (“[M]arket imperfections can leave creditworthy borrowers in low-income neighborhoods without access to credit or with less access than they would have if markets worked perfectly.”). The poor need access to long-term credit such as student loans and business loans, as well as short-term credit for daily and emergency needs that are not met by mainstream loan products. But being “banked” is not just about getting a loan; it is also about having a secure place to invest, building a credit history, and being able to avoid expensive fringe financial services.

The poor do not have a right to be banked and I am not proposing that they should. However, if barriers to credit slow economic growth for the poor—and research seems to indicate that they do—these barriers need to be examined. This Article suggests that there is a market failure in providing the poor with access to credit due to the perceived higher risk of these borrowers and discrimination. In addition, small loans are not as profitable as large loans, so profit-maximizing institutions are not incentivized to make these loans. Government-sponsored organizations operating under different profit structures, such as mutual ownership, previously existed to fill the gap created by these incentives, but they are no longer available to the low-income. This Article examines the causes of their absence and advocates a renewed government initiative in banking. Providing healthy credit to the poor requires fewer resources than many other poverty alleviation programs because the state is only providing a subsidy, if needed, in absorbing some of the risks in lending to higher risk individuals. In addition, banking is a sector that already receives subsidies from the federal government, but most of those subsidies flow to large banks and their customers. This Article advocates for a revival of the concept of democratization of credit or renewed efforts to make low-cost credit and access to banking available to all members of society.

A. The Costs of Fringe Banking on the Poor

The rise of fringe banking correlates directly with the decline in accessibility to low-cost credit from government-sponsored banks, such as the credit union and S&L. 31 Caskey, supra note 4, at 7. Christopher Peterson has noted that since “[l]ow-to-moderate income consumers have lost access to banks and credit unions since the late seventies, [they] have naturally moved to [fringe lenders] for their financial needs.” 32 Christopher L. Peterson, Taming the Sharks: Towards a Cure for the High-Cost Credit Market 21 (2004); see also Mann & Hawkins, supra note 6, at 857. Fringe banking has grown exponentially since the 1980s. 33 Caskey, supra note 4, at 1–2. “There are more pawnshops today, both in absolute numbers and on a per capita basis, than at any time in United States history.” 34 Id. at 1. Prior to the mid-1970s, check-cashing institutions existed in only a few urban areas, but throughout the 1980s, these institutions rapidly expanded throughout the country. 35 Id. at 1–2. “Virtually nonexistent in this country 20 years ago, [this sector] has grown into a $100 billion business. Since the mid-1990s, the number of payday lenders nationwide has grown over 10 percent annually.” 36Joe Mahon, Tracking “Fringe Banking”, Fedgazette, Sept. 2008, at 18, available at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4030.

The fringe banks moved into neighborhoods vacated by banks, and in turn, the prevalence and market dominance of predatory lenders drove remaining mainstream banks out of many poor communities. 37Richard R.W. Brooks, Essay, Credit Past Due, 106 Colum. L. Rev. 994, 996 (2006). This trend has only accelerated in recent years as banks have increasingly closed branches in poor neighborhoods in order to maintain profitability.

Fringe banking operations such as loan sharks, pawn shops, payday lenders, and check-cashing stores operate at high costs to the poor. 38 See generally Barr, supra note 5 (discussing the high costs of alternative financial services); Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today’s Society, 51 S.C. L. Rev. 589 (2000) (same). Scholars repeatedly point out the danger of having the poor serviced by unregulated lenders and have proposed specific regulations to curtail the most egregious behaviors of some of these lenders. 39 See, e.g., Caskey, supra note 4, at 9–10; Barr, supra note 5. There are three concerns with these alternative financial services: (1) the costs of these services “reduce take-home pay”; (2) low-income households face barriers to saving without formal bank accounts; and (3) without a formal relationship with a financial institution it is difficult to establish a credit history. 40Michael S. Barr, Essay, An Inclusive, Progressive National Savings and Financial Services Policy, 1 Harv. L. & Pol’y Rev. 161, 164 (2007).

Studies show that many low-income families carry a startling debt load to payday loan providers, often taking out loans from one fringe lender to pay off another. 41 See Peterson, supra note 32; Ronald J. Mann, After the Great Recession: Regulating Financial Services for Low- and Middle-Income Communities, 69 Wash. & Lee L. Rev. 729, 746–47 (2012) (discussing the “debt trap” of payday borrowing and its underlying causes); Skiba, supra note 6, at 1027 (“Many states have now banned payday lending based on the assumption that it enables borrowing behavior that leads to costly cycles of debt . . . .”); see also Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Wash. & Lee L. Rev. 807, 818–19 (2012) (discussing the debt trap in the context of loan sharks). Once these customers enter the payday loan industry, it becomes a trap from which they cannot escape. The typical check-cashing outlet charges between 1.5% and 3.3% of a check’s face value. 42Barr, supra note 5, at 146–47. For a typical client—who earns approximately $18,000 per year—this amounts to nearly $500 annually. 43 Id. at 148; see also Peterson, supra note 32, at 14 (“A government study indicates the average customer is usually a woman in her middle thirties earning just over $24,000 a year. She usually rents her home and once she becomes a customer of a short-term loan company she usually remains a customer for at least six months.” (internal quotation marks omitted)). For payday borrowers, total annual fees amount to nearly $600, with a typical client taking out approximately eleven two-week loans per year, at an average loan amount of $300. 44Barr, supra note 5, at 156–57. The average interest rate charged is usually 500%, well above both state and federal usury limits. 45 Id. at 154. Unfortunately such limits are easily evaded through loopholes that enable “charter renting,” whereby a payday lender forms a relationship with a federal bank and “the payday lender solicits, manages, and issues each loan, but ostensibly uses the federal bank’s funds in exchange for a per-loan fee.” 46 Peterson, supra note 32, at 12–13; see also Austin, supra note 26, at 1241 (describing bank and payday lender partnerships as specifically designed to take advantage of loopholes in banking law in part because banks are eager to have fee income). This trend, including “rent-a-charter” arrangements, has apparently survived the recent banking crisis, as banks and payday lenders continue to partner in payday lending to split the fees from such loans. See Christopher Konneker, Comment, How the Poor Are Getting Poorer: The Proliferation of Payday Loans in Texas via State Charter Renting, 14 Scholar 489, 509–10 (2011). The alternative financial service industry’s success is due to its ability to take advantage of the federally sponsored banking system, and it has come at the expense of poor individuals, many of whom, ironically, do not have access to these same government subsidies and protections.

Some scholars and industry observers defend this fee as a justifiable premium deducted by these institutions to take on higher risk clients. 47 See, e.g., Aaron Huckstep, Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?, 12 Fordham J. Corp. & Fin. L. 203, 230–31 (2007); Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? 21 (FDIC Ctr. for Fin. Research, Working Paper No. 2005-09, 2005), available at http://www.fdic.gov/bank/analytical/cfr/2005/wp2005/CFRWP_2005-09_Flannery_Samolyk.pdf (finding that the high prices charged by payday lenders can be justified by their costs and high default losses); see also Drysdale & Keest, supra note 38, at 616 (“Each segment of the fringe credit market justifies its costs in part by its higher transaction costs and in part by the higher level of risk assumed to be associated with lending to fringe market borrowers.”). However, this is not the whole story. Many of these fees are also associated with relatively low- or no-risk transactions—such as the cashing of checks paid by the federal government or payday loans for those with a stable income. The profit margins can be quite large for these transactions. It is certainly true, however, that it costs more to give credit to the low-income and a premium must be extracted in those cases. This Article suggests below that lending to the poor is not a high-profit business, but that it is a worthy policy objective and government subsidies might be used in this endeavor.

B. Barriers to Banking for the Poor

There are a variety of barriers that keep mainstream banks from serving the poor, the first of which is profitability. Poor individuals may need banks, but the reverse is certainly not true. Most bankers and scholars agree that “[p]roviding financial services to the poor is fundamentally unprofitable.” 48Sow Hup Chan, An Exploratory Study of Using Micro-Credit to Encourage the Setting Up of Small Businesses in the Rural Sector of Malaysia, 4 Asian Bus. & Mgmt. 455, 456 (2005). But see David Malmquist et al., The Economics of Low-Income Mortgage Lending, 11 J. Fin. Services Res. 169, 181–82 (1997) (noting that “low-income lending is no more and no less profitable than non-low-income lending”); Bruce G. Posner, Behind the Boom in Microloans, Inc., Apr. 1994, at 114 (stating that “[b]anks didn’t think you could make money making small loans to businesses . . . . [but] are now finding that . . . microloans can be profitable” (internal quotation marks omitted)). Banks have struggled to offer small loans to the poor because of their higher credit risk and the narrower profit margin on small loans. Banks incur approximately the same costs when originating a loan regardless of the principal amount, 49Solomon, supra note 28, at 192. but they generate much greater returns from large loans. Moreover, mainstream commercial banks have an obligation to their shareholders to maximize profits and “‘should not be required to extend credit if sound judgment suggests undue risk.’” 50Ivan Light & Michelle Pham, Beyond Creditworthy: Microcredit and Informal Credit in the United States, 3 J. Developmental Entrepreneurship 35, 37 (1998) (quoting Katharine L. Bradbury et al., Geographic Patterns of Mortgage Lending in Boston, 1982–1987, New Eng. Econ. Rev., Sept.-Oct. 1989, at 3, 3). Thus, banks look up the financial ladder to attract funds from corporations, pension funds, and high-net-worth individuals, while unregulated fringe bankers meet the needs of the poor. This tendency has created two banking systems in America: a government-subsidized, mainstream banking system for the rich and an unregulated, alternative banking system for the poor.

C. Discrimination and Redlining

Discrimination and redlining also limit the poor’s access to banks. Compounding the problems with profitability in serving the poor, studies show that there is discrimination in banking where loans are denied to creditworthy individuals simply due to their race. 51 See id. at 38 (“Results [from a Boston Federal Reserve Bank study] showed that blacks and Hispanics were 56% more likely than non-minorities to be denied a mortgage loan net of creditworthiness.”); Michele L. Johnson, Casenote, Your Loan Is Denied, but What About Your Lending Discrimination Suit?: Latimore v. Citibank Federal Savings Bank, 151 F.3d 712 (7th Cir. 1998), 68 U. Cin. L. Rev. 185, 192–94 (1999); see also Shahien Nasiripour, Wells Fargo Target of Justice Department Probe; Agency Alleges Discriminatory Lending, Huffington Post, http://www.huffingtonpost.com/2011/07/26/wells-fargo-justice-department-probe_n_910425.html (last updated Sept. 25, 2011, 6:12 AM). See generally Helen F. Ladd, Evidence on Discrimination in Mortgage Lending, J. Econ. Persp., Spring 1998, at 41 (concluding that lending data made available through various legislation shows clear discrimination in mortgage lending against minorities); Natasha Lennard, Did Wells Fargo Prey on Black Borrowers?, Salon (July 27, 2011, 1:28 PM), http://www.salon.com/2011/07/27/wells_fargo_preyed_on_black_borrowers_lawsuit/. Because many of the unbanked and underbanked are also people of color, this has exacerbated their problem of access. Other studies show that minorities are also offered worse financial products than whites. 52Lennard, supra note 51; Nasiripour, supra note 51. Moreover, banks often engage in redlining, which refers to the practice of drawing a red line through certain neighborhoods and refusing to lend there due to historic poverty, racism, or lack of adequate collateral. 53Lan Cao, Looking at Communities and Markets, 74 Notre Dame L. Rev. 841, 851 n.26 (1999). The Community Reinvestment Act (CRA), discussed below in Part IV, attempts to remedy these problems. 54 See id. at 852.

Some policy makers and scholars have given up trying to force banks to meet the needs of the poor, claiming that cost considerations prevent delivery of services in some markets. 55 See, e.g., Malmquist et al., supra note 48, at 181–82; Posner, supra note 48, at 114; cf. Barr, supra note 5, at 183 (discussing the perceived low profitability of banking the poor); Barr, supra note 30, at 528 (discussing the criticism that the “CRA forces banks to engage in unprofitable, risky lending”). Frustrated, some claim that “banks’ potential for service improvement [to the poor] is modest even were they run by God’s angels.” 56Light & Pham, supra note 50, at 39. Banks do not have to be run by “God’s angels” to properly serve the poor—but they must be run in a different way than most banks are today. 57 Id. Banking history shows a variety of examples of banks that successfully met the needs of the poor while operating outside the mainstream model.

D. The Facade of Informality

Even when banks remain geographically available, they are often out of reach. Due to various regulatory measures, mainstream banks require extensive documentation, such as utility bills, a driver’s license, and a Social Security number or alien documentation number, in order to open an account. 58 See Barr, supra note 5, at 184. Providing this documentation can be a significant barrier to banking for many in contrast to the ease by which they can access funds from fringe banks. In addition, many of the American poor who are immigrants or uneducated often do not speak English, may be illiterate, or have significant information barriers to traditional banking structures. 59 See id. at 183–84 (describing the lack of financial education as a barrier to becoming banked for at least a segment of the low-income population); Check Cashers: Moving from the Fringes to the Financial Mainstream, Communities & Banking, Summer 1999, at 2, 9 (explaining that while banks may “offer information about their services in various languages, bank staff may not be fluent in an immigrant’s native language”); cf. Michael A. Satz, How the Payday Predator Hides Among Us: The Predatory Nature of the Payday Loan Industry and Its Use of Consumer Arbitration to Further Discriminatory Lending Practices, 20 Temp. Pol. & Civ. Rts. L. Rev. 123, 149 (2010) (“The typical payday loan customer has a below-average education and may not even speak English.”). There are also intangible barriers of class and culture. When the poor have been asked about using fringe banks rather than mainstream banks, many claim that they are “not comfortable” dealing with banks. 60Barr, supra note 5, at 180 n.282 (internal quotation marks omitted) (“About 18% of unbanked respondents to surveys reported that they were not ‘comfortable’ dealing with banks.”); accord Arthur B. Kennickell et al., Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances, 86 Fed. Res. Bull. 1, 9–11 (2000).

Thus, mainstream banking has abandoned poor areas by shutting down branches and also by failing to speak the financial language of the poor. Payday lending businesses operate behind a facade of informality. These lenders operate in cash, at all hours, on a short-term basis, in the direct vicinity of their customers, and usually in their language. 61 See Michael A. Stegman & Robert Faris, Payday Lending: A Business Model That Encourages Chronic Borrowing, 17 Econ. Dev. Q. 8, 13 (2003) (“Focus groups of low-income and ethnic consumers . . . identif[y] five ways in which check cashers were superior to banks: (a) easier access to immediate cash; (b) more accessible locations; (c) better service in the form of shorter lines, more tellers, more targeted product mix in a single location, convenient operating hours, and Spanish-speaking tellers; (d) more respectful, courteous treatment of customers; and (e) greater trustworthiness.”). This business model seems to be in direct contrast to banks with their rigid hours, requirements, fees, and procedures. Surveys reveal that many low-income individuals feel “[s]nubbed” by mainstream financial institutions and are “more pride-conscious than price-conscious and are therefore susceptible to the appeal of the secondary sector’s ‘merchandising of respect.’” 62Austin, supra note 26, at 1249 (quoting Robert D. Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit 202 (2000)).

Despite the informal facade, fringe banks are highly profitable corporations whose rigid practices come into play as soon as debts become due. These businesses resort to intimidation, harassment, and legal process in order to collect payments. 63 Peterson, supra note 32, at 16. By mimicking informal markets, these fringe banks have convinced their customers that they are operating in the informal realm, but their debt collection practices are quite formal and inflexible. As one commentator observed about a Washington, D.C. check-cashing outlet, “The primitive hands-on processing and tawdry exterior of the outlets both exude welcome to poor customers and mask [the firm’s] close ties to and substantial financing from large corporations and big banks.” 64Brett Williams, What’s Debt Got to Do with It?, in The New Poverty Studies: The Ethnography of Power, Politics, and Impoverished People in the United States 79, 87 (Judith Goode & Jeff Maskovsky eds., 2001).

E. Democratization of Credit?

The payday lending industry claims that it is serving the needs of the poor and promoting the democratization of credit. 65 See Jean Braucher, Theories of Overindebtedness: Interaction of Structure and Culture, 7 Theoretical Inquiries L. 323, 335 (2006) (noting payday lenders’ portrayal of their products as promoting the democratization of credit); Cathy Lesser Mansfield, Predatory Mortgage Lending: Summary of Legislative and Regulatory Activity, Including Testimony on Subprime Mortgage Lending Before the House Banking Committee, in Consumer Financial Services Litigation 2001, at 9, 40 (PLI Corporate Law & Practice, Course Handbook Ser. No. B0-00ZV, 2001) (describing testimony before the House Banking Committee). However, this industry does not provide credit that is productive to poor individuals. The poor are often in greater debt after their interactions with payday lenders than before. 66 See supra Part I.C and accompanying notes. The industry, instead of being an aid to lift the poor out of poverty, buries them further in debt. 67 See supra Part I.C and accompanying notes. “[T]he true democratization of credit . . . should foster the enhanced well-being for the least well-off borrowers.” 68Austin, supra note 26, at 1257.

What low-income individuals need are flexible, informal banks that operate in their neighborhoods and are able to communicate in both their spoken and cultural languages. It is not implausible to imagine a less harmful institution that could serve the poor in the same way as fringe banks by understanding and meeting their needs. A 2008 report describing the financial conditions of the poor in New York City stated that “[t]here is a fundamental mismatch between current financial product and service offerings and the needs of households in these communities,” 69 Office of Fin. Empowerment, N.Y.C. Dep’t of Consumer Affairs, Neighborhood Financial Services Study: An Analysis of Supply and Demand in Two New York City Neighborhoods 24 (2008), available at http://www.nyc.gov/html/ofe/downloads/pdf/NFS_Compiled.pdf. which is the primary reason banks are not reaching the unbanked. 70 Id. The underbanked make up 28% of the U.S. population and continue to grow, and their primary need is short-term financing. 71Jennifer Tescher, Underbanked, Under Banks’ Radar, Am. Banker (N.Y.), Apr. 28, 2011, at 8 (noting that an “FDIC study showed that the nonbank products and services used most frequently by underbanked households are money orders (81%) and check cashing (30%)”).

As discussed below, when unique barriers to serving the poor have arisen in the past, specialized banking institutions created innovative products to meet those needs. In order to meet the needs of the poor today, institutions will need to overcome the documentation, language, and cultural barriers of the poor and operate in their neighborhoods. As discussed below, the government, through the vast branching network of the United States Postal Service, could potentially offer the true democratization of credit. Postal branches operate in every zip code and are both familiar and accessible to the poor. The government could launch a program to offer short-term, low-cost credit options through the Postal Service. Indeed, “[w]e live in a real-time economy. Banks have more than enough technological horsepower and data on consumer behavior patterns to cash paychecks with little to no risk.” 72 Id. The government could offer many—if not all—of the products that fringe banks currently offer at a lower cost.

II. When the Poor Had Banks

At the inception of banking in the United States, there was recognition that banks were an instrumental state entity and that they were to be used to benefit the “common people.” 73 Susan Hoffmann, Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions 43 (2001). Thus, state and national governments employed banks to further government objectives. 74 Id. at 72. Many of the first state banks were chartered to meet the credit needs of farmers, planters, and mechanics who lacked access to the First Bank of the United States. 75 Id.

During the industrial era, the nation’s banks expanded, which resulted in an accumulation of power to those with access to bank funds and a growing discomfort for those without access. 76 See Robert L. Rabin, Federal Regulation in Historical Perspective, 38 Stan. L. Rev. 1189, 1203–04 (1986). During the nineteenth century, as American industrialists were getting richer and the economy was expanding with the help of bank financing, a growing number of poor Americans clamored to be included in the banking sector. During the 1800s, an organization that was first called the “Knights of Reliance” and later “the Farmers’ Alliance” was formed in Texas to oppose the concentration of banking in the East and the power of Wall Street. 77 Id.; Donald A. Lash, The Community Development Banking Act and the Evolution of Credit Allocation Policies, 7 J. Affordable Housing & Community Dev. L. 385, 386–87 (1998); see also John D. Hicks, The Populist Revolt: A History of the Farmers’ Alliance and the People’s Party 108–09 (1931). This populist movement advocated farming cooperatives across the country that were not beholden to Eastern banks. 78 Robert Guttmann, How Credit-Money Shapes the Economy: The United States in a Global System 68, 76–78 (1994); Rabin, supra note 76, at 1202–03 (describing the attempt of the Farmers’ Alliance to promote a cooperative effort and its eventual defeat at the hands of the powerful banking system). Cooperatives were mutually owned and controlled financial institutions in which poor farmers pooled their resources and supported each other’s ventures. 79 See Hicks, supra note 77, at 132–34.

The Progressives embraced these alternative banks and advocated the democratization of credit, or the extension of credit, to the working poor. 80 James Grant, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken 76–110 (1992). In response to these political movements by the poor that intensified during the Progressive Era and the Great Depression, credit unions and the S&L were created. 81 See 80 Cong. Rec. 6753 (1936). The farming cooperatives provided the model for the credit union industry. 82Lash, supra note 77, at 386–87.

In addition to these formal institutions, there were several other banking ventures aimed at helping poor individuals. The Provident Loan Society, established in 1894 with $100,000 provided by the richest men in New York City, 83 Grant, supra note 80, at 77, 85. was a charitable organization that aimed to “relieve distress through enlightened and liberal lending but also, through competition, to force lower margins on profit-making pawnbrokers.” 84 Id. at 85. By 1919, it was making more loans than any domestic savings bank with a policy “first, to make small and costly loans and, only second, to make large and profitable ones. It made loans of as little as one dollar [that required minimal collateral].” 85 Id. The fund’s humanity was in stark contrast to the pawnbrokers at the time, but due to the nature of the bank’s loans, “[t]he truly indigent, almost by definition, were excluded, as they had nothing to pawn.” 86 Id. at 87.

In 1873, President Grant’s Postmaster General proposed a government-sponsored savings program modeled after one started in Britain. 87 Id. A few years later, President Taft responded to growing populist proposals to establish a government-backed savings system for recent immigrants and the poor. 88 Id. at 87–88. The Postal Savings System enabled the poor to save money with the assurance of a government guarantee. 89 Id. at 90; Postal Savings System, U.S. Postal Service (July 2008), http://about.usps.com/who-we-are/postal-history/postal-savings-system.pdf. These savings accounts were created and geared to recent immigrants and the unbanked poor, 90 Postal Savings System, supra note 89. and they were widely successful—at the end of the first year, there was a total of $20 million in deposits, “most of which had been coaxed out of hiding.” 91 Grant, supra note 80, at 90. The Post Office Inspector, Carter Keene, declared in 1913 that the Postal Savings System was not meant to yield a profit:

Its aim is infinitely higher and more important. Its mission is to encourage thrift and economy among all classes of citizens. It stands for good citizenship and tends to diminish crime. It places savings facilities at the very doors of those living in remote sections, and it also affords opportunity for safeguarding the savings of thousands who have absolute confidence in the Government and will trust no other institution. 92 Id.

Throughout American history, there have been various state-supported attempts to meet the banking needs of the poor. The following sections outline the history of three banking institutions that were created for the poor and their eventual abandonment of their mission. Interestingly, all of these banks changed roughly at the same time—in the 1980s. The causes of this collective change in banking will be examined at length below. These banks shared several common traits: they were born of necessity to meet the needs of the poor, they formed special charters that were different from mainstream banks and were embraced by the law, they each drifted from their founding mission to serve the poor and started to compete with other banks, and they were each deregulated in order to compete with mainstream banks. None of these banks operated at a large profit, but that was not the point of their charters. Today, all of these banks maintain profit margins rivaling mainstream banks and are marketing their products to wealthy individuals.

A. Credit Unions

1. Born of Necessity

Credit unions started as a populist mechanism designed to empower farmers against bad loans that kept them indebted to bankers. 93 See Rabin, supra note 76, at 1203–04 (detailing the Farmers’ Alliance plan to have the federal government issue credit for the farmers’ crops to effectively eliminate private funding). Farmers needed credit to run their businesses, but their source of credit was typically confined to traditional banks that were based in major cities like New York and Boston. 94 Id.; see Lee J. Alston, Wayne A. Grove & David C. Wheelock, Why Do Banks Fail? Evidence from the 1920s, 31 Explorations in Econ. Hist. 409, 415–18 (1994); Julie Andersen Hill, Bailouts and Credit Cycles: Fannie, Freddie, and the Farm Credit System, 2010 Wis. L. Rev. 1, 10–16. As the crop failures and financial woes of the 1920s took their toll on farms across the country, farmers quickly became heavily indebted to these outside banks and often lost their equipment, land, and livelihood. 95 See Rabin, supra note 76, at 1202–03. This quickly led to a populist sentiment that resulted in farmers organizing a grassroots campaign to start credit unions. 96 See 80 Cong. Rec. 6752 (1936). Credit unions were envisioned as a way to cut out the middleman—commercial banks—and give farmers access to lower cost credit. 97 See Fred Galves, The Discriminatory Impact of Traditional Lending Criteria: An Economic and Moral Critique, 29 Seton Hall L. Rev. 1467, 1479 n.18 (1999) (“Perhaps the most remarkable success story, however, was the credit union movement. Credit unions have been around since early in the century. They sprang from the . . . public spirited impulse . . . to facilitate the supply of consumer credit to workers, farmers, and other[s] . . . whose credit needs were not being adequately served by existing banking facilities.” (alterations in original) (quoting Jonathan R. Macey & Geoffrey P. Miller, Banking Law and Regulation 28–29 (2d ed. 1997))); Kelly Culp, Comment, Banks v. Credit Unions: The Turf Struggle for Consumers, 53 Bus. Law. 193, 193–94 (1997).

Thus, the proliferation of credit unions in the United States came in response to the Great Depression. 9880 Cong. Rec. 6753 (1936) (showing that the number of credit unions grew from 257 in 1925 to 1,017 in 1930 and to 4,000 in 1935, and that credit union membership grew from 292,800 members in 1930 to 1,000,000 members in 1935). Previously, banks had made their services available mostly to corporations and wealthy individuals, disregarding lower income individuals. 99 See History of Credit Unions, Nat’l Credit Union Admin., http://www.ncua.gov/about/history/Pages/CUHistory.aspx (last visited Jan. 18, 2013). This practice left underserved groups susceptible to exploitation. Loan companies would often charge up to the maximum interest rate allowed by law, while installment buying would exploit those in need of credit through “confusing rate schedules and discount schemes.” 10080 Cong. Rec. 6752 (1936); see also 78 Cong. Rec. 7260 (1934) (comments of Sen. Sheppard). Senator Sheppard recounted the story of a man earning $40 per week who undertook an installment purchase plan that required him to pay $52 per week. Id. Those unwilling or unable to navigate these legal alternatives to banks were forced to turn to loan sharks who would extract “up to a thousand percent” in interest rates. 10180 Cong. Rec. 6752 (1936); see also 78 Cong. Rec. 7260 (1934) (comments of Sen. Sheppard). Senator Sheppard recounted the story of “a railroad employee who borrowed $30 from a loan shark, paid in interest $1,080, and was then sued for the $30. He paid 3,600 percent.” Id. These high interest rates reduced purchasing power among the poorer classes, which in turn contributed to the economic malaise of the times. 10278 Cong. Rec. 7260 (1934) (comments of Sen. Sheppard).

Specifically, credit unions provided a method of lending in which farmers and rural populations were organized into credit groups. 103 Id.; see also 80 Cong. Rec. 6752 (1936). Within these groups, those with excess money would make deposits from which the other local residents could receive loans. 104 See 80 Cong. Rec. 6752 (1936). The borrowers would then repay the loans when they were financially able to do so. 105 Id. Joining a group required recommendation from one’s neighbors and entitled one to deposit, borrow, and vote on the operation of the bank under a “one-man one-vote” system. 106 Id. (internal quotation marks omitted). Borrowers would receive loans “for productive or provident purposes upon security that the fellow credit unionists thought adequate.” 107 Id. Interest paid on loans was kept low, even though it was a credit union’s sole source of income. 108 Id.

2. An Innovative Response

The early credit unions were able to overcome the high costs associated with lending to the poor, such as risk of delinquency, through group supervision. There was a requirement that there be a “common bond” among credit union members, 109 12 U.S.C. § 1759(b)(1)–(2) (2006); accord Issues Currently Facing the Credit Union Industry: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Banking & Fin. Servs., 105th Cong. 12 (1997) [hereinafter D’Amours Statement] (statement of Norman E. D’Amours, Chairman, National Credit Union Administration). which was aimed at reducing the cost of credit and the chance of delinquency because members knew each other. 110Jonathan R. Siegel, Zone of Interests, 92 Geo. L.J. 317, 333 (2004); see also First Nat’l Bank v. Nat’l Credit Union Admin., 863 F. Supp. 9, 10 (D.D.C. 1994) (“The original purpose behind the common bond provision was twofold: to insure the financial stability of credit unions by providing a sense of cohesiveness among members and by enabling the members to establish a borrower’s credit worthiness at minimum cost; and to promote the growth of credit unions because it was faster and easier to form a credit union with members who already had a common bond.”), rev’d sub nom. First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 90 F.3d 525 (D.C. Cir. 1996), aff’d, 522 U.S. 479 (1998); cf. 78 Cong. Rec. 7259–60 (1934) (comments of Sen. Barkley and Sen. Sheppard). By design, loan repayment was limited to two years, and the maximum interest rate chargeable was 1% per month. 111Federal Credit Union Act, ch. 750, § 7, 48 Stat. 1216, 1218 (1934). The credit union’s innovative response to high-cost credit was to use personal knowledge of an applicant as a proxy for the high interest usually used to offset the risk of lending to the low-income. 112 See First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 988 F.2d 1272, 1276 (D.C. Cir. 1993); Siegel, supra note 110, at 333; see also 78 Cong. Rec. 7259–60 (1934) (comments of Sen. Barkley and Sen. Sheppard); History of Credit Unions, supra note 99.

The common bond requirement served several important purposes. Primarily, it was a substitute for the members’ lack of credit history and collateral that traditional banks required to issue loans. 113 See First Nat’l Bank, 863 F. Supp. at 10 (“The original purpose behind the common bond provision was twofold: to insure the financial stability of credit unions by providing a sense of cohesiveness among members and by enabling the members to establish a borrower’s credit worthiness at minimum cost; and to promote the growth of credit unions because it was faster and easier to form a credit union with members who already had a common bond.”); cf. First Nat’l Bank & Trust Co., 988 F.2d at 1275 (“[T]he very notion [that Congress intended the common bond requirement to protect banks against competition from credit unions] seems anomalous because Congress’ general purpose was to encourage the proliferation of credit unions, which were expected to provide service to those would-be customers that banks disdained.”). Congress intended the common bond among the members of a credit union to create “a cohesive association in which the members are known by the officers and by each other in order to ‘ensure both that those making lending decisions would know more about applicants and that borrowers would be more reluctant to default.’” 114First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 90 F.3d 525, 529–30 (D.C. Cir. 1996) (quoting First Nat’l Bank & Trust Co., 988 F.2d at 1276), aff’d, 522 U.S. 479 (1998); cf. D’Amours Statement, supra note 109, at 12 (“[The] common bond [requirement] then was an organization mechanism for credit unions and an early standard of safety and soundness. It was never the defining characteristic of credit unions.”). Such a cohesive association theoretically allowed “credit unions, unlike banks, [to] ‘loan on character.’” 115 First Nat’l Bank & Trust Co., 988 F.2d at 1276 (quoting 78 Cong. Rec. 12,223 (1934) (comments of Rep. Steagall)). The common bond made federal credit unions distinctly tailored to serve the needs of lower income individuals.

3. Embraced by the Law

These initial credit unions later served as the catalyst for the Massachusetts Credit Union Act of 1909, 116Massachusetts Credit Union Act of 1909, ch. 419, 1909 Mass. Acts 392. the first state credit union act, which later served as the basis for the Federal Credit Union Act. 11778 Cong. Rec. 7259 (1934); see also id. at 12,224 (comments of Rep. Blanchard) (noting that “Massachusetts and other States have excellent laws on credit unions”). The majority of states passed laws supporting the establishment of credit unions during the first three decades of the twentieth century. 118Id. at 7260 (comments of Sen. Sheppard) (noting that only ten states did not have credit-union laws by this point). Congress passed the Federal Credit Union Act (FCUA) in 1934, 119Federal Credit Union Act, ch. 750, 48 Stat. 1216 (1934) (codified as amended in scattered sections of 12 U.S.C.). stating that the Act addressed a “great national problem” 12078 Cong. Rec. 7259 (1934) (comments of Sen. Sheppard). and noting the “very extraordinary” and “highly successful” record of credit unions in addressing the “legitimate credit” needs of “the poorer and working classes” throughout the Great Depression. 121 Id. at 7259−61 (noting that credit unions “came through the depression practically without runs or failures”).

As originally passed, the FCUA required that credit union members elect management, with each member having one vote 122Federal Credit Union Act §§ 10, 11(b). as well as the ability to purchase shares and receive loans. 123 Id. § 7(6)–(7). Membership in a credit union was “limited to groups having a common bond of occupation, or association, or to groups within a well-defined neighborhood, community, or rural district.” 124 Id. § 9. While initially subject to taxation just like other banking institutions, 125 Id. § 18. concern arose that subjecting credit unions to the same taxation as commercial banks would place “a disproportionate and excessive burden on the credit unions.” 12682 Cong. Rec. 358 (1937) (statement of Rep. Steagall). Responding to this concern, Congress, three years after initially passing the FCUA, amended the statute by extending significant tax exemptions to credit unions. 127Federal Credit Union Act Amendments, ch. 3, 51 Stat. 4, 4 (1937) (amending section 18 of the Federal Credit Union Act). Results from some recent studies suggest that traditional banking institutions would need to earn 40% more than a credit union to achieve the same level of retained earnings due to the tax exemption. See Donald Novajovsky, Note, From National Credit Union Administration v. First National Bank & Trust to the Revised Federal Credit Union Act: The Debate over Membership Requirements in the Credit Union Industry, 44 N.Y.L. Sch. L. Rev. 221, 227 (2000). This was the first of a series of alterations to the federal credit union structure dealing with safety and soundness. In 1970, Congress created the National Credit Union Share Insurance Fund, a deposit insurance backed by the Treasury, analogous to the FDIC. See Act of Oct. 19, 1970, Pub. L. No. 91-468, § 203(a), 84 Stat. 994, 999–1000 (codified as amended at 12 U.S.C. § 1783 (2006)). In 1998, as part of the Credit Union Membership Access Act, Congress imposed heightened risk-based capital requirements on credit unions. See Credit Union Membership Access Act, Pub. L. No. 105-219, § 301(a), 112 Stat. 913, 923–31 (1998) (codified as amended at 12 U.S.C. § 1790d (2006)); 12 C.F.R. § 702 (1998).

The tax exemptions were a critical government subsidy that allowed credit unions to continue to provide low-cost services. As a result of these provisions, the credit union industry grew dramatically after the Great Depression. 128 See Novajovsky, supra note 127, at 224 (citing Herman E. Krooss & Martin R. Blyn, A History of Financial Intermediaries 241–42 (1971)). In 1930, there were 1,100 credit unions in the United States; by 1960 there were over 10,000. History of Credit Unions, supra note 99. Specifically, from 1945 to 1966 the number of credit unions grew from 8,683 holding $435 million in funds, to more than 23,000 holding in excess of $11.5 billion in funds. 129 See Novajovsky, supra note 127, at 224 (citing Krooss & Blyn, supra note 128, at 241–42). Additionally, these federally chartered credit unions were indeed serving the underserved, working-class families that needed credit to expand and succeed. 130William R. Emmons & Frank A. Schmid, Credit Unions and the Common Bond, 81 Rev. 41, 43 (1999) (“Historically, members of credit unions were drawn from groups that were underserved by traditional private financial institutions; these consumers tended to have below-average incomes or were otherwise not sought out by banks.”).

4. Credit Unions Drift from Their Initial Mission

Credit unions slowly began to shift from being a resource for poor Americans to competing with other banks for the business of the middle class. Credit unions were caught up in the broader changes in banking and faced internal as well as external pressure to compete with other banks and seek higher profits. Credit unions started losing customers to unregulated entities due to their regulatory burdens, such as the common bond requirement and the interest rate limitations—the very things that enabled them to serve the poor. 131 See The Proposed Consumer Financial Protection Agency: Implications for Consumers and the FTC: Hearing Before the Subcomm. on Commerce, Trade, & Consumer Prot. of the H. Comm. on Energy & Commerce, 111th Cong. 27 (2009) (statement of Michael Barr, Assistant Secretary for Financial Institutions, United States Treasury Department) (“Credit unions and community banks with straightforward credit products struggled to compete with less-scrupulous providers who appeared to offer a good deal and then pulled a switch on the consumer.”); Amanda Masset, Note, The Evolution of the Common Bond in Occupational Credit Unions: How Close Must the Tie that Binds Be?, 3 N.C. Banking Inst. 387, 399 (1999) (stating that credit unions are better able to compete with commercial banks after the enactment of the Credit Union Membership Access Act that expanded the number of people eligible to join a federal credit union). These forces created pressure on the credit union industry to seek deregulation and offer more attractive interest rates to its customers who had a growing number of investment options. 132 Hoffman, supra note 73, at 204 (“[Americans’] savings—not worth banks’ bother in 1930—became the object of vigorous competition among banks, S&Ls, and, later, the new money market mutual funds.”).

In 1970, the industry sought to completely overhaul its charter and adopt less restrictive requirements, leading Congress to amend the FCUA. 133 Id. Thus, credit unions started to focus on attracting more customers and expanding the industry in order to stay viable among the different banking alternatives. The process of expansion and deregulation led to a change of mission. Credit unions were no longer about poverty alleviation; they were now a desirable alternative for middle-class investment.

5. Deregulation

The mantra of banking regulation in the 1970s was increased competition, 134Clifford L. Fry & Donald R. House, Economic Issues in the Defense of Directors and Officers of Financial Institutions, 110 Banking L.J. 542, 546 (1993). and credit unions wanted to join. 135 James M. Bickley, Cong. Research Serv., No. 97-548 E, Should Credit Unions Be Taxed? 1, 7 (2005) (describing how the National Credit Union Association issued a series of administrative rulings that allowed multi-group federal credit unions and, consequently, allowed credit unions to be more competitive). They started offering market-oriented products to attract and keep customers. 136 See id. However, their ability to compete was hampered by regulatory burdens, such as the common bond requirement, that kept them from freely courting customers. Eventually, the industry sought to relax the common bond requirement—its defining characteristic—to include multiple groups of people. 137The National Credit Union Administration began this process in 1982 by issuing Interpretive Ruling and Policy Statement 82-1, Membership in Federal Credit Unions, 47 Fed. Reg. 16,775 (Apr. 20, 1982). It was later replaced by Interpretive Ruling and Policy Statement 82-3, Membership in Federal Credit Unions, 47 Fed. Reg. 26,808 (June 22, 1982), which further expanded the common bond requirement.

As credit unions shifted their focus to compete with banks for the funds of the middle class, a debate ensued over the common bond requirement, and the requirement came to represent the competitive advantage of banks vis-à-vis credit unions. As the economic recession of the late 1970s and early 1980s worsened, the National Credit Union Association (NCUA) undertook a reexamination of the common bond requirement. 138Membership in Federal Credit Unions, 47 Fed. Reg. at 26,808. In an effort to help credit unions compete with banks, the NCUA issued an interpretive statement stating that credit union memberships could include multiple occupational groups as long as each group had a common bond. 139 Id. This dilution of the common bond requirement naturally led to increased credit union size, services, and competitive advantage. 140After this expansive interpretation, the membership in credit unions increased by 30% from 1982 until 1998. Wendy Cassity, Note, The Case for a Credit Union Community Reinvestment Act, 100 Colum. L. Rev. 331, 331 n.1 (2000); see also Brief for Petitioners, Nat’l Credit Union Admin. v. First Nat’l Bank & Trust Co., 522 U.S. 479 (1998) (Nos. 96-843, 96-847), 1997 WL 245673, at *10. The number of credit unions grew fourfold from 1982 until the mid-1990s and combined to control nearly $330 billion in funds from 70 million members. See Dean Foust, Clipping the Wings of Credit Unions, BloombergBusinessweek (Aug. 25, 1996), http://www.businessweek.com/stories/1996-08-25/clipping-the-wings-of-credit-unions. This growth has been primarily attributed to attracting customers from outside the typical common bond requirement. For example, nearly two-thirds of all the members in the AT&T Family Federal Credit Union do not work for AT&T and are considered outside of the company. Id.

The Supreme Court held, however, that the industry could not change its defining trait unilaterally. 141First Nat’l Bank & Trust Co., 522 U.S. 479. The Court struck down this broad interpretation of the common bond under a Chevron analysis in National Credit Union Administration v. First National Bank & Trust Co. in 1998. 142 Id. In swift response, the NCUA and the credit union industry began lobbying Congress for an amendment to the FCUA allowing for diversification. The NCUA’s lobbying efforts focused on the preservation of the freedom of financial choice for Americans. 143 D’Amours Statement, supra note 109, at 15–16. The freedom to choose credit unions over traditional banks gained some traction in Congress partly due to the fact that most credit union members were now in the middle class and credit unions had turned into a formidable lobby. 144Cassity, supra note 140, at 344 (“Even before the Supreme Court decision was announced, . . . . it was almost inevitable that . . . Congress would amend the FCUA . . . . [T]he typical credit union member—educated, middle-class, mortgage-owning—is also the average voter.” (footnote omitted)); see also The Supreme Court’s February 25, 1998 Decision Regarding the Credit Union Common Bond Requirement: Hearing Before the H. Comm. on Banking & Fin. Servs., 105th Cong. 15–16 (1998) (statement of Paul Kanjorski, Rep., H. Comm. on Banking & Fin. Servs.). Bankers still complain about the credit union lobby and its power. See, e.g., Stacy Kaper, CUs’ Deal on Mortgage Bill Irks Bankers, Am. Banker (N.Y.), Feb. 26, 2008, at 1.

Six months after the Supreme Court’s decision in National Credit Union Administration, 145 See Eileen Canning, House Passes Credit Union Bill; Measure Headed for White House, Bloomberg Banking Daily (BNA) (Aug. 5, 1998). Congress passed the Credit Union Membership Access Act (CUMAA) 146Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 913 (1998) (codified as amended in scattered sections of 12 U.S.C.). with near unanimous support to “ratify the longstanding policy of the [NCUA] with regard to [the] field of membership [in] Federal credit unions” by “specifically authoriz[ing] multiple common bond federal credit unions.” 147 H.R. Rep. No. 105-472, at 1, 18 (1998); see also Cassity, supra note 140, at 345 n.92 (noting that the CUMAA passed 411–8 in the House and 96–2 in the Senate). CUMAA was considered necessary to ensure that customers continued to have a broad array of choices in financial services. 148 See Alex D. McElroy, Clinton Signs Credit Union Bill; NCUA to Begin Implementing Law Soon, Bloomberg Banking Daily (BNA) (Aug. 11, 1998); see also Credit Union Membership Access Act §§ 1–2. Representative Vento also noted that “[b]y . . . allowing multiple common-bond credit unions, we are revamping and facilitating the federal credit union law and empowering credit unions to adapt to the 1990’s market place.” 144 Cong. Rec. 18,730 (1998) (statement of Rep. Vento). One of the Act’s most significant features was the exemption of credit unions from the Community Reinvestment Act (CRA), an Act aimed at providing banking access to low-income individuals. 149 See also Credit Union Membership Access Act § 203. The exemption was a direct result of credit union lobbying.

Because of the seemingly rushed nature of the CUMAA, 150 See Cassity, supra note 140, at 345 n.91. there were many inconsistencies in the Act. Specifically, although Congress imposed numeric membership requirements that sought to limit the growth of multiple-common-bond credit unions, the limits were easily subverted and led to an increase in credit union membership. 151The current statute allows “fifty 3,000 member groups [to] come together . . . [with a] net growth to the institution [of] 150,000 members.” However, the statute does not allow “three 50,000 member groups” for a net growth of 150,000. Because there are more smaller groups than larger groups it is likely that this will increase the membership in credit unions. Novajovsky, supra note 127, at 243. Moreover, Congress did not answer the glaring contradiction raised initially by the court of appeals regarding an expansive, multiple-common-bond interpretation, namely how unrelated members and groups can adequately determine and evaluate the creditworthiness of the additional members. 152First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 90 F.3d 525, 529–30 (D.C. Cir. 1996), aff’d, 522 U.S. 479 (1998); First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 988 F.2d 1272, 1276 (D.C. Cir. 1993). The Act also did nothing to assuage the banking industry’s fears that credit unions were acting essentially like banks without having to pay taxes or comport with the requirements of the CRA.

Today, credit unions are much like mainstream banks. The American Banking Association (ABA) has continually argued that credit unions are not fulfilling their mission to serve the underserved. 153George Cleland, Bank-like Credit Unions Should Face Bank-like Taxes, ABA Banking J., Jan. 1989, at 14 (explaining that the origin of the federal credit unions as self-help cooperatives with members sharing a common bond had been rejected for a more inclusive, profitable cooperative); Walter A. Dods, Jr., This Is a Common Bond?, ABA Banking J., July 1997, at 17 (stating that “the typical credit union member is more likely to have above-average income and be college-educated and a homeowner—not low-income and underserved by banks”). Buttressing the ABA’s claim is a GAO report, which concluded that credit unions are more likely to serve middle and upper income people than lower income people. 154 U.S. Gov’t Accountability Office, GAO-07-29, Credit Unions: Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements 5, 8 (2006) [hereinafter GAO, Credit Unions]. According to a 1996 study done by the Credit Union National Association (CUNA), credit union members had an average household income of $43,480, whereas non-members had an average income of $31,660—a difference of 37%. Culp, supra note 97, at 213. And according to the American Banking Association, “[C]redit union members have more years of education and are more likely to be employed full-time.” Id. at 213 n.161. Indeed, credit union expansion allowed them to compete with banks while enjoying advantageous tax and other regulatory and statutory exemptions, which taken together created an uneven playing field. Notably, some even claim that credit unions “‘come in and cherry-pick the most profitable [banking] business and then give nothing back to the community,’” 155 See Foust, supra note 140 (quoting Joe G. Howard, senior vice president at First National Bank & Trust Company in Asheboro, North Carolina). a practice far from the original objectives of the Depression Era cooperatives. 156 Id.

6. Community Development Credit Unions

Despite the credit union industry’s general movement away from its original objectives, there still exist credit unions specifically designed to service low- and moderate-income groups and communities. One such organization, the National Federation of Community Development Credit Unions, was organized in the 1970s “to strengthen those credit unions that serve low-income, urban and rural communities.” 157 About Us, Nat’l Fed’n Community Dev. Credit Unions, http://www.natfed.org/i4a/pages/index.cfm?pageid=256 (last visited Jan. 18, 2013). Credit unions with a focus on the poor call themselves “community development credit unions” (CDCU). 158 Id. However, many of these credit unions have struggled to survive. 159 See Letter from Debbie Matz, Chairman, Nat’l Credit Union Admin., to Federally-Insured Credit Unions (Jan. 2010) [hereinafter NCUA Letter] (regarding the supervising of low-income credit unions and community development credit unions). Some estimates place the CDCU failure rate during the 1990s near 50%. Charles D. Tansey, Community Development Credit Unions: An Emerging Player in Low Income Communities, Brookings Inst. (Sept. 2001), http://www.brookings.edu/articles/2001/09metropolitanpolicy_tansey.aspx. Statutory and regulatory efforts have been made to assist these credit unions in fulfilling their mission. See Lehn Benjamin et al., Community Development Financial Institutions: Current Issues and Future Prospects, 26 J. Urb. Aff. 177, 178–79 (2004).

Despite their struggles to remain viable, some of these credit unions have proved at least somewhat successful in fulfilling their missions. One study of New York City’s Lower East Side People’s Federal Credit Union showed that the vast majority of the credit union’s borrowers were low-income minorities with little or no credit and no relationship with mainstream financial institutions. 160 See Tansey, supra note 159. Another study of Vermont’s Opportunity Credit Union showed that borrowers with little or no credit history were 30% less likely to receive auto loans from traditional banks as similarly situated individuals with some credit history. Jessica Holmes et al., Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from the Automobile Loan Market, 88 Soc. Sci. Q. 585, 595 (2007). However, when seeking an auto loan from a CDCU, such borrowers suffered no significant disadvantage. Id. This, in large part, is due to the CDCU’s reliance on relationship lending. Id. This is significant because, as the authors explained, several studies show that relationship lending “can lower the cost of financial capital and lessen credit rationing in the markets for small business loans and consumer loans.” Id. at 585 (citations omitted). Moreover, loans were small—$1,700 on average—and for shorter terms, thus tailored specifically to meet the needs of the individuals the credit union served. 161 Marva E. Williams, The Un-Banks: The Community Development Role of Alternative Depository Institutions, in Financing Low-Income Communities: Models, Obstacles, and Future Directions 159, 173 (Julia Sass Rubin ed., 2007) (summarizing other studies with similar findings). The CDCU demonstrate that it is possible for credit unions to fulfill the mission that they were initially equipped to serve.

B. Savings and Loans

The S&L framework was built for the public purpose of increasing home ownership and savings among the poor. 162 See Hoffmann, supra note 73, at 141. President Hoover believed that home ownership was intrinsically good for individuals and for society and pushed for the creation of a banking institution that could help the poor overcome the barriers to home ownership. 163 See David L. Mason, From Buildings and Loans to Bail-Outs: A History of the American Savings and Loan Industry 1831–1995, at 78 (2004); see also Richard F. Babcock & Fred P. Bosselman, Suburban Zoning and the Apartment Boom, 111 U. Pa. L. Rev. 1040, 1046 n.50 (1963); Kenneth A. Stahl, The Suburb as a Legal Concept: The Problem of Organization and the Fate of Municipalities in American Law, 29 Cardozo L. Rev. 1193, 1253 (2008). President Hoover’s sentiment was not unique at the time. The California Supreme Court reasoned that:With ownership comes stability, the welding together of family ties, and better attention to the rearing of children. With ownership comes increased interest in the promotion of public agencies, such as church and school, which have for their purpose a desired development of the moral and mental make-up of the citizenry of the country. With ownership of one’s home comes recognition of the individual’s responsibility for his share in the safe-guarding of the welfare of the community and increased pride in personal achievement which must come from personal participation in projects looking toward community betterment.Miller v. Bd. of Pub. Works of L.A., 234 P. 381, 387 (Cal. 1925) (in bank). Originating in the United States prior to the Civil War, building and loan associations were set up “to help independent workingmen get suitable homes.” 164Lloyd Rodwin, Studies in Middle Income Housing, 30 Soc. Forces 292, 293 (1952) (emphasis omitted); see also Mason, supra note 163, at 12. The S&L framework combined the building and loan associations and savings banks, which were created in the nineteenth century to facilitate saving by the poor. 165 Richard Scott Carnell et al., The Law of Banking and Financial Institutions 12 (4th ed. 2009). The S&Ls were labeled the “Workingman’s Way to Wealth” and lauded the “virtues of cooperation and emancipation from landlords.” 166Rodwin, supra note 164, at 293.

1. Born of Necessity

The need for these alternative sources of credit arose as a result of the collapse of the banking system in the South following the Civil War and the lack of banking services in the still-undeveloped West. 167Edward L. Rubin, Communing with Disaster: What We Can Learn from the Jusen and the Savings and Loan Crises, 29 Law & Pol’y Int’l Bus. 79, 80–81 (1997). Most functioning banks available were in the Northeast and Midwest. 168 Id. at 80. This lack of credit forced farmers in the South to turn to tenant farming, “borrowing from their landlord against their next year’s crop at exorbitant prices, . . . . [while in] the West, they often managed without credit by living as subsistence farmers.” 169 Id. at 80–81. Communities in these credit-starved areas addressed the lack of credit by creating institutions in which they pooled their money, from which those in need could receive loans to buy land, while those who had money could receive some return on their savings. 170 Id. at 81.

2. An Innovative Response

Much like credit unions, S&Ls were created as mutual savings banks. 171 Nicole Fradette et al., Project: Regulatory Reform: A Survey of the Impact of Reregulation and Deregulation on Selected Industries and Sectors, 47 Admin. L. Rev. 461, 645 (1995); Rubin, supra note 167, at 81. The model of the industry was neighbors helping neighbors. 172 See Lawrence V. Conway, Am. Sav. & Loan Inst., Savings and Loan Principles 254 (3d ed. 1965) (“[S]avings associations . . . try to be, and want you to think of us as, your friend and neighbor.”). Multiple S&Ls also use the phrase as a motto for their business or to describe the history of their establishment. See, e.g., About Us—The Story, Abbeville Savings & Loan, http://www.abbevillesavings.com/about.htm (last visited Jan. 18, 2013); Dalhart Fed. Savings & Loan Ass’n, http://www.dalhartfederal.com/ (last visited Jan. 18, 2013). The first S&Ls were mutually owned. 173 Hoffmann, supra note 73, at 155; Mason, supra note 163, at 17–18. They were created not to make profits, but to achieve the public purpose of building homes for their members. 174 See Mason, supra note 163, at 18; William F. McKenna, Control and Management of Federal Savings and Loan Associations, 27 S. Cal. L. Rev. 47, 49 (1953). These were distinctively not market entities—they were self-help institutions for the poor made possible by government subsidies and regulation. 175 Mason, supra note 163, at 12. Members also participated heavily in governance, much like in credit unions. S&L members elected the institution’s officers, who frequently were community leaders. 176 Id. at 21. This pooling and lending of resources enabled home ownership for low-income people who were not given access to customary bank loans. 177 Michigan Tax on Bank Shares at Higher Rates Than on Savings and Loan Associations Does Not Violate Section 5219 of Revised Statutes, 77 Banking L.J. 588, 590–91 (1960); see also Rodwin, supra note 164, at 293. Soon, S&Ls were able to get bank loans to assist them in making larger loans to their members. 178 See Mason, supra note 163, at 78.

Savings and loans created innovative products to meet their members’ unique needs. The S&L was initially responsible for creating loans that were accessible to average Americans. Their loans featured long-term amortization and high loan-to-value ratios (65%–75%). 179 Id. at 91, 162; cf. Allen F. Jung, Terms on Conventional Mortgage Loans on Existing Houses, 17 J. Fin. 432, 435 (1962) (discussing study showing that twenty-six of thirty-one surveyed S&Ls routinely offered mortgage loans with loan-to-value ratios of 60% or higher). These loans are familiar today, but it was the S&L that first created them. 180 See Mason, supra note 163, at 17–21 (describing various lending innovations, including a precursor to the amortizing mortgage, created by S&Ls to facilitate lending to individuals who did not have substantial savings). Before the S&L, banks only provided home financing for 40%–60% loan-to-value ratios, 181 See id. at 16, 91; cf. Jung, supra note 179, at 439–42. with a term of one, three, or five years. 182 Mason, supra note 163, at 16; Fradette et al., supra note 171, at 645. Many people needed to get a second mortgage—through an unregulated lender at usurious rates—in order to finance their home. 183 See Lendol Calder, Financing the American Dream: A Cultural History of Consumer Credit 65–66 (1999). Mainstream home financing was not within reach of most Americans, and there were no loans on older homes or low-value homes. S&Ls achieved great success 184 See Kenneth A. Snowden, Jr., The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s, in The Panic of 2008: Causes, Consequences and Implications for Reform 51, 58 (Lawrence E. Mitchell & Arthur E. Wilmarth, Jr. eds., 2010) (noting that the affordability of S&L mortgages resulted in the institutions holding a greater market share of one-to-four-family home mortgages “than life insurance companies, commercial banks and mutual savings banks combined”). in providing low- and moderate-income Americans access to home ownership. 185 See Calder, supra note 183, at 66–67. And they met this need by creating a product tailored to the needs of the poor.

3. Embraced by the Law

Savings and loans gained popularity because they met a growing need and desire of Americans. In 1930, there were over 12,000 S&Ls with more than twelve million members and assets of more than $8 billion. 186Fradette et al., supra note 171, at 645. During the Depression, S&Ls were susceptible to runs and in danger of being shut down. Banks called in the loans to S&Ls while their customers demanded their deposits. 187 See Carl Felsenfeld, The Savings and Loan Crisis, 59 Fordham L. Rev. S7, S8 (1991). Despite their struggles, many S&Ls survived the Depression intact because they did not hold demand deposits and were not obligated to pay their depositors right away. 188 Mason, supra note 163, at 77–78; see also Todd A. Caraway, Note, The Standard of Review for Financial Institution Conservator and Receiver Appointments and Generally Accepted Accounting Principles: Franklin Savings Association v. Office of Thrift Supervision, 10 J.L. & Com. 263, 266 (1991). In 1932, Congress, with President Hoover’s backing, passed the Federal Home Loan Bank Act (FHLBA) 189Federal Home Loan Bank Act, ch. 522, 47 Stat. 725 (1932) (codified as amended in scattered sections of 12 U.S.C.). with the long-term goal of strengthening the S&Ls to provide home mortgages and increase home ownership. 190[1 An Examination of the Banking Crises of the 1980s and Early 1990s] Div. of Research & Statistics, FDIC, History of the Eighties—Lessons for the Future 170 (1997) (noting that the FHLBA was the first statute in a series of legislation “driven by the public policy goal of encouraging home ownership”).

After defeating President Hoover, President Roosevelt continued this vision for the S&L and enacted several pieces of legislation intended to help homeowners. The Home Owners’ Loan Act of 1933 provided a federal charter to S&Ls and imposed federal control over them. 191Home Owners’ Loan Act of 1933, ch. 64, 48 Stat. 128 (codified as amended in scattered sections of 12 U.S.C.). Savings and loan members initially resisted because they wanted to preserve the “local” nature of the S&L and asked that their mission be written into the charter: S&Ls were to loan to customers within fifty miles of their office to build homes valued at $20,000 or less. 192 Hoffmann, supra note 73, at 172.

Several times throughout the history of the S&L, the movement fizzled or risked being co-opted by business interests, but was saved by state and federal legislation aimed at preserving its purpose. 193Rodwin, supra note 164, at 293–94 (describing the threat to S&Ls and legislation introduced by the Massachusetts legislature to preserve their purpose). For example, when the FDIC started insuring banks in 1933, 194 See Banking Act of 1933, ch. 89, 48 Stat. 162 (repealed 1999). deposits flowed out of S&Ls and into banks. 195 See Hoffmann, supra note 73, at 173. In 1934, S&Ls were given deposit insurance through the Federal Savings and Loan Insurance Corporation. 196 Lawrence J. White, The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation 54 (1991). This made their continued existence viable by bringing them on par with mainstream banks. 197 See id.

In addition to having their own insurance fund, S&Ls also had their own regulators because they functioned differently from traditional banks. 198 See Hoffmann, supra note 73, at 158, 173. “The mechanisms of the S&L framework were deliberately and elegantly engineered to channel social resources into home ownership, and they served their purpose effectively for forty-five years.” 199 Id. at 177. S&Ls drew in the modest deposits of their members and channeled those into home mortgages for low-income families. 200They also used resources of large investors. However, until 1958, the banks were over 95% funded by deposits. See Horace Russell, Savings and Loan Associations 31, 651 tbl.6 (2d ed. 1960).

4. The S&L Drifts from Its Mission

The S&L charters, which had grown increasingly popular over several decades, were slowly standardized and became an industry rather than a movement. 201 Hoffmann, supra note 73, at 171, 178. Nevertheless, S&Ls continued for decades to fulfill their progressive mission to provide housing for low-income Americans and continued to be mutually owned until the 1970s. However, the S&L industry failed disastrously in the late 1970s and 1980s for a variety of reasons, one of which is that it lost sight of its initial progressive purpose. 202 See Felsenfeld, supra note 187, at S28–S29. While there are a lot of hypotheses offered to explain the colossal failure of the S&L industry, it is undisputed that the industry changed its focus from serving low-income individuals to seeking higher profits by mimicking traditional banks. 203 Id.

By the 1970s, mutual funds and money market accounts (MMAs) had become popular and were drawing deposits away from banks and S&Ls, who were capped in how much interest they could pay for deposits. 204 Id. at S20; see also Anita Ingrid Lotz, Deregulation or Regulation: Money Market Mutual Funds and Other Illegitimate Offspring of the Banking and Securities Industry, 1 Ann. Rev. Banking L. 187, 201 (1982) (discussing the “competitive threat” that money market accounts posed to depository institutions, and the “limited” ability of depository institutions to respond). Savings and loans joined banks in arguing for the repeal of Regulation Q, 205Prohibition Against the Payment of Interest on Demand Deposits (Regulation Q), 12 C.F.R. § 217 (2011); see also Mason, supra note 163, at 190 (noting that “thrifts pushed regulators to let them offer innovative savings accounts capable of competing with investments earning market rates”). the cap on interest rates. 206Felsenfeld, supra note 187, at S20. The cap on interest rates was ultimately repealed. 207Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C. § 1735f-7a(a)(2) (2006); see also Felsenfeld, supra note 187, at S20. But the repeal of the interest rate cap posed a problem for S&Ls, whose assets were primarily composed of long-term home loans that continued to pay interest at low rates. 208 See Felsenfeld, supra note 187, at S20–S21. The sudden jump in rates S&Ls had to pay to attract deposits without a corresponding jump in rates being paid by their existing long-term borrowers meant that much more money was flowing out than in. 209 Id. S&Ls were caught in an interest rate squeeze. 210 Id. Instead of supporting the mission of the S&L, policy makers responded by deregulating S&Ls and allowing them to engage in shorter term profit-making activities to bridge the profit and loss mismatch created by the sudden rise in market interest for deposits. 211Stephen Pizzo, Mary Fricker & Paul Muolo, Inside Job: The Looting of America’s Savings and Loans 11 (1989); Felsenfeld, supra note 187, at S16.

Deregulation of S&Ls coupled with advances in banking that allowed money to move quickly between financial institutions caused S&Ls to abandon their missions. Soon, S&L members and the communities that had supported them for decades abandoned these changed entities. They did so for two reasons. First, the interest rate on deposits became more important because investors could now shop for the highest interest rate regardless of the location of the institution. 212 See Gail Otsuka Ayabe, Comment, The “Brokered Deposit” Regulation: A Response to the FDIC’s and FHLBB’s Efforts to Limit Deposit Insurance, 33 UCLA L. Rev. 594, 621 (1985) (arguing that “differences in interest rates” offered at different deposit institutions “reflect . . . a competition for deposits [because] [d]epositors seek to place their funds in the financial institution that offers the highest rates”). The rate of return became more important than “buying local” for higher wealth individuals. Second, these changes diminished the importance of community and joint ownership. As the industry became more national and dispersed, communities and S&L members felt less of an obligation or a desire to invest with their local bank because they knew that with the S&L’s expanded powers, the funds could now be used internationally and would not necessarily be used to build their communities. 213 See Mason, supra note 163, at 241 (noting that efforts to rebuild public confidence in S&Ls after the crisis “involved emphasizing how thrifts were community organizations committed to serving local financial needs”). The national marketplace commoditized the lending business. S&L customers became less aware of how their S&Ls were operated and became less resistant when S&Ls began to drift from their limited charters and engage in more mainstream banking activities.

5. Deregulation

In the early 1980s, the S&L industry underwent three phases of deregulation through the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), regulatory changes by the Bank Board, and the Garn-St Germain Act of 1982. 214Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, 96 Stat. 1469 (codified as amended in scattered sections of 12 U.S.C.). The DIDMCA repealed Regulation Q and broadened S&Ls’ permissive activities. 215Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 132 (codified as amended in scattered sections of 12 U.S.C.); see also R. Alton Gilbert, Requiem for Regulation Q: What It Did and Why It Passed Away, Fed. Res. Bank St. Louis Rev., Feb. 1986, at 22, 30–33, available at http://research.stlouisfed.org/publications/review/86/02/Requiem_Feb1986.pdf. Savings and loans could now offer credit cards and traditional interest-bearing checking accounts, as well as engage in commercial and general consumer lending. 216 Depository Institutions Deregulation and Monetary Control Act §§ 401, 402; see Mason, supra note 163, at 216 (noting that the DIDMCA allowed “S&Ls to offer charge cards and NOW accounts,” which are interest-bearing checking accounts). They could also invest up to 20% of their assets in any combination of consumer loans, commercial paper, and corporate bonds, while commercial banks were still prohibited from investing in any type of securities. 217Depository Institutions Deregulation and Monetary Control Act § 401; Jeffrey W. Allister, Federal Charter vs. State Charter: New Opportunities for Savings Banks, 98 Banking L.J. 908, 909 (1981). The DIDMCA also increased Federal Savings and Loan Insurance Corporation (FSLIC) insurance from $40,000 per account to $100,000. 218Depository Institutions Deregulation and Monetary Control Act § 308.

In 1983, the Federal Home Loan Bank Board further loosened regulations on S&Ls to allow them to invest in options and to buy and sell securities—both prohibited for commercial banks—and to offer variable-rate mortgages to shift some interest rate risk onto their customers. 219Implementation of New Powers; Limitation on Loans to One Borrower, 48 Fed. Reg. 23,032, 23,061, 23,070 (May 23, 1983) (codified at 12 C.F.R. §§ 545.33, .75 (1984)). Regulators also lifted a 5% cap on so-called “brokered deposits,” big bundles of accounts from pension funds, unions, or government agencies. 220 Pizzo, Fricker & Muolo, supra note 211, at 19; Key Federal Regulatory Changes for S&Ls, Banking Pol’y Rep., Aug. 16, 1993, at 7. Now, when an S&L needed an infusion of deposits, it could simply offer the highest interest rate for the day and arrange for brokers to deposit virtually as much money as was needed or wanted. 221 See Felsenfeld, supra note 187, at S31. Savings and loans were growing larger and, due to more relaxed accounting standards allowed by federal regulators, taking larger risks. 222 Id. at S30–S34.

In spite of these efforts to save the S&L industry, it continued to mount record losses throughout the early 1980s. 223Robert J. Laughlin, Note, Causes of the Savings and Loan Debacle, 59 Fordham L. Rev. S301, S310–S311 (1991). Congress passed the Garn-St Germain Act in 1982 as another attempt to prop up the ailing industry. 224 Id. at S314. Under Garn-St Germain, Congress increased the proportion of non-home-related loans S&Ls could make, 225Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, § 322, 96 Stat. 1469, 1499 (codified as amended at 12 U.S.C. § 1464 (2006)); Gillian Garcia et al., The Garn-St Germain Depository Institutions Act of 1982, Econ. Persp., Mar. 1983, at 3, 10–11; Jan S. Blaising, Note, Are the Accountants Accountable? Auditor Liability in the Savings and Loan Crisis, 25 Ind. L. Rev. 475, 480 (1991). dropped the down payment requirement for home loans, 226 See Real Estate Lending Standards, 12 C.F.R. § 390.265 (2012). and allowed S&Ls to be called “savings banks” rather than “savings and loan associations.” 227Garn-St Germain Depository Institutions Act §§ 311, 325; Henry N. Pontell & Kitty Calavita, White-Collar Crime in the Savings and Loan Scandal, Annals Am. Acad. Pol. & Soc. Sci., Jan. 1993, at 31, 34. Through a joint resolution, Congress also placed the full faith and credit of the United States behind FSLIC insurance. 228 Pizzo, Fricker & Muolo, supra note 211, at 12; Edward J. Kane, The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital, J. Econ. Persp., Fall 1989, at 31, 41. At the same time, regulators loosened the regulations on who could own an S&L. Previously, an S&L was required to have at least 400 shareholders, with no one shareholder owning more than 25% of the stock. 229 Pizzo, Fricker & Muolo, supra note 211, at 12; Barbara Crutchfield George et al., The Opaque and Under-Regulated Hedge Fund Industry: Victim or Culprit in the Subprime Mortgage Crisis?, 5 N.Y.U. J.L. & Bus. 359, 383 (2009); Henry N. Pontell & Kitty Calavita, The Savings and Loan Industry, 18 Crime & Just. 203, 209–10 (1993). Now, a single shareholder could own an S&L. 230 Pizzo, Fricker & Muolo, supra note 211, at 12.

In addition to these measures, the Federal Home Loan Bank Board, the primary regulator of S&Ls, stopped enforcing many of its existing regulations. 231George et al., supra note 229, at 381; see also Div. of Research & Statistics, supra note 190 (describing the internal shortcomings of the Federal Home Loan Bank Board, such as how the regulator was understaffed and underqualified to supervise the industry after passage of the DIDMCA and Garn-St Germain). Moreover, the number of regulators overseeing the industry was being reduced just as interest in owning and operating S&Ls was increasing. 232 See Div. of Research & Statistics, supra note 190. Since S&L deposits were FSLIC-insured and backed by the full faith and credit of the United States, S&L owners could deal fast and loose with deposits without having to worry about repercussions from depositors. In reference to the S&L industry in the 1980s, Representative Jim Leach said, “What has developed . . . is a giveaway system where the potential profit has been privatized while the potential loss has been socialized . . . .” 233 Pizzo, Fricker & Muolo, supra note 211, at 312. Thus, the industry became an attractive target for many unscrupulous investors and organizations. The loosened regulations attracted the interest of anyone who wanted access to millions of FSLIC-insured dollars without much fear of close scrutiny from regulators, including people with ties to the mafia and other organized crime. 234 See generally Pizzo, Fricker & Muolo, supra note 211 (detailing the stories of several unscrupulous owners of S&Ls who recklessly established complicated schemes to launder money from S&Ls with little fear of being caught by regulators); James B. Stewart, Den of Thieves (1991) (narrating the story of the key players in the insider trading and junk bond scandals of the 1980s, including how S&Ls were targeted as vehicles to finance these speculative investments).

In 1987, President Reagan signed into law the Competitive Equality Banking Act (CEBA), 235Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 552 (codified as amended in scattered sections of 12 U.S.C.). which bailed out the S&L industry to the tune of $10.8 billion. 236 Id. § 301(e)(1)(B). Even then, industry observers knew this was far less than what was necessary to save the industry. 237 See Arthur E. Wilmarth, Jr., The Expansion of State Bank Powers, the Federal Response, and the Case for Preserving the Dual Banking System, 58 Fordham L. Rev. 1133, 1245–47 (1990) (attributing “the massive waive of failures that swept over the thrift industry” in part to Congress’s failure to pass a $15 billion recapitalization plan). Many S&Ls continued to fail during the 1980s with a total loss to the federal government of over $87 billion. 238 U.S. Gen. Accounting Office, GAO/AIMD-96-123, Financial Audit: Resolution Trust Corporation’s 1995 and 1994 Financial Statements 9–10 (1996) [hereinafter GAO, Financial Audit].

These deregulatory measures were envisioned to help the ailing S&L industry recover its market strength by allowing them to compete more directly with commercial banks. 239 See Kathleen Day, S&L Hell: The People and the Politics Behind the $1 Trillion Savings and Loan Scandal 100 (1993); Wilmarth, supra note 237, at 1143–44; see also Felsenfeld, supra note 187, at S33. The neoliberal ideal that dominated the era had little regard for the S&L’s unique mission and advocated for less government involvement and more freedom for S&Ls. 240 Day, supra note 239, at 61. This, it was thought, would save the industry. This assumption led S&Ls to look more like commercial banks. 241 Id. Although there is significant debate on the issue, many scholars have claimed that it was the deregulation of the industry that caused it to fail. 242 See, e.g., Felsenfeld, supra note 187, at S36 (“Inadequate activity on the part of both federal and state regulators is widely cited as a reason for the S&L crisis . . . .”); George et al., supra note 229, at 380–85; Mark David Wallace, Comment, Life in the Boardroom After FIRREA: A Revisionist Approach to Corporate Governance in Insured Depository Institutions, 46 U. Miami L. Rev. 1187, 1253–63 (1992); Irvine Sprague, Unrelated Series of Events Led to S&L Crisis, Am. Banker (N.Y.), May 3, 1989, at 4 (“[I]f we must point a finger, it would have to be directed toward the Reagan deregulation philosophy of ‘everything goes’ and ‘every man for himself.’”). Others have concluded that the mission of the S&L—to increase home ownership—was the cause of its failure because it did not allow them to diversify into different products when the real estate market suffered. Felsenfeld, supra note 187, at S48.

The deregulation of the industry certainly contributed to its collapse, but it is also true that the S&L mission could not survive the 1980s atmosphere without serious political support and support by the S&L industry itself, neither of which existed. It is also the case that by the 1980s, home ownership was not the main financial obstacle of the poor because home financing was more accessible than at any other time. 243 See Calder, supra note 183, at 6567.

C. Morris Banks and Industrial Loan Companies

Morris Banks were a for-profit venture created to provide credit at low cost to low-income industrial workers. These banks were created by a financial innovation that enabled extending consumer credit without demanding collateral from the borrower. 244 See O. Emre Ergungor & James B. Thomson, Fed. Reserve Bank of Cleveland, Industrial Loan Companies, Econ. Comment. (Oct. 2006), available at http://www.clevelandfed.org/research/commentary/2006/1001.pdf. Morris Banks later became known as industrial loan companies (ILCs) or industrial banks (IBs). 245 See id. Industrial banks today are dramatically different from early Morris Banks and would have been a historical footnote were it not for the shifts in banking that made them the only banking charter that could be owned and controlled by a commercial bank. Today, these banks are referred to interchangeably as industrial loan companies or industrial banks.

1. Born of Necessity

At the dawn of the twentieth century, there was a great need for small-scale and short-term credit among the poor and working classes. 246 See Grant, supra note 80, at 76–110. No one was meeting the short-term credit needs of the poor for four primary reasons: (1) usury laws prevented traditional lenders from extending credit at profitable rates; 247 Franklin W. Ryan, Usury and Usury Laws 5–6 (1924). (2) lenders were unable to distinguish between high- and low-risk borrowers who could not provide collateral, creating adverse selection problems; 248Ergungor & Thomson, supra note 244. (3) public mores attached a stigma to both the client and the lender; 249 See, e.g., Paul Hamilton, Jr., “You’ve Changed–We’ve Changed–and We Must Now Change Even More!, Indus. Banker, June–July 1971, at 7. and (4) bankers were of the opinion that consumer loans were not a market for banking. 250 Grant, supra note 80, at 76–77.

In 1910, Arthur Morris, a Virginia lawyer who first coined the phrase “democratization of credit,” felt a personal motivation to meet the credit needs of the poor. He had observed that low- to moderate-level income earners lacking the necessary collateral but with a consistent history of income were unable to obtain loans through conventional commercial banks and were instead forced to turn to pawnbrokers or loan sharks for their credit needs. 251 Inventory of the Papers of Arthur J. Morris: Biographical Sketch, U. Va. L. Sch., http://www.law.virginia.edu/main/Morris,+Arthur+J. (last visited Jan. 19, 2013) [hereinafter Biographical Sketch]. Morris desired to correct this “weak spot” in the banking system and combed the existing laws in search of a solution “that would correct the existing evils and supply credit to the needy.” 252 Peter W. Herzog, The Morris Plan of Industrial Banking 12–13 (1928). Testifying before Congress, Morris repeatedly explained his desire to supply credit to the poor and working classes. See Control and Regulation of Bank Holding Companies: Hearings on H.R. 2674 Before the H. Comm. on Banking & Currency, 84th Cong. 585 (1955) [hereinafter Control and Regulation of Bank Holding Companies] (statement of Arthur J. Morris, Chairman of the Board, Morris Plan Corporation of America) (“I began the first Morris Plan bank . . . for the sole purpose of making a start in the democratization of credit. By this I mean the making of loans to the individual who had no security to offer for bank credit. I was not long in discovering the fact that more than 80 percent of the American public had no access to credit of any kind except as they resorted to loan sharks or charitable institutions.”); Providing for Control and Regulation of Bank Holding Companies: Hearings on S. 829 Before the S. Comm. on Banking & Currency, 80th Cong. 98 (1947) (statement of Arthur J. Morris, Chairman of the Board, Morris Plan Corporation of America) (“[T]here was no person, firm, or corporation in this country prior to 1910 that [was] interested for 5 minutes in democratizing credit, and giving the honest wage earner any access to credit, regardless of his human necessities or his business opportunities or any other reason. . . . But I just made up my mind that these people deserved an access to monetary credit, and I started the first Morris Plan Bank in Norfolk, Va., in 1910, in which everybody in that community pretty near said I was something sick, lame, and disordered.”); Rural Credits: Joint Hearings Before the Subcomms. of the Comms. on Banking & Currency of the S. & of the H.R. Charged with the Investigation of Rural Credits, 63d Cong. 717 (1914) (statement of Arthur J. Morris) (“The Morris plan is intended to correct . . . the loan-shark evil in the cities, and the present existing misapprehension that prevails in the minds of the laboring classes with respect to capital. One of its fundamental purposes is to teach the laboring classes of this country habits of frugality, the value of systematized thrift, . . . . [and it] was intended to be to the wage earner what the national banks are to the men of commerce.”).

2. An Innovative Solution

Arthur Morris was motivated to meet this need and was innovative in his approach. Morris, who was convinced that “80 percent of the American public was being denied adequate banking services,” 253 Grant, supra note 80, at 92. designed a system whereby loans to the poor were made based on three principles: (1) “[c]haracter, plus earning power, is a proper basis of credit”; (2) “[l]oans made on this basis of credit must carry the privilege of repayment over a period long enough to match the [borrower’s earning power]”; and (3) “[m]oney so borrowed should always be for some constructive and useful purpose.” 254 Herzog, supra note 252, at 17. From these principles, Morris developed a system that replaced collateral with the signatures of two cosigners, both of whom agreed to pay the loan should the borrower default. 255Ergungor & Thomson, supra note 244. This innovation in lending is still used today.

By requiring cosigners to the loan, the “Morris Plan” resolved the adverse selection problem that had historically vexed lenders. 256 Id. However, by itself, the cosigner innovation would not have been sufficient for proper entrance into the personal loan market. The legal hurdle of usury laws also needed to be overcome; otherwise, the lender could not make any profit. 257 See M. R. Neifeld, Neifeld’s Manual on Consumer Credit 371 (1961). For a state-by-state list of statutory maximums extant near the time Morris started his business, see Ryan, supra note 247, at 26–31. Morris also solved this problem through a “dual plan,” involving two separate transactions. 258 Neifeld, supra note 257, at 371; see also Louis N. Robinson, The Morris Plan, 21 Am. Econ. Rev. 222, 22223 (1931). The plan resulted in a system that could stay within the letter of the usury law but still recoup the full cost of making relatively small, unsecured personal loans to unfamiliar borrowers. 259 See Neifeld, supra note 257, at 371. With his revolutionary new method of extending credit, Morris began establishing “Morris Plan” institutions in various cities around the United States, 260David Mushinski & Ronnie J. Phillips, The Role of Morris Plan Lending Institutions in Expanding Consumer Microcredit in the United States, in Entrepreneurship in Emerging Domestic Markets 121, 126 (Glenn Yago et al. eds., 2008). and by 1928 there were 106 such institutions. 261 Id. at 127.

3. Embraced by the Law

While their expansion was swift, Morris Plan Banks encountered some difficulty in obtaining charters because of confusion about their exact nature. In response to Morris’s original application for incorporation of his charter bank in Virginia, a member of the Virginia Corporation Commission responded by letter:

I have carefully considered your application for a charter for your hybrid and mongrel institution. Frankly, I don’t know what it is. It isn’t a savings bank; it isn’t a state or national bank; it isn’t a charity. It isn’t anything I ever heard of before. Its principles seem sound however, and its purpose admirable. But the real reason that I am going to grant a charter is because I believe in you. 262 Biographical Sketch, supra note 251.

The first Morris Plan Bank—the Fidelity Savings & Trust Company—was opened in Norfolk in 1910 with a state charter. 263 Grant, supra note 80, at 92; see also Ralph N. Larson, The Future of Installment Banking, Indus. Banker, Aug. 1962, at 12.

Arthur Morris set out on a vigorous campaign to encourage enactment of laws that would enable the Morris Banks to fulfill their mission of lending to low-income workers. 264 See Evans Clark, Financing the Consumer 6970 (1930). By 1930, Morris Plan Banks were operating in thirty-one states. 265 See id. In some states, specially tailored legislation was enacted to support Morris Banks; in other states, Morris Banks operated under the state banking or even general corporation laws. 266 See id. Thus, although united in name, the industry was divided in operations and, increasingly, in customer markets. 267 See Calder, supra note 183, at 286. It was along these fault lines that the industry split into those that would continue to fulfill Arthur Morris’s vision of extending credit to the working class and those that pursued other clients for their business. 268 Id.; cf. A United Industry and One Strong Association, Indus. Banker, June–July 1971, at 5. This last article announced the merger of the American Industrial Bankers Association (AIBA), publisher of the Industrial Banker, with the National Consumer Finance Association (NCFA). Significantly, the joined associations would maintain the name National Consumer Finance Association, while the AIBA would be subsumed as a section within the NCFA. Symbolic of the closeness that the personal finance industry (which had partially grown out of the entities regulated by the Uniform Small Loan Law) maintained with Morris’s original consumer, the industrial worker, this last edition of the Industrial Banker ran an article entitled, Mobile Home Financing. See Leslie M. Jones, Mobile Home Financing, Indus. Banker, June–July 1971, at 9.

4. Competition from Other Banks and Loss of Mission

The principal reasons for Morris Banks converting to commercial banks were an increasingly competitive market, 269 Raymond J. Saulnier, Industrial Banking Companies and Their Credit Practices 30 (1940). changes in the legal and regulatory environment that incentivized or required the switch, 270 Id. at 54. and tax advantages available to owners of commercial banks that were not available to industrial bank owners. 271 Id. at 53. The primary driver of the Morris Banks’ downfall as originally conceived was the competition for consumer loans. Because these banks were not mutually owned like credit unions and S&Ls, but instead made profits for their owners, their products were quickly copied by mainstream banks that also wanted to capitalize on these loans. 272 Id. at 169–71. Expansion by commercial banks into consumer credit affected industrial banks most acutely “[s]ince commercial banks competed directly for Morris Plan clients, and could draw on much cheaper money.” 273 Calder, supra note 183, at 361 n.70. “In both New York and in the rest of the country, loan volume and outstandings of industrial banks fell dramatically from 1931 to 1934. . . . By 1936, co-maker loans comprised less than 50 percent of total extensions of Morris Plan banks in New York State.” David H. Rogers, Consumer Banking in New York 24–25 (1974) (footnote omitted). “Throughout the late 1930s, their average loan sizes were similar; and although the [industrial banks’] rates were somewhat higher than those of personal loan departments, the industrial bank was unquestionably a specialist in personal credit.” Id. at 37.

Commercial banks moved into consumer credit for a variety of reasons: lack of commercial loans during the Great Depression, 274 Calder, supra note 183, at 285. a high demand for consumer credit, 275 Neil H. Jacoby & Raymond J. Saulnier, Business Finance and Banking 23 (1947). bankers’ increased familiarity with and belief in the soundness of installment loans, 276 Id. at 116–17. and a change in the classification of intermediate- and long-term loans. 277 Id. at 213. With commercial banks entering into the personal loan market, Morris Banks found themselves needing to compete for their customers’ dollars intensely and vigorously. 278Rogers, supra note 273, at 37–38; cf. Fred H. Clarkson et al., Consumer Credit and Its Uses 33–34 (Charles O. Hardy ed., 1938) (listing eighteen different services the Morris Plan Industrial Bank of New York offered in 1938, which included Cunard-White Star Line Travel Loans, a plan to purchase furs, and a plan to finance memorials). Their strategy was twofold: expanding the types of loans they made and adopting commercial loan practices. 279 See Clarkson et al., supra note 278, at 33–34. By operating more like a commercial bank, Morris Banks found they could effectively compete. 280 Neifeld, supra note 257, at 380 (“[T]he dual plan institutions have departed widely from the original ideal which was to limit such an institution’s facilities to the individual with modest credit requirements. They now serve business and professional people as well. They have come more and more to resemble commercial banks and to employ conventional bank lending techniques and types of loans.”). It was not much of a stretch for these institutions to go from operating like a commercial bank to converting into one, which is what happened with more and more regularity as the ILC grew further distant from its founding mission.

Although Morris Banks were attempting to democratize credit for low-income workers, they were a for-profit business from their creation. 281T. D. MacGregor, Lending on Character Plus—the Modus Operandi of the Morris Plan Banks, 103 Bankers’ Mag. 863 (1921). However, the high costs associated with making small individual loans to those in desperate straits 282 Neifeld, supra note 257, at 371; Ernst A. Dauer, Radical Changes in Industrial Banks, 25 Harv. Bus. Rev. 609, 617 (1947). made it difficult for these banks to retain their original mission after the founder, Arthur Morris, was no longer championing the cause. 283 See Morris Plan Bankers Convention, 105 Bankers’ Mag. 924, 924 (1922) (detailing the assessment of Thomas Coughlin—the Morris Plan Bankers Association’s new president—regarding Morris Banks’ difficulties and the Banks’ new direction). A statement by H. B. Jackson, secretary of the Morris Plan Company of New York, illustrates this shift: “While the remedial loan was the entering wedge of the Morris Plan and must always remain an important part of our work, it is to the constructive loan that we look with the greatest expectation of results.” 284 Id. While it may have been the wish of Arthur Morris to make the low-income wage earner the perpetual focus of Morris Bank loans, the movement away from this original mission was accelerated by the simple fact that, even from the very beginning, Morris Plan institutions were locally owned and operated and would respond to the demands of those local owners. 285 See Control and Regulation of Bank Holding Companies, supra note 252, at 578 (statement of Ellery C. Huntington, President, Morris Plan Corporation of America). This rapid shift demonstrates that profit-seeking ownership will always search out the most efficient use of capital for the desired appetite for risk. Morris Banks quickly abandoned their mission, and the legal and regulatory environment increasingly made commercial banks the attractive model for the ill-defined industrial bank. 286 See Morris Plan Bankers Convention, supra note 283, at 924.

5. Deregulation

In the 1980s, commercial firms became interested in acquiring “nonbank banks,” or banks that were exempt from the Bank Holding Company Act (BHCA). 287 U.S. Gov’t Accountability Office, GAO-05-621, Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in Regulatory Authority 17 (2005) [hereinafter GAO, Industrial Loan Corporations] (explaining that owning a bank exempt from the BHCA prior to CEBA would allow these banks to escape certain regulations). Owning such a bank would allow commercial firms to enter banking without having to comply with the onerous regulations of the BHCA. 288 Id. The Competitive Equality Banking Act of 1987 closed the “nonbank bank[]” loophole, 289 Id. A letter from former Federal Reserve Board Chair Alan Greenspan to Congressman Jim Leach suggests that perhaps the reason CEBA exempted ILCs from the definition of banks was because at the time CEBA was enacted the number of ILCs was small, their total assets were small, and most states were not chartering or had a moratorium on chartering new ILCs. Randall Dodd, Fin. Policy Forum, Special Policy Report 13, Industrial Loan Banks: Regulatory Loopholes as Big as a Wal-Mart 7–8 (2006), available at http://www.financialpolicy.org/fpfspr13.pdf. but specifically exempted ILCs because of a few well-placed senators whose states had a vested interest in chartering ILCs. 290 Dodd, supra note 289, at 7–8. The FDIC summarized it this way: “[I]n 1988, the first commercially owned ILC applied for FDIC insurance. Once the precedent had been set, more applications followed.” See Mindy West, The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective, Supervisory Insights, Summer 2004, at 5, 9, available at http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum04/sisum04.pdf. The ILC loophole became one of the only and most attractive options for a commercial firm to own a bank. 291 Dodd, supra note 289. Quickly after CEBA’s passage, large commercial firms, such as General Electric, General Motors, and American Express, started operating ILCs that they used to finance their own products. 292 Id. The ILC sector grew exponentially. 293Total assets grew from $3.8 billion to over $140 billion from 1987 to 2004. GAO, Industrial Loan Corporations, supra note 287, at 5. Today, there are no ILCs that operate like their early predecessors. Their early mission is just a curious historical note.

D. Common Features of Banks That Served the Poor

As Part II has shown, credit unions, S&Ls, and Morris Banks have several common features. First, these banks were born out of necessity. All three of these banks were used to meet the needs of the poor that were not being met by the banking institutions of the day. They were created outside of mainstream banking and with a different vision than most banks. Second, they were all innovative in addressing the needs of the poor. The S&L helped create the modern mortgage, the Morris Bank created the non-collateralized loan, and the credit union created formalized lending cooperatives. The S&L and credit union were both community-owned and controlled and emphasized personal relationships with the borrower as a proxy for high interest. Third, each was supported by the government and regulated differently than mainstream banks. This governmental support was essential in the expansion of each of these banks and allowed them to thrive despite obstacles in servicing their clients. Fourth, all of these banks changed course dramatically in the 1980s and have abandoned their primary mission of providing credit to the poor. Fifth, deregulation played a key role in each bank’s change of focus.

The following Part describes some of the general changes in banking and society that explain why low-income individuals have struggled with access to banks. These include changes in banking philosophy, including deregulation, as well as changes in the demographics of the poor and the changing nature of their needs. Drawing on successful features of the credit union, S&L, and Morris Bank, this Article then describes a few programs launched by the government, the poor, and non-profit organizations that may provide solutions to the problem of banking the poor.

III. Welcome to Pottersville

In Frank Capra’s classic film It’s a Wonderful Life, Mr. Potter, a heartless banker, tries to persuade George Bailey’s building and loan association to stop providing home loans to the working poor. But George Bailey believes in the community building mission of his bank and starts up Bailey Park, an affordable housing project with the funds from his building and loan association. In contrast, Henry Potter envisions maximizing profits for his bank by driving out the poor and getting the most out of his bank’s assets. In the movie, George Bailey triumphs with the help of an angel and a whole town’s support. But in American banking history, Henry Potter’s vision is the one that has more or less come to pass. The contrast between Bailey’s and Potter’s banks illustrates the difference between running a building and loan association that makes a profit, but has as its main objective servicing the working poor, and running a bank whose only aim is to maximize profits for its shareholders. Most mainstream banks today operate like Potter’s bank.

This Part attempts to explain the sudden and dramatic shift in banking for the poor that occurred in the 1980s. Several specific factors caused the credit union, S&L, and Morris Bank to shift their focus away from the poor and toward mainstream banking customers, many of which have been outlined above. However, there are broader shifts in banking and in society that also explain this change, which is the focus of the following Part. Below, this Part discusses three generalized explanations of how the poor were cut out of banking: (1) market forces—such as changes in banking products, disintermediation, and financial innovation in the 1980s—that put pressure on the traditional banking model; (2) deregulation in banking; and (3) social and cultural explanations for the banking sector’s abandonment of the poor.

A. Market Forces

During the 1980s, mainstream banks that used to dominate the financial market started to lose market share to the capital markets and unregulated financial entities, such as investment banks, mutual funds, and hedge funds. 294 See FDIC, Mandate for Change: Restructuring the Banking Industry 17–35 (1987) (discussing the declining market share of banks at the hands of unregulated financial innovations); Joseph C. Shenker & Anthony J. Colletta, Asset Securitization: Evolution, Current Issues and New Frontiers, 69 Tex. L. Rev. 1369, 1389–90 (1991) (noting banks’ struggles on both the asset and liability sides of the balance sheet). Banks were no longer the only option for investors. The sophistication of the capital markets and new financial products allowed institutional and individual investors to access the markets without needing intermediaries. Disintermediation caused a streamlining in the movement of credit to the benefit of many businesses. At the same time, financial innovation provided customers a variety of investment options, and they quickly became comfortable depositing their money in money market accounts or mutual funds and removing it from their non-interest-bearing deposit accounts. 295 Carl Felsenfeld, Banking Regulation in the United States 47–48 (2004). Under these circumstances, bankers became increasingly resistant to government regulations that kept them from competing with non-banking entities and looked for ways to shed their regulatory chains. See Ebonya Washington, The Impact of Banking and Fringe Banking Regulation on the Number of Unbanked Americans, 41 J. Hum. Resources 106, 111–12 (2006).

Banks started to find ways around regulations in order to participate in the financial bounty of the 1980s. During this time, most banks left the “storage business”—originating and holding loans—and moved to the “moving business”—taking loans from originators, repackaging them, and moving them to secondary market investors like pension funds. 296 Joseph E. Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy 14 (2010). Where banks used to make money on the spread—the difference between what they received from borrowers and the interest paid to depositors—banks now focused on fees for transactions. 297 Id. at 84. The easy profits from transactions distracted many banks from their core functions, and banks stopped lending to small- and medium-sized businesses in pursuit of ever-higher fees. 298 Id. at 5–6. Banks, which had operated a boring and safe business plan for many decades, became exciting, innovative, and much more profitable.

With the introduction of the money market account in the 1980s that paid high interest and allowed customers liquidity (the ability to write checks on the account), banks were forced to compete for large deposits and cut costs, including services previously offered to low-income customers. 299 Caskey, supra note 4, at 88–89. Both the S&L and the credit union were casualties of the increased competitive environment. Both of these banks joined the competition for deposits and were forced to shed unprofitable accounts in order to stay above water. 300 See supra Part II.A–B.

The number of people with bank accounts declined starting in the 1980s, especially within the low-income sector, 301 See Caskey, supra note 4, at 86. See generally Burhouse & Osaki, supra note 3. due to “an increase in fees on deposit accounts with small balances.” 302 Caskey, supra note 4, at 87. The GAO published an extensive report 303 See id. at 86 n.3, 88–90. on these changes and prompted an additional study by the Federal Reserve that supported the finding that banks were indeed shedding low-income customers due to higher fees on checking accounts. 304 Id. Banks also began closing branches in low-income areas, leaving many low-income neighborhoods with no physical access to any banking institution. 305 Id. at 87, 90–91. These branch closings especially impacted African-Americans and Hispanics living in urban areas. 306 Id. at 94–95. Once the banks left low-income communities, fringe banks moved in with staggering numbers. 307 See supra Part I.C and accompanying notes.

During this time, banking also moved from focusing on a local market toward taking advantage of economies of scale and seeking a national presence. The impact on the poor from this change cannot be understated. In the age of conservative and boring banks, banks had a presence in a community and their assets and liabilities stayed within the community. This was the model of George Bailey’s bank as well as the S&L and credit union. Funds would gather in a bank and stay there, which allowed the rich in the community to subsidize loans to the poor. As banking and banks became more complex in their operations, they also became more global and less local; money no longer had to stay in the community in which a depositor resided. If those assets could be used more efficiently in another market, they would move there—either through bank branching or banking affiliates. The advantage to this movement and complexity is the rate at which money could grow and make profits by being put to its most efficient use. Unfortunately, giving small loans to the poor at low interest is not an efficient way to grow money, and thus most banks stopped doing it.

B. Financial Deregulation

The rules of banking were changed to match the changed landscape. Banks lobbied vigorously for deregulation and for limited government intrusion into the banking market. 308Washington, supra note 295, at 111–12. The gradual deregulation of banks expanded from the Carter to the second Bush Administration. 309 See Richard B. Freeman, Reforming the United States’ Economic Model After the Failure of Unfettered Financial Capitalism, 85 Chi.-Kent L. Rev. 685, 685–86 (2010) (discussing the development of banking deregulation throughout presidential administrations). The banking sector thought that government regulation was stifling market competition and that they could operate more profitably and efficiently without it. Proponents of deregulation advocated a banking regime that was as close to a free market as possible. 310 See Troy S. Brown, Legal Political Moral Hazard: Does the Dodd-Frank Act End Too Big to Fail?, 3 Ala. C.R. & C.L. L. Rev. 1, 8 (2012) (describing pro-market fundamentalism as “the basis for the incremental deregulation of the U.S. banking system”). See generally Thomas F. Cargill & Gillian G. Garcia, Financial Deregulation and Monetary Control: Historical Perspective and Impact of the 1980 Act (1982). Cargill and Garcia argued that the problem with the structure of the financial system in the United States, beginning with reform legislation following the Great Depression through the 1970s, was that it constrained competition. Id. at 11–12. There were many changes during this time, but most relevant here was the homogenization of banking. 311 See James J. White, Introduction to the Banking Law Symposium: A 200 Year Journey from Anarchy to Oligarchy, 50 Ohio St. L.J. 1059, 1063 (1989) (arguing that the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA) would speed the “ultimate assimilation [of savings and loans] into commercial banks”); Daniel E. Feder, Comment, Should Loan-to-Value Ratio Restrictions Be Reimposed on National Banks’ Real Estate Lending Activities?, 6 Ann. Rev. Banking L. 341, 34454 (1987) (positing that a main goal of the Garn-St Germain Depository Institutions Act of 1982 was “to deregulate and homogenize the deposit-taking financial institutions market”). As a result of the deregulation, most banks resembled each other in their mission and purpose. 312 See White, supra note 311, at 1063; Arthur E. Wilmarth, Jr., The Transformation of the U.S. Financial Services Industry, 1975–2000: Competition, Consolidation, and Increased Risks, 2002 U. Ill. L. Rev. 215, 476.

The pluralism in banking was more or less abandoned and a more homogenized sector emerged. What this meant was that banks were all treated as market participants and forced to compete against each other for the same deposits and customers. The goals of the credit union and S&L were slowly lost and replaced by the demands of a competitive banking market. Many banks started to vigorously oppose the credit unions’ favorable tax status as they started to compete more directly with banks. 313Banks and policy makers fought against tax advantages and other special privileges for credit unions and S&Ls. See G. Allen Hicks, Comment, Common Sense on the Common Bond: Banks, Federal Credit Unions, and Field of Membership Rules, 66 Tenn. L. Rev. 1201, 1219–20 (1999). Many believed that the banking market could meet the needs of the poor without these specially chartered institutions. 314 See, e.g., id. at 1207 (noting studies showing that banks made more mortgage loans to low-income individuals than credit unions). Indeed, some have even claimed that securitization was the market’s answer to the home ownership goals of the S&Ls. 315 See Neil Fligstein & Adam Goldstein, A Long Strange Trip: The State and Mortgage Securitization, 1968–2010, in The Oxford Handbook of the Sociology of Finance (forthcoming 2013) (manuscript at 1011), available at http://www.history.ucsb.edu/projects/labor/documents/Fligstein_ALongStrangeTrip_UCSB.pdf. As a natural extension, increased securitization during the housing bubble should have been the ultimate fulfillment of the American dream rather than a major setback.

After the collapse of the financial markets, few people today would advocate for the deregulation that was pushed in the 1980s. Many policy makers recognize now that the recent banking collapse was at least partly caused by the no-holds-barred deregulation of the 1980s that allowed banks to become larger and more active in a variety of markets. 316 See, e.g., Richard A. Posner, A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression 45–46 (2009); Brian J.M. Quinn, The Failure of Private Ordering and the Financial Crisis of 2008, 5 N.Y.U. J.L. & Bus. 549, 55562 (2009) (arguing that a root cause of the financial crisis of 2008 was “financial innovation and the corresponding long-term move towards liberalization and self-regulation”). The Dodd-Frank Act of 2010 317Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified in scattered sections of the U.S. Code). is, at least theoretically, a re-stiffening of banking regulation and a reasserting of regulatory control over banks. 318 See id. § 312, 124 Stat. at 152123 (codified at 12 U.S.C. § 5412 (2006 & Supp. IV 2010)). However, as policy makers have begun to question some of the principles of deregulation, none have drawn attention to some of the important victims of deregulation: the banks that used to serve the poor.

C. Social and Cultural Changes

There are other possible explanations for why banking institutions stopped serving the poor that focus not on banks, but on the poor. These potential explanations can be summarized as follows: (1) banking institutions were victims of their own success—they graduated the poor into the middle class, solved the problem they were created to address, or are no longer needed to service the poor; and (2) the poor are now poorer than before and do not have sufficient funds to be banked.

1. The Problem Was Solved

This argument posits that when the S&L and credit union were created, the populace was much poorer than it is today. These institutions started in an era when there was more rampant poverty and less government support. It is indeed the case that American society has softened the blow of poverty since the Great Depression due to government safety nets; thus, there is more recourse for the destitute today than before. However, poverty remains and is increasing. 319Mark S. Littman, Poverty in the 1980’s: Are the Poor Getting Poorer?, Monthly Lab. Rev., June 1989, at 13, 13, 17; Hope Yen & Liz Sidoti, Poverty Rate in U.S. Saw Record Increase in 2009: 1 in 7 Americans Are Poor, Huffington Post (Sept. 12, 2010, 12:14 AM), http://www.huffingtonpost.com/2010/09/11/poverty-rate-in-us-saw-re_n_713387.html. In September 2011, the Census Bureau reported that “the number of Americans living below the official poverty line, 46.2 million people, was the highest number in the 52 years the bureau has been publishing figures on it.” 320Sabrina Tavernise, Poverty Rate Soars to Highest Level Since 1993, N.Y. Times, Sept. 14, 2011, at A1. The report also warned of increased income inequality, wage stagnation, and rampant unemployment. 321 Id. Poverty has always been, and continues to be, a reality for many Americans.

a. The Poor Have Access to Credit

Some claim that credit is abundantly available to the poor and that the problem they face is not that they are underserved by the credit industry, but overserved. 322 See generally Gary Rivlin, Broke, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business (2010) (discussing the variety of financial services offered by the multibillion-dollar fringe banking industry). This argument relies on the widespread availability of fringe banking. However, as mentioned above, the fringe banking industry does not provide healthy credit options for the poor—credit that allows them to escape poverty. Aiding the poor is not about increasing the quantity of credit available. Rather, it is about improving the quality of available credit. The reason the credit union, S&L, and Morris Bank were successful in their missions is that they offered credit that was low cost and flexible.

Others claim that the poor need financial education in order to take advantage of smart credit, as opposed to high-cost credit. 323 See Marie Frederichs & Andrea Rohrke, Fed. Reserve Bank of S.F., Guide to Financial Literacy Resources 1 (Lena Robinson ed., 2002), available at http://www.frbsf.org/community/webresources/bankersguide.pdf (“Consumers who understand the merits of responsibly managing their financial resources are more likely to effectively and profitably utilize the services of a traditional financial institution.”); Getting It Right on the Money, Economist, Apr. 5, 2008, at 73, 73 (stating “[t]hat many poor people do not have a bank account—and that few of them understand why this puts them at a disadvantage (let alone other essentials of personal finance)”). They claim that those who are poor are poor because they do not have the financial understanding of the middle class. 324 Frederichs & Rohrke, supra note 323, at 1 (“Financial literacy can also break the cycle of poverty, which is often associated with the unbanked.”); Annamaria Lusardi, Financial Literacy: An Essential Tool for Informed Consumer Choice? 2 (June 2008) (unpublished manuscript), available at http://www.dartmouth.edu/~alusardi/Papers/Lusardi_Informed_Consumer.pdf (linking financial illiteracy to failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior). Financial education is indeed necessary to overcome poverty. There are many factors that cause endemic poverty, and lack of education is an important contributor. Most low-income individuals know the difference between good credit and bad credit, but due to their economic status are only offered the latter. Many assume that the poor do not understand the financial system, and that they must be taught how it works. 325 See Light & Pham, supra note 50, at 37. This is not necessarily the case. Many of the poor are balancing a variety of debts from different lenders, and juggling multiple payments with very few assets and resources. 326 See Ignacio Mas & Mireya Almazan, Viewpoint: Transaction-Based Model Best for Poor, Am. Banker (N.Y.), Nov. 5, 2010, at 9 (explaining how the poor require as much or more financial activity because of their volatile income and financial position). In many respects, they are better versed in the financial system than many in the middle class because they are in daily contact with money, debt, and credit. 327 Id. (explaining how the poor are often more experienced in the number of transactions they must undertake because of their changing income and financial position). Thus, it is not financial literacy that they most need, but institutional access that meets their specific needs.

2. Too Poor to Bank

The argument that the poor are too poor for bank accounts has some support in the historical data. John Caskey believed that lower income is the main cause for the decrease in bank accounts. 328 Caskey, supra note 4, at 103, 105. In other words, apart from the changes in banking, people just do not have enough money to save anything at all. The poor are simply poorer now than they were in the past. Caskey identified several social changes that led to lower income for the poor, including the loss of low-skilled jobs, increased immigration, and an increase in single-parent homes. 329 Id. at 100, 108. According to Caskey, lower income is one factor that led to the poor gradually moving away from mainstream banks and toward fringe lenders. 330 Id. at 106 (“[T]he decline in account ownership mainly reflected a deterioration in the economic situation of households in the lower end of the income distribution.”). This does not mean, however, that the poor do not need banks. They may not benefit from savings accounts, but as demonstrated above, they do need short-term credit.

IV. Solutions for Banking to the Poor

A. Enlisting Mainstream Banks

Since the era of deregulation, government efforts to provide banking services to the poor have centered on mainstream banks. Policy makers have tried both carrot and stick measures in an attempt to get these banks to lend to the poor. Most of these initiatives have been unsuccessful.

1. FDIC Pilot Program

The most recent attempt by policy makers to induce mainstream banks to lend to the poor was launched in February 2008. The FDIC began the “Small-Dollar Loan Pilot Program,” a two-year campaign to enlist mainstream banks to loan to the poor. 331 Small-Dollar Loan Pilot Program, Fed. Deposit Ins. Corp., http://www.fdic.gov/smalldollarloans/ (last updated June 23, 2010). The project was described as “a case study designed to illustrate how banks can profitably offer affordable small-dollar loans as an alternative to high-cost credit products, such as payday loans and fee-based overdraft protection.” 332 Id. The program enlisted twenty-eight volunteer banks to offer banking services that the poor needed, such as payday loans and check cashing. 333 Id.

The Subcommittee on Financial Institutions and Credit of the House Committee on Financial Services met in September 2011 to review the program, and many were in agreement that the program had failed. 334 The Availability of Credit Hearing, supra note 2, at 9–10, 16–17. Observers noted that banks were charging the maximum rates allowed in the program—36% APR and 20% charges on cashed checks. 335 Id. (statement of Robert W. Mooney, Deputy Director, Consumer Protection and Affairs). Some noted that these products were just like payday loans. 336 Id. Other congressmen resisted forcing mainstream banks to take on the risk of lending to the poor. 337 Id. at 19, 24, 30 (comments of Rep. Luetkemeyer, Rep. Pearce, and Rep. Scott); see also id. at 44–45 (statement of Michael A. Grant, President, National Bankers Association). Although the program resulted in some unbanked individuals forging new relationships with banks, the banks offered products that were not much more desirable than those offered by fringe banks, and the banks did not design new procedures or products that might be more attractive to the poor.

The main reason this program failed is that mainstream banks did not have the incentive to sacrifice profits in order to meet the needs of the poor. They must survive and stay profitable in a competitive banking market, and when they offer low-cost loans to the poor, they lose their competitive position and hurt their bottom line. The reason that the credit union, S&L, and Morris Bank were able to successfully reach the poor was because they were motivated to do so. In fact, that was their primary goal. Policy makers misunderstand the nature of mainstream banks if they are relying on them to adequately meet the needs of the poor. At best, they can be incentivized to do it in order to appease regulators. The products they offer are not innovative creations resulting from market research about what the poor really need—they offer the bare minimum so that they can maintain profitability while fulfilling a regulatory mandate. 338Many of the banks volunteered for the program because they were told that they would be fulfilling their CRA requirements. See id. at 44–45 (statement of Michael A. Grant, President, National Bankers Association). Forcing banks, whose purpose is to make maximum profits, to make loans to the poor will inevitably lead to inadequate loans and disgruntled bankers.

2. Community Reinvestment Act

Government efforts such as the Community Reinvestment Act attempt to remedy discriminatory behavior such as redlining, but they also encourage banks to lend in low-income communities. 339 See Cao, supra note 53, at 852. The CRA views the lending market through an affirmative-action framework and imposes duties on banks to lend to underserved communities. 340 Id.; Anthony D. Taibi, Banking, Finance, and Community Economic Empowerment: Structural Economic Theory, Procedural Civil Rights, and Substantive Racial Justice, 107 Harv. L. Rev. 1463, 1485–89 (1994). The CRA represents government imposition of social norms on the banking market and forces commercial banks to serve markets that they have deemed unprofitable. 341 Jonathan R. Macey & Geoffrey P. Miller, The Community Reinvestment Act: An Economic Analysis, 79 Va. L. Rev. 291, 295 (1993). As such, it has been controversial. Professors Macey and Miller have criticized the CRA by stating that it “promotes the concentration of assets in geographically nondiversified locations, encourages banks to make unprofitable and risky investment and product-line decisions, and penalizes banks that seek to reduce costs by consolidating services or closing or relocating branches.” 342 Id.

Proponents of the CRA counter these claims by showing that the Act has indeed increased lending to low-income communities and led to more branch openings in these underserved areas. 343 See Barr, supra note 30, at 517, 561–66, 623. But most commentators agree that the enforcement of the CRA has been weak and has not brought about the desired results. 344 See id. at 603 (“CRA’s broad standards and ‘enforcement’ mechanisms . . . have long been derided by both proponents and detractors of CRA. Community advocates urge stricter rules and harsher consequences of failure. Bankers lament the lack of clear rules or safe harbors and the intrusive role of the public.”); Charles W. Calomiris et al., Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor, 26 J. Money, Credit & Banking 634, 637 (1994) (stating that “the vagueness of the CRA has led to arbitrary enforcement”); Keith N. Hylton, Banks and Inner Cities: Market and Regulatory Obstacles to Development Lending, 17 Yale J. on Reg. 197, 203 (2000) (explaining that enforcement of the CRA has been uneven and unpredictable); Macey & Miller, supra note 341, at 326–29 (describing the view that enforcement of the CRA is subjective and uncertain).

There is a robust debate about the effectiveness and appropriateness of the CRA 345 Compare Barr, supra note 30, at 513, 519, 522 (arguing that in comparison with similar regulations, the CRA has been relatively successful in addressing market failure through increased availability of lending to low-income communities), with Macey & Miller, supra note 97, and Michael Klausner, Market Failure and Community Investment: A Market-Oriented Alternative to the Community Reinvestment Act, 143 U. Pa. L. Rev. 1561, 1561, 1564–65 (1995) (suggesting alternatives to the ambiguity and ineffectiveness of the CRA). that this Article will not engage, except to posit that regardless of its effects on low-income communities, the CRA relies on profit-maximizing banks to meet the needs of the poor. As one scholar has reasoned: “In an industry of banks of many types and sizes, without credit quotas and with institutional decisionmaking left to bank managers, the best the CRA can do is to prescribe inexact guidelines and then to ask that bureaucrats apply these guidelines to various real-world situations on a case-by-case basis.” 346Taibi, supra note 340, at 1513. Unfortunately, when such a mismatch of incentives exists, it will lead banks to pay more attention to their interests than the interests of the targeted customers, the poor, often resulting in damaging consequences. 347 Id.

And because the underlying goal of mainstream banks is to maximize profits, the CRA is ripe for manipulation. During the financial crisis, there were reports that “at least in some instances, the CRA . . . served as a catalyst, inducing banks to enter underserved markets that they might otherwise have ignored,” which resulted in unfavorable loans to people in those underserved communities. 348 See Ben S. Bernanke, Chairman, Fed. Reserve Sys., The Community Reinvestment Act: Its Evolution and New Challenges, Speech at the Washington D.C. Community Affairs Research Conference (Mar. 30, 2007), available at http://www.federalreserve.gov/newsevents/speech/bernanke20070330a.htm. “[R]ecent problems in mortgage markets illustrate that an underlying assumption of the CRA—that more lending equals better outcomes for local communities[—]may not always hold.” 349 Id. The CRA’s emphasis on the number of loans given, as opposed to the quality of the loans, has revealed itself to be a problematic measure of success.

The debate over the CRA implicates two broader questions about providing banking for the poor: (1) whether mainstream commercial banks should be tasked with providing these services, and (2) whether they can do it in a way that is beneficial to the poor. In other words, if a bank that attempts to maximize profits is forced by regulators to offer services to the poor, will this lead to harmful products or manipulation of regulatory loopholes? Indeed, these banks are not equipped to meet the needs of the poor and their incentives to maximize profits run counter to the needs of the poor.

B. Community Development Banking Act

Through the Community Development Banking Act (CDBA), the idea of community-centered banks—banks that would receive funding from the government or other sources and would specialize in providing financial services to poor communities—had a short-lived resurgence. But the model has not yet succeeded because it has not escaped the mainstream ideology of banking and been fully supported by the government.

South Shore Bank in Chicago started as an experiment in which community activists bought a struggling bank and began lending in an impoverished area with apparent success in transforming the area. 350Patricia Hanrahan & Katharine Rankin, Ignoring the Homeless: An American Pastime, Hum. Rts., Summer 1990, at 36, 37. Bill Clinton, after visiting the bank in 1985, wanted to make it a model for low-income communities and subsequently made a campaign promise that he would establish one hundred such banks across the country. 351Sharon Stangenes, South Shore Bank Thrust into Spotlight, Chi. Trib., Nov. 15, 1992, § 7 (Business), at 1. The campaign promise was transformed into legislative action in 1994. The Riegle Community Development and Regulatory Improvement Act of 1994, commonly known as the Community Development Banking Act, 352Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-325, 108 Stat. 2160 (codified as amended in scattered sections of 12 U.S.C.). was intended “to promote economic revitalization and community development through investment in and assistance to community development financial institutions.” 35312 U.S.C. § 4701(b) (2006). The Act provided for a fund that would support any Community Development Financial Institution (CDFI), which it defined as an institution that (1) has “a primary mission of promoting community development”; (2) “serves an investment area or targeted population”; and (3) “provides development services in conjunction with equity investments or loans.” 35412 U.S.C. § 4702(5)(A)(i)–(iii) (2006).

Congress, however, never appropriated the full amount authorized by the CDBA for the CDFI Fund, which would have enabled government investments in community banks. 355 Lash, supra note 77, at 397 tbl.1, 398. The Fund was also brought within the purview of the Treasury Department in 1996 and has been mentioned as one of the accomplishments of the Clinton Administration. Id. at 398. The Bush Administration also sharply reduced funds to the CDFIs. 356 See Sarah Molseed, Note, An Ownership Society for All: Community Development Financial Institutions as the Bridge Between Wealth Inequality and Asset-Building Policies, 13 Geo. J. on Poverty L. & Pol’y 489, 509 (2006); Katie Kuehner-Hebert, CDFI Fund Appropriation Could Increase to $100M, Am. Banker (N.Y.), June 13, 2007, at 4 (indicating that the Bush Administration sharply reduced funding from its peak in 2001, however, it requested an increase for fiscal year 2008); David Morrison, Bush Administration Lowballs CDFI Fund Once Again, Credit Union Times, Feb. 4, 2008, at 2 (stating that the proposed budget under the Bush Administration was an almost 70% cut to the CDFI Fund). These funds have never been robust or popular. In fact, the press and the banking community have largely ignored these banks because they are still relatively small in number and a large portion of the funds are dispersed among various community development initiatives. 357 See Benjamin et al., supra note 159, at 179 (explaining that the existing analysis is limited because the existing groups are so diverse and hard to classify). According to the Fund’s financial disclosures, the majority of investments have gone, first, to real estate development in low-income communities and, second, to businesses operating in those areas. 358 Id. at 178–88. In other words, the majority of the funds have not been used to provide what the majority of the poor need, such as short-term credit.

From the start, the framework of the CDBA was stuck in the modern banking model and based on the faulty premise that these banks could maintain high levels of profitability while serving the poor. The needs of the poor would be met without any adjustment to free market rules and with minimal government intervention. It was thought that these institutions would lend profitably to low-income communities, achieve significant returns on investments, and thereby induce mainstream financial institutions to join them in providing credit to the poor. 359Lash, supra note 77, at 399. Former Treasury Secretary Lawrence Summers envisioned “[a] successful CDFI [as] perhaps best compared to a niche venture capital firm that deploys its superior knowledge of an emerging market niche to invest and manage risk better than other investors.” 360Lawrence H. Summers, U.S. Sec’y of Treasury, Building Emerging Markets in America’s Inner Cities, Remarks to the National Council for Urban Economic Development (Mar. 2, 1998), available at http://www.treasury.gov/press-center/press-releases/Pages/rr2262.aspx. Summers envisioned these banks as “market scouts” that would seek out profits in overlooked markets. 361 Id. CDFIs were meant to be private institutions seeking profits while serving the poor. Donald Lash, an early CDBA advocate, claimed that competition in banking would open the way for CDFIs to expand in response to market needs. 362Lash, supra note 77, at 401.

Many in the banking community lauded South Shore Bank as a model of profitability as well as community-mindedness. 363 See, e.g., Rochelle E. Lento, Community Development Banking Strategy for Revitalizing Our Communities, 27 U. Mich. J.L. Reform 773, 790 (1994) (“Shorebank presents a success story in the community development banking world. As of May 1991, its total loan portfolio was $125 million, with a delinquency rate of 1–2%, a bit lower than the national average of 3–5%. In 1992, it had $244 million in assets and a net income of $1.6 million. Shorebank demonstrates that deliberate investment in disinvested communities can revive a local economy, rekindle the imagination of its people, and restore market forces to health and interdependency.” (footnotes omitted)); see also Hanrahan & Rankin, supra note 350, at 37. Here was a bank that could serve the poor and make profits for its investors. The vision of the CDFI Fund was that without structural changes to the banking framework, profit-maximizing institutions could be induced through modest funds and incentives to meet the needs of struggling communities. But this was not the vision of South Shore Bank, which was started by civil rights activists in Chicago with the aim of serving the direct needs of the community and an ambitious slogan, “Let’s change the world.” 364Dave Carpenter, “Bank with a Heart” Thrives, Spokesman-Review (Spokane), June 12, 2007, at A13.

Because these banks were forced to work in the dominant banking model, many have recently failed or are in trouble. 365 See, e.g., Robert Barba, Deal Shows ShoreBank Was Savvy to the End, Am. Banker (N.Y.), Aug. 24, 2010, at 1. In 2010, South Shore Bank was taken over after being declared insolvent. 366 See Nick Carey, Regulators Close Well-Connected ShoreBank, Reuters, Aug. 20, 2010, available at http://www.reuters.com/article/2010/08/20/us-shorebank-failure-idUSTRE67J5AE20100820. Even before the financial crisis wrought havoc on small banking nationwide, these institutions were struggling to remain profitable. Compared with their more conventional peers, CDFIs routinely show weaker financial performance. “An analysis of regulated CDFI Fund awardees found that these CDFIs typically had fewer total assets, higher loan delinquency and charge-off rates, and lower returns on assets than their non-CDFI contemporaries.” 367Benjamin et al., supra note 159, at 189. The way CDFIs operate is simply more costly than the way their traditional counterparts operate, and their objectives would be thwarted if they attempted to offset their risks with excessively high interest rates.

Part of the problem with the CDBA was that the legislation was not aspirational enough in its scope and mission. Although modeled after the bold vision of South Shore Bank, the CDBA was not intended to change the business of banking to meet the needs of the poor, but to fit the needs of the poor into the business of banking. Unlike the progressive and populist movements that brought about the credit union and the S&L, the CDBA movement is dependent on the current banking structure and does not attempt to subvert the institutional profit-seeking model. By offering financial incentives to mainstream banks to reach out to the poor, the CDBA expects these banks to do the heavy lifting without changing the competitive environment of banking or offering significant subsidies. Thus, the CDBA is the proverbial carrot as the CRA was the stick—both attempting to coax mainstream banks to do something inherently inconsistent with their business models.

Despite the failure of the model to expand nationwide and survive financial distress, the CDBA should be refined, not abandoned. Primarily, the CDBA model needs to escape the profit-centered ideology of modern banking to allow these institutions to function. If these banks are to continue to offer needed services to the poor, they must be able to function with minimal profits and maximum government support. Lending to the poor is not a profitable business, and the government must not outsource this important social need to the mainstream banking model. Congress must adequately subsidize this lending if it is to be effective.

C. Movements Led by the Poor

1. Informal Lending Circles

As noted above, mainstream banks and the modern banking model fail to provide appropriate services to the poor because they lack the motivation to do so. Effective banking to the poor may require that the communities themselves be involved, just as they were in the formation of the credit union and S&L. The poor know what they lack and what they need, and they should be empowered to organize movements that meet their credit needs. However, to be successful, they must have government support and access to the formal banking infrastructure.

An example of self-help financing is the lending circle model prevalent both in the United States and abroad. In the United States, undocumented workers and many immigrant groups have organized informal lending circles whereby individuals pool resources and pick a member of the group by lot to receive a loan. 368 See Cao, supra note 53, at 877. These informal lending circles resemble the early credit unions and have roughly the same goal of providing credit to their members outside formal markets. 369Id. at 884–88; Light & Pham, supra note 50, at 39, 47 n.8. These groups can overcome the informational asymmetries and transaction costs that are often the most important barriers for mainstream institutions lending credit to immigrant and poor communities. 370 See Cao, supra note 53, at 884–88.

These informal lending circles resemble the microcredit model of the Grameen Bank and other international nonprofits. Multiple attempts at establishing formal microcredit ventures in the United States have been organized on the principles underlying the Grameen Bank in Bangladesh, 371Rashmi Dyal-Chand, Reflection in a Distant Mirror: Why the West Has Misperceived the Grameen Bank’s Vision of Microcredit, 41 Stan. J. Int’l L. 217, 220 (2005). but many have suffered from setbacks and hurdles, such as lack of informal markets as well as geographical and social impediments. 372Solomon, supra note 28, at 206. Furthermore, the microcredit model is useful for small businesses and entrepreneurial ventures but is not a model that can meet the short-term credit needs of the poor. 373 See Dean Karlan & Jonathan Zinman, Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts, 23 Rev. Fin. Stud. 433 (2010).

The communities that develop informal lending circles are usually tightly knit and share a cultural bond or language. 374Cao, supra note 53, at 843 n.6, 887. These groups are formed on mutual trust, which is “faithful to the Latin from which ‘credit’ derives: credere—‘to believe.’” 375David Bornstein, The Barefoot Bank with Cheek, Atlantic Monthly, Dec. 1995, at 40, 40–41. And belief is something mainstream lenders lack when it comes to assessing the creditworthiness of immigrants, minorities, and the poor. Thus, credit circles are designed to overcome market inefficiencies and allow capital formation and growth among tightly knit communities. 376Cao, supra note 53, at 887. Studies in New York’s Chinatown and California’s Japanese communities reveal that these institutions are the dominant form of banking among these groups. A staggering 80% of Koreans in the United States belong to at least one informal credit group. 377 Id. at 880–81. These groups optimize community wealth, do not rely on government enforcement or intrusion, and are entirely self-funded. 378 See Carlos G. Vélez-Ibañez, Bonds of Mutual Trust: The Cultural Systems of Rotating Credit Associations Among Urban Mexicans and Chicanos (1983); Cao, supra note 53, at 898.

These groups are seen as alternative markets formed to deal with market imperfections, an arrangement that bolsters the dominant free market model. They operate outside the mainstream banking model as a “borrower’s solution to market imperfections, a consumer-driven arrangement that is a solution to an inherent market deficiency soluble neither by state regulation nor by open market arrangements.” 379Cao, supra note 53, at 863 (emphasis omitted). These groups are an essential feature of the informal credit market and preferable to for-profit fringe banking that is currently filling gaps in the mainstream banking sector at high costs. But these alternative markets do not interact with or inform the mainstream markets.

Despite the attractiveness and desirability of such a solution to the problems facing the poor, informal lending circles are not an adequate remedy for several reasons. First, these groups do not have any formal relationship with traditional banks, which is problematic because their members are not able to develop a credit history and enter mainstream banking. Additionally, their deposits are not protected and their investments are vulnerable to fraud or mismanagement by others. Second, while these groups may be an answer for tightly knit groups of immigrants with a shared language and culture, they do not arise among the large majority of American urban and rural poor who do not share common social norms. In addition, these groups only serve those on the fringe of the mainstream markets who have community support and not the destitute or those completely cut off from any help. 380Light & Pham, supra note 50, at 41–42. Third, credit is no less costly from these groups than from alternative lending sources. Members can pay up to 20% interest on loans, which means these funds are funds of last resort or necessary because borrowers lack an alternative. 381Cao, supra note 53, at 877–78. Lastly, these groups cannot help with emergency or everyday credit needs, which continue to be the domain of loan sharks or payday loans.

2. Formal Lending Circles

One way to remedy some of the shortcomings outlined above is to formalize these lending circles, which was essentially the success of the credit union movement. Informal lending circles resemble the early credit unions and building and loans, but they lack the governmental support that allowed these institutions to thrive and expand. However, these lending circles can forge partnerships with banks and give their members the ability to build credit and open bank accounts. One example of such an arrangement was initiated by the Mission Asset Fund (MAF) in San Francisco, which has linked a lending circle, called a “cesta,” with Citibank. 382 See Alexa Vaughn, Mission District Lending Circle Helps Low-Income Earners Pursue Dreams, S.F. Gate (June 6, 2011), http://www.sfgate.com/cgi-bin/blogs/kalw/detail?entry_id=90450; accord Lending Circles: The Program, Lending Circles Mission Asset Fund, http://www.lendingcircles.org/lending-circles/the-program (last visited Jan. 19, 2013). MAF serves as a credit servicer that bridges the gap between the pooled assets of the lending circle and the formal banking system. 383 Lending Circles, supra note 382. The fund currently serves Spanish-speaking immigrants. 384 See id. All members are required to have a bank account, and the payments are automatically withdrawn from the individuals’ accounts and given out electronically as well. 385 See Jen Haley, The Mission Asset Fund: A Bridge Between Informal and Formal Banking, Dowser (Feb. 17, 2011, 11:00 AM), http://dowser.org/the-mission-asset-fund-a-bridge-between-informal-and-formal-banking/. These transactions are reported to the credit bureau, helping members build a positive credit history. 386 See Lending Circles, supra note 382; Jose Quinonez, Microfinance: Bringing the Unbanked into the Financial Mainstream, Citigroup (May 23, 2011, 3:27 PM), http://new.citi.com/2011/05/microfinance-bringing-the-unbanked-into-the-financial-mainstream.shtml. The group claims a zero default rate and a successful education initiative for its members. 387Vaughn, supra note 382. The MAF model has received a grant from the Center for Financial Services Innovation (CFSI) and will attempt to replicate its model among Chinese immigrants, African-Americans, Middle-Eastern immigrants, and the LGBT communities in San Francisco. 388 See Bay Area Partners, Lending Circles Mission Asset Fund, http://www.lendingcircles.org/partner-with-us/current-partners/bay-area (last visited Jan. 19, 2013).

A formalized lending circle has the capacity to overcome some of the weaknesses in the informal lending model by formalizing these arrangements to gain the benefits of FDIC insurance and establishing credit. As mentioned above, many of the poor prefer informality in lending, and institutions that can feign informality, such as check cashers, have capitalized on this preference. The MAF attempts to do the same, but without a motive to make large profits. However, this model is limited in reach and scope. It relies on bankers’ willingness to forge these partnerships, and only a limited number of knowledgeable bankers may be altruistic enough to engage in such an enterprise. Moreover, only members can benefit from the fund, and members must commit funds to the lending circle to participate. These funds do not provide short-term credit, do not replace the services of fringe banks, and do not offer the scope of services the credit unions, S&Ls, and Morris Banks offered.

D. Post Office Banking

In addition to supporting innovative movements led by the poor themselves, policy makers should consider initiating alternative banking forms that would provide much-needed services to the large and growing unbanked population. Instead of relying on the commercial banking sector to fill the gaps in banking, government-sponsored institutions could meet these needs. As demonstrated by the credit union and S&L industries, a successful movement must be embraced by the government in order to gain trust and legitimacy. One option is to reenlist the Postal Service and use an existing, but struggling, government resource to meet a pressing policy objective. 389Two other scholars have concurrent projects suggesting reenlisting the Postal Service to meet certain banking customer demands. See Adam J. Levitin, Going Postal: Financial Inclusion via Postal Banking (Jan. 2011) (unpublished manuscript) (on file with author) (describing the history of postal banking in the United States and suggesting the possibility of postal banking serving certain needs of the unbanked); Sheldon Garon, A Savings Account at the Post Office, CNN (Jan. 12, 2012, 8:38 AM), http://globalpublicsquare.blogs.cnn.com/2012/01/12/garon-bring-back-postal-savings/ (making the case for post office savings accounts that are already in use in other countries). As mentioned above, the government has used the Postal Service in the past to enable the poor to open savings accounts. Post offices can be used as a way to offer short-term, low-interest credit to low-income Americans. Just like credit unions and S&Ls of the past, the Postal Service could operate through minimal government subsidies and still maintain modest profits.

The post office could offer check cashing and payday lending services much like those offered by fringe banks, but at a much lower cost. It could also offer them without all the documentation and formal barriers of banks. There are currently non-banks, other than fringe lenders, starting to offer these products because they do not involve sophisticated credit analysis or any regulatory support, such as FDIC deposit insurance. For example, Wal-Mart recently started to offer simple credit options, such as check cashing, at a discount to its customers in its stores with much acclaim. 390Maria Aspan, No Charter? No Problem for Wal-Mart, Am. Banker (N.Y.), Nov. 12, 2009, at 1. Similarly, the Postal Service could function as a basic credit intermediary. Fringe banks do not need a banking charter to offer these simple types of credit, so banking laws would not apply to such an arrangement. 391Katherine E. Howell-Best, Note, Universal Charter Options: Providing a Competitive Advantage for State Financial Institutions, 6 N.C. Banking Inst. 487, 511–12 (2002); see also Jean Ann Fox, Consumer Fed’n of Am., Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank Charters to Peddle Usury 11 (2004), available at http://www.consumerfed.org/pdfs/pdlrentabankreport.pdf. The Postal Service would need to hire trained staff and design a uniform underwriting protocol, but as demonstrated by the fringe banking industry, which makes high margins of profit by offering relatively low-risk credit, the service does not require any specialized expertise.

The U.S. Postal Service is struggling to maintain profitability and relevance as its services slowly become obsolete due to the Internet and other technological advances. 392Jeff Jordan, Avoiding Financial Armageddon at the Post Office, Atlantic (Oct. 29, 2012, 10:25 AM), http://www.theatlantic.com/business/archive/2012/10/how-to-save-the-us-postal-service-through-innovation/264221/. By rethinking the purpose of the Postal Service and its many existing branches, the Postal Service might be saved and a serious public need could be met. Launching such a system would certainly require up-front costs and marketing, but the costs of maintaining such a system would not have to be large. Customers would still pay a fee to cash a check, but the fee would not be as high as the fee they currently pay. Operating through the Postal Service would sacrifice some of the flexibility and innovation of the credit union and S&L movements, but the government subsidy and support would go a long way in providing access. Post offices already exist in all neighborhoods, and people of all classes and cultures have had interactions with the Postal Service. Thus, the barriers of access do not exist as they do with mainstream commercial banks.

The poor pay more for credit than any other sector of the population, and private companies profit from that spread. 393Ian Ayres, Market Power and Inequality: A Competitive Conduct Standard for Assessing When Disparate Impacts Are Unjustified, 95 Calif. L. Rev. 669, 674–75 (2007) (“‘[T]he poor pay more’ not just because of higher costs of supply but often because sellers prey on consumers’ limited access to information and competitive alternatives. . . . [S]tudy after study has shown—in car negotiations, predatory lending, rent-to-own markets, and dozens of other contexts—that sellers are able to extract disproportionate profits from poor and disproportionately minority consumers.” (footnote omitted)); see also David Caplovitz, The Poor Pay More: Consumer Practices of Low-Income Families 18–20 (1967). The government could step into this sector and offer lower cost credit options to the poor by only taking into account the actual cost of credit and forgoing large profit margins. For example, many members of the military currently use fringe lenders to turn their government-backed paychecks into cash. There is virtually no risk associated with a government check, but members of the military pay astronomical fees for this service. If the Postal Service could offer to turn these checks into cash and only take account of the actual costs of the credit, members of the military could take home more of their hard-earned paychecks. These services could be offered to the poor across the country without using banks as an intermediary.

Government-sponsored student loans operate under this premise. A student borrower who qualifies for such a loan receives credit at a lower-than-market interest rate and remains indebted to the government until the loan is paid off. The government supports such loans because they facilitate an important public objective—educating the population. Enabling the poor to escape poverty is no less important a public concern. Offering good credit to the poor would enable economic mobility—which has lagged significantly in the United States in recent years—and solve a variety of public problems.

Post office lending does not reach the level of services previously offered by S&Ls, credit unions, or Morris Banks, but it would certainly help alleviate some of the onerous costs of the fringe banking sector on the poor. And the competition provided by the government entering this sector could possibly drive prices down in the private fringe banking sector to reflect more accurately the risks of lending to the poor. Given the recent debacles of federally funded institutions, such as Fannie Mae and Freddie Mac, the federal government would have to be cautious in taking on risks associated with lending to the poor. However, these services do not entail the scope of risks associated with home mortgages. Cashing a check for a small fee or offering a payday loan often involves very little risk. And although they do not provide the access to credit that was given by the previously mentioned full-service institutions, post office banking would provide more access for services that the poor need and are currently paying too much for.

Enacting such a wide-scale change may not be politically feasible. Legislators have shown a lack of motivation to regulate the fringe banking industry in the past, mainly due to the lobbying strength of the sector. 394 See Edmund Mierzwinski & Jean Ann Fox, Show Me the Money!: A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures 1 (2000) (highlighting success of payday lender lobby in seeking enactment of pro-industry legislation). The fringe banking lobby would likely vigorously oppose government attempts to compete with the sector with the low-cost alternatives proposed here. However, after the Great Depression, President Roosevelt made significant and unpopular changes to the banking structure, like strengthening the S&L and the credit union, which made banking more accessible to the poor. 395 See Timothy A. Canova, The Transformation of U.S. Banking and Finance: From Regulated Competition to Free-Market Receivership, 60 Brook. L. Rev. 1295, 1297–98 (1995). These changes were a response to an outcry by Americans who were suffering economically. President Roosevelt seized the economic upheaval of the 1930s to overcome similar political hurdles. A banking crisis often presents such an opportunity for enacting changes that benefit the public, and we again have the opportunity to reenvision the banking sector. The recent recession is the greatest banking crisis the United States has faced since the Great Depression and therefore presents an opportunity to change the banking structure.

Conclusion

“Poor people are not just like rich people without money. . . . Poverty creates an abrasive interface with society; poor people are always bumping into sharp legal things.” 396Stephen Wexler, Practicing Law for Poor People, 79 Yale L.J. 1049, 1049–50 (1970). Thus, they cannot be banked just like rich people with less money. The poor often have different financial habits, culture, and preferences than the middle class, such as a desire for informality and a need for short-term credit. A banking structure aimed at meeting their needs would have to be responsive to these preferences if it is to successfully replace the pernicious fringe banks currently dominating financial services to the poor.

Currently, many of the poor only access the financial system through fringe banks that operate at high costs to the poor. This type of credit keeps the poor indebted with crippling interest rates for long periods of time, introducing additional barriers to their escape from poverty. The poor use these institutions because there are currently no banks designed to meet their needs. This was not always the case. In the past, the government has supported banks with a special mission of meeting the needs of the poor, such as credit unions, S&Ls, and Morris Banks.

These successful charters aimed to provide credit and access for the poor and shared a few common traits: they were born of necessity, they were created outside the dominant banking framework, they were innovative, and they had the support of the government. Yet all of these institutions have abandoned their initial missions due to structural and philosophical changes in the banking framework. This Article identifies trends in modern banking that have resulted in a homogenization of bank structures across the industry, which has left little room for banks seeking to serve disadvantaged communities. Such trends include deregulation and structural changes in the banking sector that have caused all banks to compete with each other for higher profit margins.

Since the demise of these institutions, there have been several attempts to force mainstream banks to meet the needs of the poor—all of which have failed. Mainstream banks have been unable to offer productive products because of their unwillingness and inability to reduce profits. In order to properly serve the disadvantaged in this country, some of the more lucrative ventures must be sacrificed. But the goal is worth pursuing. Providing credit to the underprivileged can help them escape poverty in a way that rewards self-reliance. Although banking is not a right, it is a social good—not just for the low-income, but for the entire society. This Article attempts to encourage the development of banking institutions that would provide more people access to the government-subsidized banking system that already exists.

The credit union, S&L, and Morris Bank show that a bank must operate outside the mainstream banking culture as well as have the support of the government to succeed. Thus, this Article proposes several alternative banking structures that would meet the needs of the poor, such as providing more support for the CDBA system, promoting formal lending circles, or using the Postal Service to offer check cashing and payday lending services. Above all, this Article highlights the void in banking the poor and attempts to revive the public purpose of banks.

Footnotes

Assistant Professor, University of Georgia Law School. The author thanks Arthur Wilmarth, Erik Gerding, Julie Hill, Kristin Johnson, Peter Conti-Brown, Fred Gedicks, David Moore, Usha Rodriguez, and Jared Bybee for their helpful comments on earlier versions of this draft. The author would also like to thank Brad Lowe, Tim Nally, Danny Brimhall, Jonathan Love, and Seth Atkisson for their invaluable research support. All errors are solely those of the author.

1The label poor is judgment-laden, paternalistic, and an inadequate description of the relevant group of people who are affected by the changes involved in banking. This group includes no-income, low-income, and middle-income individuals who are financially vulnerable in many ways. Poverty is not just about low wages and may not be a permanent condition, and those who are poor do not share common traits. This Article attempts to describe circumstances that affect those that have fewer financial resources and less access relative to others in society. These individuals are often low-income individuals—sometimes minorities or immigrants and sometimes less educated than their more wealthy counterparts—but no single one of these traits is the defining trait of the poor. Although the terms poor, underprivileged, and low-income do not accurately capture this group and have unintended negative connotations, I will use these labels interchangeably throughout the Article.

2 An Examination of the Availability of Credit for Consumers: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Fin. Servs., 112th Cong. 141 n.1 (2011) [hereinafter The Availability of Credit Hearing] (citing Annamaria Lusardi et al., Financially Fragile Households: Evidence and Implications (Nat’l Bureau of Econ. Research, Working Paper No. 17072, 2011)) (statement of Robert W. Mooney, Deputy Director, Consumer Protection and Community Affairs).

3Susan Burhouse & Yazmin Osaki, FDIC, 2011 FDIC National Survey of Unbanked and Underbanked Households 4 (2012).

4 See, e.g., John P. Caskey, Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor 7 (1994).

5 See, e.g., Michael S. Barr, Banking the Poor, 21 Yale J. on Reg. 121, 124 (2004).

6 See, e.g., 10 U.S.C. § 987 (2006); N.C. Gen. Stat. § 53-276 (2006); Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. Rev. 855, 858–60 (2007); Paige Marta Skiba, Regulation of Payday Loans: Misguided?, 69 Wash. & Lee L. Rev. 1023, 1043 (2012) (stating that fourteen states completely ban payday loans); Scott A. Hefner, Note, Payday Lending in North Carolina: Now You See It, Now You Don’t, 11 N.C. Banking Inst. 263, 285–87 (2007).

7Pearl Chin, Note, Payday Loans: The Case for Federal Legislation, 2004 U. Ill. L. Rev. 723, 744.

8Mary Spector, Taming the Beast: Payday Loans, Regulatory Efforts, and Unintended Consequences, 57 DePaul L. Rev. 961, 978–79 (2008).

9 See, e.g., Barr, supra note 5, at 129; Brian M. McCall, Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury, 30 Cardozo L. Rev. 549, 551 (2008); Benjamin D. Faller, Note, Payday Loan Solutions: Slaying the Hydra (and Keeping It Dead), 59 Case W. Res. L. Rev. 125, 126 (2008).

10 See infra Part II.A and accompanying notes.

11 See infra Part II.B and accompanying notes.

12 See infra Part II.A–B.

13 See infra Part II.C.

14Edward L. Symons, Jr., The United States Banking System, 19 Brook. J. Int’l L. 1, 11–12 (1993).

15 See id. at 15.

16 See, e.g., Robert W. Dixon, Note, The Gramm-Leach-Bliley Financial Modernization Act: Why Reform in the Financial Services Industry Was Necessary and the Act’s Projected Effects on Community Banking, 49 Drake L. Rev. 671, 680 (2001).

17Lee B. David, Comment, Banking—Mergers—Is Commercial Banking Still a Distinct Line of Commerce?, 57 Tul. L. Rev. 958, 970–79 (1983).

18Fred E. Case, Deregulation: Invitation to Disaster in the S&L Industry, 59 Fordham L. Rev. S93, S94 (1991); see also Helen A. Garten, Regulatory Growing Pains: A Perspective on Bank Regulation in a Deregulatory Age, 57 Fordham L. Rev. 501, 528–29, 533, 540 (1989).

19 See infra Part I.

20Schaake v. Dolley, 118 P. 80, 83 (Kan. 1911) (internal quotation marks omitted).

21 Id.

22 See Joe Adler, Frequently Asked Questions: Nationalize or Not? Hard to Define, Harder to Answer, Am. Banker (N.Y.), Feb. 20, 2009, at 1.

23 Id.

24 See infra Part IV.D.

25 See Barr, supra note 5, at 134–41 (listing consequences of not having access to mainstream financial services); Stacie Carney & William G. Gale, Asset Accumulation Among Low-Income Households 22–23 (Feb. 2000) (unpublished manuscript), available at http://www.brookings.edu/views/papers/gale/19991130.pdf (finding households without bank accounts 43% less likely to have positive holdings of net financial assets); Lawrence H. Summers, U.S. Sec’y of Treasury, Remarks Before the U.S. Conference of Mayors (Jan. 28, 2000), available at http://www.treasury.gov/press-center/press-releases/Pages/ls356.aspx (describing individual access to financial services, and specifically bank accounts as the “basic passport to the broader economy”).

26“Access to credit assures access to basic necessities for debtors who, because of un- or under-employment, lack an adequate income to pay for essentials like food, shelter, and medicine.” Regina Austin, Of Predatory Lending and the Democratization of Credit: Preserving the Social Safety Net of Informality in Small-Loan Transactions, 53 Am. U. L. Rev. 1217, 1227 (2004).

27 See Asli Demirgüç-Kunt et al., World Bank, Finance for All?: Policies and Pitfalls in Expanding Access 138 (2008) (concluding that “the bulk of the evidence suggests financial development and improved access to finance is likely not only to accelerate economic growth but also to reduce income inequality and poverty”); Barr, supra note 5, at 127; J. Wyatt Kendall, Note, Microfinance in Rural China: Government Initiatives to Encourage Participation by Foreign and Domestic Financial Institutions, 12 N.C. Banking Inst. 375, 377 (2008) (“Researchers have demonstrated that there is a strong, positive correlation between an individual’s access to traditional banking services and an individual’s well-being.”).

28 Demirgüç-Kunt et al., supra note 27, at 99; Lewis D. Solomon, Microenterprise: Human Reconstruction in America’s Inner Cities, 15 Harv. J.L. & Pub. Pol’y 191, 199 (1992).

29 See Kendall, supra note 27, at 375 (“[P]eople with access to banking services live above the poverty line, whereas those without access to banking services live below the poverty line.”).

30“Access to credit” is too broad a statement to be empirically measurable. The World Bank and various economists have studied this question without conclusive results as to what type of access is desirable among the poor. Anjali Kumar et al., Measuring Financial Access, in Building Inclusive Financial Systems: A Framework for Financial Access 7, 14–30 (Michael S. Barr et al. eds., 2007). This Article will not delve into this nuanced discussion; rather, it will start with the assumption that the low-income have less access to credit than others and that the credit they are given is not as good as the types of financial products given to the middle and upper classes. Numerous studies of credit options for the poor support these assumptions. See, e.g., Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. Pa. L. Rev. 1, 68–69 (2008) (explaining that the presence of payday loans and subprime mortgages in low-income neighborhoods is not surprising because they are designed to extend credit to borrowers who are denied access to traditional credit); Michael S. Barr, Credit Where It Counts: The Community Reinvestment Act and Its Critics, 80 N.Y.U. L. Rev. 513, 517, 553 (2005) (noting the connection between lower wealth and less access to credit); Kelly D. Edmiston, Could Restrictions on Payday Lending Hurt Consumers?, Econ. Rev., First Quarter 2011, at 63, 83, available at http://www.kc.frb.org/publicat/econrev/pdf/11q1Edmiston.pdf (showing that in the absence of payday lending consumers in low-income counties would have limited access to credit); Michael Klausner, Market Failure and Community Investment: A Market-Oriented Alternative to the Community Reinvestment Act, 143 U. Pa. L. Rev. 1561, 1571 (1995) (“[M]arket imperfections can leave creditworthy borrowers in low-income neighborhoods without access to credit or with less access than they would have if markets worked perfectly.”).

31 Caskey, supra note 4, at 7.

32 Christopher L. Peterson, Taming the Sharks: Towards a Cure for the High-Cost Credit Market 21 (2004); see also Mann & Hawkins, supra note 6, at 857.

33 Caskey, supra note 4, at 1–2.

34 Id. at 1.

35 Id. at 1–2.

36Joe Mahon, Tracking “Fringe Banking”, Fedgazette, Sept. 2008, at 18, available at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4030.

37Richard R.W. Brooks, Essay, Credit Past Due, 106 Colum. L. Rev. 994, 996 (2006).

38 See generally Barr, supra note 5 (discussing the high costs of alternative financial services); Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today’s Society, 51 S.C. L. Rev. 589 (2000) (same).

39 See, e.g., Caskey, supra note 4, at 9–10; Barr, supra note 5.

40Michael S. Barr, Essay, An Inclusive, Progressive National Savings and Financial Services Policy, 1 Harv. L. & Pol’y Rev. 161, 164 (2007).

41 See Peterson, supra note 32; Ronald J. Mann, After the Great Recession: Regulating Financial Services for Low- and Middle-Income Communities, 69 Wash. & Lee L. Rev. 729, 746–47 (2012) (discussing the “debt trap” of payday borrowing and its underlying causes); Skiba, supra note 6, at 1027 (“Many states have now banned payday lending based on the assumption that it enables borrowing behavior that leads to costly cycles of debt . . . .”); see also Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Wash. & Lee L. Rev. 807, 818–19 (2012) (discussing the debt trap in the context of loan sharks).

42Barr, supra note 5, at 146–47.

43 Id. at 148; see also Peterson, supra note 32, at 14 (“A government study indicates the average customer is usually a woman in her middle thirties earning just over $24,000 a year. She usually rents her home and once she becomes a customer of a short-term loan company she usually remains a customer for at least six months.” (internal quotation marks omitted)).

44Barr, supra note 5, at 156–57.

45 Id. at 154.

46 Peterson, supra note 32, at 12–13; see also Austin, supra note 26, at 1241 (describing bank and payday lender partnerships as specifically designed to take advantage of loopholes in banking law in part because banks are eager to have fee income). This trend, including “rent-a-charter” arrangements, has apparently survived the recent banking crisis, as banks and payday lenders continue to partner in payday lending to split the fees from such loans. See Christopher Konneker, Comment, How the Poor Are Getting Poorer: The Proliferation of Payday Loans in Texas via State Charter Renting, 14 Scholar 489, 509–10 (2011).

47 See, e.g., Aaron Huckstep, Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?, 12 Fordham J. Corp. & Fin. L. 203, 230–31 (2007); Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? 21 (FDIC Ctr. for Fin. Research, Working Paper No. 2005-09, 2005), available at http://www.fdic.gov/bank/analytical/cfr/2005/wp2005/CFRWP_2005-09_Flannery_Samolyk.pdf (finding that the high prices charged by payday lenders can be justified by their costs and high default losses); see also Drysdale & Keest, supra note 38, at 616 (“Each segment of the fringe credit market justifies its costs in part by its higher transaction costs and in part by the higher level of risk assumed to be associated with lending to fringe market borrowers.”).

48Sow Hup Chan, An Exploratory Study of Using Micro-Credit to Encourage the Setting Up of Small Businesses in the Rural Sector of Malaysia, 4 Asian Bus. & Mgmt. 455, 456 (2005). But see David Malmquist et al., The Economics of Low-Income Mortgage Lending, 11 J. Fin. Services Res. 169, 181–82 (1997) (noting that “low-income lending is no more and no less profitable than non-low-income lending”); Bruce G. Posner, Behind the Boom in Microloans, Inc., Apr. 1994, at 114 (stating that “[b]anks didn’t think you could make money making small loans to businesses . . . . [but] are now finding that . . . microloans can be profitable” (internal quotation marks omitted)).

49Solomon, supra note 28, at 192.

50Ivan Light & Michelle Pham, Beyond Creditworthy: Microcredit and Informal Credit in the United States, 3 J. Developmental Entrepreneurship 35, 37 (1998) (quoting Katharine L. Bradbury et al., Geographic Patterns of Mortgage Lending in Boston, 1982–1987, New Eng. Econ. Rev., Sept.-Oct. 1989, at 3, 3).

51 See id. at 38 (“Results [from a Boston Federal Reserve Bank study] showed that blacks and Hispanics were 56% more likely than non-minorities to be denied a mortgage loan net of creditworthiness.”); Michele L. Johnson, Casenote, Your Loan Is Denied, but What About Your Lending Discrimination Suit?: Latimore v. Citibank Federal Savings Bank, 151 F.3d 712 (7th Cir. 1998), 68 U. Cin. L. Rev. 185, 192–94 (1999); see also Shahien Nasiripour, Wells Fargo Target of Justice Department Probe; Agency Alleges Discriminatory Lending, Huffington Post, http://www.huffingtonpost.com/2011/07/26/wells-fargo-justice-department-probe_n_910425.html (last updated Sept. 25, 2011, 6:12 AM). See generally Helen F. Ladd, Evidence on Discrimination in Mortgage Lending, J. Econ. Persp., Spring 1998, at 41 (concluding that lending data made available through various legislation shows clear discrimination in mortgage lending against minorities); Natasha Lennard, Did Wells Fargo Prey on Black Borrowers?, Salon (July 27, 2011, 1:28 PM), http://www.salon.com/2011/07/27/wells_fargo_preyed_on_black_borrowers_lawsuit/.

52Lennard, supra note 51; Nasiripour, supra note 51.

53Lan Cao, Looking at Communities and Markets, 74 Notre Dame L. Rev. 841, 851 n.26 (1999).

54 See id. at 852.

55 See, e.g., Malmquist et al., supra note 48, at 181–82; Posner, supra note 48, at 114; cf. Barr, supra note 5, at 183 (discussing the perceived low profitability of banking the poor); Barr, supra note 30, at 528 (discussing the criticism that the “CRA forces banks to engage in unprofitable, risky lending”).

56Light & Pham, supra note 50, at 39.

57 Id.

58 See Barr, supra note 5, at 184.

59 See id. at 183–84 (describing the lack of financial education as a barrier to becoming banked for at least a segment of the low-income population); Check Cashers: Moving from the Fringes to the Financial Mainstream, Communities & Banking, Summer 1999, at 2, 9 (explaining that while banks may “offer information about their services in various languages, bank staff may not be fluent in an immigrant’s native language”); cf. Michael A. Satz, How the Payday Predator Hides Among Us: The Predatory Nature of the Payday Loan Industry and Its Use of Consumer Arbitration to Further Discriminatory Lending Practices, 20 Temp. Pol. & Civ. Rts. L. Rev. 123, 149 (2010) (“The typical payday loan customer has a below-average education and may not even speak English.”).

60Barr, supra note 5, at 180 n.282 (internal quotation marks omitted) (“About 18% of unbanked respondents to surveys reported that they were not ‘comfortable’ dealing with banks.”); accord Arthur B. Kennickell et al., Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances, 86 Fed. Res. Bull. 1, 9–11 (2000).

61 See Michael A. Stegman & Robert Faris, Payday Lending: A Business Model That Encourages Chronic Borrowing, 17 Econ. Dev. Q. 8, 13 (2003) (“Focus groups of low-income and ethnic consumers . . . identif[y] five ways in which check cashers were superior to banks: (a) easier access to immediate cash; (b) more accessible locations; (c) better service in the form of shorter lines, more tellers, more targeted product mix in a single location, convenient operating hours, and Spanish-speaking tellers; (d) more respectful, courteous treatment of customers; and (e) greater trustworthiness.”).

62Austin, supra note 26, at 1249 (quoting Robert D. Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit 202 (2000)).

63 Peterson, supra note 32, at 16.

64Brett Williams, What’s Debt Got to Do with It?, in The New Poverty Studies: The Ethnography of Power, Politics, and Impoverished People in the United States 79, 87 (Judith Goode & Jeff Maskovsky eds., 2001).

65 See Jean Braucher, Theories of Overindebtedness: Interaction of Structure and Culture, 7 Theoretical Inquiries L. 323, 335 (2006) (noting payday lenders’ portrayal of their products as promoting the democratization of credit); Cathy Lesser Mansfield, Predatory Mortgage Lending: Summary of Legislative and Regulatory Activity, Including Testimony on Subprime Mortgage Lending Before the House Banking Committee, in Consumer Financial Services Litigation 2001, at 9, 40 (PLI Corporate Law & Practice, Course Handbook Ser. No. B0-00ZV, 2001) (describing testimony before the House Banking Committee).

66 See supra Part I.C and accompanying notes.

67 See supra Part I.C and accompanying notes.

68Austin, supra note 26, at 1257.

69 Office of Fin. Empowerment, N.Y.C. Dep’t of Consumer Affairs, Neighborhood Financial Services Study: An Analysis of Supply and Demand in Two New York City Neighborhoods 24 (2008), available at http://www.nyc.gov/html/ofe/downloads/pdf/NFS_Compiled.pdf.

70 Id.

71Jennifer Tescher, Underbanked, Under Banks’ Radar, Am. Banker (N.Y.), Apr. 28, 2011, at 8 (noting that an “FDIC study showed that the nonbank products and services used most frequently by underbanked households are money orders (81%) and check cashing (30%)”).

72 Id.

73 Susan Hoffmann, Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions 43 (2001).

74 Id. at 72.

75 Id.

76 See Robert L. Rabin, Federal Regulation in Historical Perspective, 38 Stan. L. Rev. 1189, 1203–04 (1986).

77 Id.; Donald A. Lash, The Community Development Banking Act and the Evolution of Credit Allocation Policies, 7 J. Affordable Housing & Community Dev. L. 385, 386–87 (1998); see also John D. Hicks, The Populist Revolt: A History of the Farmers’ Alliance and the People’s Party 108–09 (1931).

78 Robert Guttmann, How Credit-Money Shapes the Economy: The United States in a Global System 68, 76–78 (1994); Rabin, supra note 76, at 1202–03 (describing the attempt of the Farmers’ Alliance to promote a cooperative effort and its eventual defeat at the hands of the powerful banking system).

79 See Hicks, supra note 77, at 132–34.

80 James Grant, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken 76–110 (1992).

81 See 80 Cong. Rec. 6753 (1936).

82Lash, supra note 77, at 386–87.

83 Grant, supra note 80, at 77, 85.

84 Id. at 85.

85 Id.

86 Id. at 87.

87 Id.

88 Id. at 87–88.

89 Id. at 90; Postal Savings System, U.S. Postal Service (July 2008), http://about.usps.com/who-we-are/postal-history/postal-savings-system.pdf.

90 Postal Savings System, supra note 89.

91 Grant, supra note 80, at 90.

92 Id.

93 See Rabin, supra note 76, at 1203–04 (detailing the Farmers’ Alliance plan to have the federal government issue credit for the farmers’ crops to effectively eliminate private funding).

94 Id.; see Lee J. Alston, Wayne A. Grove & David C. Wheelock, Why Do Banks Fail? Evidence from the 1920s, 31 Explorations in Econ. Hist. 409, 415–18 (1994); Julie Andersen Hill, Bailouts and Credit Cycles: Fannie, Freddie, and the Farm Credit System, 2010 Wis. L. Rev. 1, 10–16.

95 See Rabin, supra note 76, at 1202–03.

96 See 80 Cong. Rec. 6752 (1936).

97 See Fred Galves, The Discriminatory Impact of Traditional Lending Criteria: An Economic and Moral Critique, 29 Seton Hall L. Rev. 1467, 1479 n.18 (1999) (“Perhaps the most remarkable success story, however, was the credit union movement. Credit unions have been around since early in the century. They sprang from the . . . public spirited impulse . . . to facilitate the supply of consumer credit to workers, farmers, and other[s] . . . whose credit needs were not being adequately served by existing banking facilities.” (alterations in original) (quoting Jonathan R. Macey & Geoffrey P. Miller, Banking Law and Regulation 28–29 (2d ed. 1997))); Kelly Culp, Comment, Banks v. Credit Unions: The Turf Struggle for Consumers, 53 Bus. Law. 193, 193–94 (1997).

9880 Cong. Rec. 6753 (1936) (showing that the number of credit unions grew from 257 in 1925 to 1,017 in 1930 and to 4,000 in 1935, and that credit union membership grew from 292,800 members in 1930 to 1,000,000 members in 1935).

99 See History of Credit Unions, Nat’l Credit Union Admin., http://www.ncua.gov/about/history/Pages/CUHistory.aspx (last visited Jan. 18, 2013).

10080 Cong. Rec. 6752 (1936); see also 78 Cong. Rec. 7260 (1934) (comments of Sen. Sheppard). Senator Sheppard recounted the story of a man earning $40 per week who undertook an installment purchase plan that required him to pay $52 per week. Id.

10180 Cong. Rec. 6752 (1936); see also 78 Cong. Rec. 7260 (1934) (comments of Sen. Sheppard). Senator Sheppard recounted the story of “a railroad employee who borrowed $30 from a loan shark, paid in interest $1,080, and was then sued for the $30. He paid 3,600 percent.” Id.

10278 Cong. Rec. 7260 (1934) (comments of Sen. Sheppard).

103 Id.; see also 80 Cong. Rec. 6752 (1936).

104 See 80 Cong. Rec. 6752 (1936).

105 Id.

106 Id. (internal quotation marks omitted).

107 Id.

108 Id.

109 12 U.S.C. § 1759(b)(1)–(2) (2006); accord Issues Currently Facing the Credit Union Industry: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Banking & Fin. Servs., 105th Cong. 12 (1997) [hereinafter D’Amours Statement] (statement of Norman E. D’Amours, Chairman, National Credit Union Administration).

110Jonathan R. Siegel, Zone of Interests, 92 Geo. L.J. 317, 333 (2004); see also First Nat’l Bank v. Nat’l Credit Union Admin., 863 F. Supp. 9, 10 (D.D.C. 1994) (“The original purpose behind the common bond provision was twofold: to insure the financial stability of credit unions by providing a sense of cohesiveness among members and by enabling the members to establish a borrower’s credit worthiness at minimum cost; and to promote the growth of credit unions because it was faster and easier to form a credit union with members who already had a common bond.”), rev’d sub nom. First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 90 F.3d 525 (D.C. Cir. 1996), aff’d, 522 U.S. 479 (1998); cf. 78 Cong. Rec. 7259–60 (1934) (comments of Sen. Barkley and Sen. Sheppard).

111Federal Credit Union Act, ch. 750, § 7, 48 Stat. 1216, 1218 (1934).

112 See First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 988 F.2d 1272, 1276 (D.C. Cir. 1993); Siegel, supra note 110, at 333; see also 78 Cong. Rec. 7259–60 (1934) (comments of Sen. Barkley and Sen. Sheppard); History of Credit Unions, supra note 99.

113 See First Nat’l Bank, 863 F. Supp. at 10 (“The original purpose behind the common bond provision was twofold: to insure the financial stability of credit unions by providing a sense of cohesiveness among members and by enabling the members to establish a borrower’s credit worthiness at minimum cost; and to promote the growth of credit unions because it was faster and easier to form a credit union with members who already had a common bond.”); cf. First Nat’l Bank & Trust Co., 988 F.2d at 1275 (“[T]he very notion [that Congress intended the common bond requirement to protect banks against competition from credit unions] seems anomalous because Congress’ general purpose was to encourage the proliferation of credit unions, which were expected to provide service to those would-be customers that banks disdained.”).

114First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 90 F.3d 525, 529–30 (D.C. Cir. 1996) (quoting First Nat’l Bank & Trust Co., 988 F.2d at 1276), aff’d, 522 U.S. 479 (1998); cf. D’Amours Statement, supra note 109, at 12 (“[The] common bond [requirement] then was an organization mechanism for credit unions and an early standard of safety and soundness. It was never the defining characteristic of credit unions.”).

115 First Nat’l Bank & Trust Co., 988 F.2d at 1276 (quoting 78 Cong. Rec. 12,223 (1934) (comments of Rep. Steagall)).

116Massachusetts Credit Union Act of 1909, ch. 419, 1909 Mass. Acts 392.

11778 Cong. Rec. 7259 (1934); see also id. at 12,224 (comments of Rep. Blanchard) (noting that “Massachusetts and other States have excellent laws on credit unions”).

118Id. at 7260 (comments of Sen. Sheppard) (noting that only ten states did not have credit-union laws by this point).

119Federal Credit Union Act, ch. 750, 48 Stat. 1216 (1934) (codified as amended in scattered sections of 12 U.S.C.).

12078 Cong. Rec. 7259 (1934) (comments of Sen. Sheppard).

121 Id. at 7259−61 (noting that credit unions “came through the depression practically without runs or failures”).

122Federal Credit Union Act §§ 10, 11(b).

123 Id. § 7(6)–(7).

124 Id. § 9.

125 Id. § 18.

12682 Cong. Rec. 358 (1937) (statement of Rep. Steagall).

127Federal Credit Union Act Amendments, ch. 3, 51 Stat. 4, 4 (1937) (amending section 18 of the Federal Credit Union Act). Results from some recent studies suggest that traditional banking institutions would need to earn 40% more than a credit union to achieve the same level of retained earnings due to the tax exemption. See Donald Novajovsky, Note, From National Credit Union Administration v. First National Bank & Trust to the Revised Federal Credit Union Act: The Debate over Membership Requirements in the Credit Union Industry, 44 N.Y.L. Sch. L. Rev. 221, 227 (2000). This was the first of a series of alterations to the federal credit union structure dealing with safety and soundness. In 1970, Congress created the National Credit Union Share Insurance Fund, a deposit insurance backed by the Treasury, analogous to the FDIC. See Act of Oct. 19, 1970, Pub. L. No. 91-468, § 203(a), 84 Stat. 994, 999–1000 (codified as amended at 12 U.S.C. § 1783 (2006)). In 1998, as part of the Credit Union Membership Access Act, Congress imposed heightened risk-based capital requirements on credit unions. See Credit Union Membership Access Act, Pub. L. No. 105-219, § 301(a), 112 Stat. 913, 923–31 (1998) (codified as amended at 12 U.S.C. § 1790d (2006)); 12 C.F.R. § 702 (1998).

128 See Novajovsky, supra note 127, at 224 (citing Herman E. Krooss & Martin R. Blyn, A History of Financial Intermediaries 241–42 (1971)). In 1930, there were 1,100 credit unions in the United States; by 1960 there were over 10,000. History of Credit Unions, supra note 99.

129 See Novajovsky, supra note 127, at 224 (citing Krooss & Blyn, supra note 128, at 241–42).

130William R. Emmons & Frank A. Schmid, Credit Unions and the Common Bond, 81 Rev. 41, 43 (1999) (“Historically, members of credit unions were drawn from groups that were underserved by traditional private financial institutions; these consumers tended to have below-average incomes or were otherwise not sought out by banks.”).

131 See The Proposed Consumer Financial Protection Agency: Implications for Consumers and the FTC: Hearing Before the Subcomm. on Commerce, Trade, & Consumer Prot. of the H. Comm. on Energy & Commerce, 111th Cong. 27 (2009) (statement of Michael Barr, Assistant Secretary for Financial Institutions, United States Treasury Department) (“Credit unions and community banks with straightforward credit products struggled to compete with less-scrupulous providers who appeared to offer a good deal and then pulled a switch on the consumer.”); Amanda Masset, Note, The Evolution of the Common Bond in Occupational Credit Unions: How Close Must the Tie that Binds Be?, 3 N.C. Banking Inst. 387, 399 (1999) (stating that credit unions are better able to compete with commercial banks after the enactment of the Credit Union Membership Access Act that expanded the number of people eligible to join a federal credit union).

132 Hoffman, supra note 73, at 204 (“[Americans’] savings—not worth banks’ bother in 1930—became the object of vigorous competition among banks, S&Ls, and, later, the new money market mutual funds.”).

133 Id.

134Clifford L. Fry & Donald R. House, Economic Issues in the Defense of Directors and Officers of Financial Institutions, 110 Banking L.J. 542, 546 (1993).

135 James M. Bickley, Cong. Research Serv., No. 97-548 E, Should Credit Unions Be Taxed? 1, 7 (2005) (describing how the National Credit Union Association issued a series of administrative rulings that allowed multi-group federal credit unions and, consequently, allowed credit unions to be more competitive).

136 See id.

137The National Credit Union Administration began this process in 1982 by issuing Interpretive Ruling and Policy Statement 82-1, Membership in Federal Credit Unions, 47 Fed. Reg. 16,775 (Apr. 20, 1982). It was later replaced by Interpretive Ruling and Policy Statement 82-3, Membership in Federal Credit Unions, 47 Fed. Reg. 26,808 (June 22, 1982), which further expanded the common bond requirement.

138Membership in Federal Credit Unions, 47 Fed. Reg. at 26,808.

139 Id.

140After this expansive interpretation, the membership in credit unions increased by 30% from 1982 until 1998. Wendy Cassity, Note, The Case for a Credit Union Community Reinvestment Act, 100 Colum. L. Rev. 331, 331 n.1 (2000); see also Brief for Petitioners, Nat’l Credit Union Admin. v. First Nat’l Bank & Trust Co., 522 U.S. 479 (1998) (Nos. 96-843, 96-847), 1997 WL 245673, at *10. The number of credit unions grew fourfold from 1982 until the mid-1990s and combined to control nearly $330 billion in funds from 70 million members. See Dean Foust, Clipping the Wings of Credit Unions, BloombergBusinessweek (Aug. 25, 1996), http://www.businessweek.com/stories/1996-08-25/clipping-the-wings-of-credit-unions. This growth has been primarily attributed to attracting customers from outside the typical common bond requirement. For example, nearly two-thirds of all the members in the AT&T Family Federal Credit Union do not work for AT&T and are considered outside of the company. Id.

141First Nat’l Bank & Trust Co., 522 U.S. 479.

142 Id.

143 D’Amours Statement, supra note 109, at 15–16.

144Cassity, supra note 140, at 344 (“Even before the Supreme Court decision was announced, . . . . it was almost inevitable that . . . Congress would amend the FCUA . . . . [T]he typical credit union member—educated, middle-class, mortgage-owning—is also the average voter.” (footnote omitted)); see also The Supreme Court’s February 25, 1998 Decision Regarding the Credit Union Common Bond Requirement: Hearing Before the H. Comm. on Banking & Fin. Servs., 105th Cong. 15–16 (1998) (statement of Paul Kanjorski, Rep., H. Comm. on Banking & Fin. Servs.). Bankers still complain about the credit union lobby and its power. See, e.g., Stacy Kaper, CUs’ Deal on Mortgage Bill Irks Bankers, Am. Banker (N.Y.), Feb. 26, 2008, at 1.

145 See Eileen Canning, House Passes Credit Union Bill; Measure Headed for White House, Bloomberg Banking Daily (BNA) (Aug. 5, 1998).

146Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 913 (1998) (codified as amended in scattered sections of 12 U.S.C.).

147 H.R. Rep. No. 105-472, at 1, 18 (1998); see also Cassity, supra note 140, at 345 n.92 (noting that the CUMAA passed 411–8 in the House and 96–2 in the Senate).

148 See Alex D. McElroy, Clinton Signs Credit Union Bill; NCUA to Begin Implementing Law Soon, Bloomberg Banking Daily (BNA) (Aug. 11, 1998); see also Credit Union Membership Access Act §§ 1–2. Representative Vento also noted that “[b]y . . . allowing multiple common-bond credit unions, we are revamping and facilitating the federal credit union law and empowering credit unions to adapt to the 1990’s market place.” 144 Cong. Rec. 18,730 (1998) (statement of Rep. Vento).

149 See also Credit Union Membership Access Act § 203.

150 See Cassity, supra note 140, at 345 n.91.

151The current statute allows “fifty 3,000 member groups [to] come together . . . [with a] net growth to the institution [of] 150,000 members.” However, the statute does not allow “three 50,000 member groups” for a net growth of 150,000. Because there are more smaller groups than larger groups it is likely that this will increase the membership in credit unions. Novajovsky, supra note 127, at 243.

152First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 90 F.3d 525, 529–30 (D.C. Cir. 1996), aff’d, 522 U.S. 479 (1998); First Nat’l Bank & Trust Co. v. Nat’l Credit Union Admin., 988 F.2d 1272, 1276 (D.C. Cir. 1993).

153George Cleland, Bank-like Credit Unions Should Face Bank-like Taxes, ABA Banking J., Jan. 1989, at 14 (explaining that the origin of the federal credit unions as self-help cooperatives with members sharing a common bond had been rejected for a more inclusive, profitable cooperative); Walter A. Dods, Jr., This Is a Common Bond?, ABA Banking J., July 1997, at 17 (stating that “the typical credit union member is more likely to have above-average income and be college-educated and a homeowner—not low-income and underserved by banks”).

154 U.S. Gov’t Accountability Office, GAO-07-29, Credit Unions: Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements 5, 8 (2006) [hereinafter GAO, Credit Unions]. According to a 1996 study done by the Credit Union National Association (CUNA), credit union members had an average household income of $43,480, whereas non-members had an average income of $31,660—a difference of 37%. Culp, supra note 97, at 213. And according to the American Banking Association, “[C]redit union members have more years of education and are more likely to be employed full-time.” Id. at 213 n.161.

155 See Foust, supra note 140 (quoting Joe G. Howard, senior vice president at First National Bank & Trust Company in Asheboro, North Carolina).

156 Id.

157 About Us, Nat’l Fed’n Community Dev. Credit Unions, http://www.natfed.org/i4a/pages/index.cfm?pageid=256 (last visited Jan. 18, 2013).

158 Id.

159 See Letter from Debbie Matz, Chairman, Nat’l Credit Union Admin., to Federally-Insured Credit Unions (Jan. 2010) [hereinafter NCUA Letter] (regarding the supervising of low-income credit unions and community development credit unions). Some estimates place the CDCU failure rate during the 1990s near 50%. Charles D. Tansey, Community Development Credit Unions: An Emerging Player in Low Income Communities, Brookings Inst. (Sept. 2001), http://www.brookings.edu/articles/2001/09metropolitanpolicy_tansey.aspx. Statutory and regulatory efforts have been made to assist these credit unions in fulfilling their mission. See Lehn Benjamin et al., Community Development Financial Institutions: Current Issues and Future Prospects, 26 J. Urb. Aff. 177, 178–79 (2004).

160 See Tansey, supra note 159. Another study of Vermont’s Opportunity Credit Union showed that borrowers with little or no credit history were 30% less likely to receive auto loans from traditional banks as similarly situated individuals with some credit history. Jessica Holmes et al., Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from the Automobile Loan Market, 88 Soc. Sci. Q. 585, 595 (2007). However, when seeking an auto loan from a CDCU, such borrowers suffered no significant disadvantage. Id. This, in large part, is due to the CDCU’s reliance on relationship lending. Id. This is significant because, as the authors explained, several studies show that relationship lending “can lower the cost of financial capital and lessen credit rationing in the markets for small business loans and consumer loans.” Id. at 585 (citations omitted).

161 Marva E. Williams, The Un-Banks: The Community Development Role of Alternative Depository Institutions, in Financing Low-Income Communities: Models, Obstacles, and Future Directions 159, 173 (Julia Sass Rubin ed., 2007) (summarizing other studies with similar findings).

162 See Hoffmann, supra note 73, at 141.

163 See David L. Mason, From Buildings and Loans to Bail-Outs: A History of the American Savings and Loan Industry 1831–1995, at 78 (2004); see also Richard F. Babcock & Fred P. Bosselman, Suburban Zoning and the Apartment Boom, 111 U. Pa. L. Rev. 1040, 1046 n.50 (1963); Kenneth A. Stahl, The Suburb as a Legal Concept: The Problem of Organization and the Fate of Municipalities in American Law, 29 Cardozo L. Rev. 1193, 1253 (2008). President Hoover’s sentiment was not unique at the time. The California Supreme Court reasoned that:With ownership comes stability, the welding together of family ties, and better attention to the rearing of children. With ownership comes increased interest in the promotion of public agencies, such as church and school, which have for their purpose a desired development of the moral and mental make-up of the citizenry of the country. With ownership of one’s home comes recognition of the individual’s responsibility for his share in the safe-guarding of the welfare of the community and increased pride in personal achievement which must come from personal participation in projects looking toward community betterment.Miller v. Bd. of Pub. Works of L.A., 234 P. 381, 387 (Cal. 1925) (in bank).

164Lloyd Rodwin, Studies in Middle Income Housing, 30 Soc. Forces 292, 293 (1952) (emphasis omitted); see also Mason, supra note 163, at 12.

165 Richard Scott Carnell et al., The Law of Banking and Financial Institutions 12 (4th ed. 2009).

166Rodwin, supra note 164, at 293.

167Edward L. Rubin, Communing with Disaster: What We Can Learn from the Jusen and the Savings and Loan Crises, 29 Law & Pol’y Int’l Bus. 79, 80–81 (1997).

168 Id. at 80.

169 Id. at 80–81.

170 Id. at 81.

171 Nicole Fradette et al., Project: Regulatory Reform: A Survey of the Impact of Reregulation and Deregulation on Selected Industries and Sectors, 47 Admin. L. Rev. 461, 645 (1995); Rubin, supra note 167, at 81.

172 See Lawrence V. Conway, Am. Sav. & Loan Inst., Savings and Loan Principles 254 (3d ed. 1965) (“[S]avings associations . . . try to be, and want you to think of us as, your friend and neighbor.”). Multiple S&Ls also use the phrase as a motto for their business or to describe the history of their establishment. See, e.g., About Us—The Story, Abbeville Savings & Loan, http://www.abbevillesavings.com/about.htm (last visited Jan. 18, 2013); Dalhart Fed. Savings & Loan Ass’n, http://www.dalhartfederal.com/ (last visited Jan. 18, 2013).

173 Hoffmann, supra note 73, at 155; Mason, supra note 163, at 17–18.

174 See Mason, supra note 163, at 18; William F. McKenna, Control and Management of Federal Savings and Loan Associations, 27 S. Cal. L. Rev. 47, 49 (1953).

175 Mason, supra note 163, at 12.

176 Id. at 21.

177 Michigan Tax on Bank Shares at Higher Rates Than on Savings and Loan Associations Does Not Violate Section 5219 of Revised Statutes, 77 Banking L.J. 588, 590–91 (1960); see also Rodwin, supra note 164, at 293.

178 See Mason, supra note 163, at 78.

179 Id. at 91, 162; cf. Allen F. Jung, Terms on Conventional Mortgage Loans on Existing Houses, 17 J. Fin. 432, 435 (1962) (discussing study showing that twenty-six of thirty-one surveyed S&Ls routinely offered mortgage loans with loan-to-value ratios of 60% or higher).

180 See Mason, supra note 163, at 17–21 (describing various lending innovations, including a precursor to the amortizing mortgage, created by S&Ls to facilitate lending to individuals who did not have substantial savings).

181 See id. at 16, 91; cf. Jung, supra note 179, at 439–42.

182 Mason, supra note 163, at 16; Fradette et al., supra note 171, at 645.

183 See Lendol Calder, Financing the American Dream: A Cultural History of Consumer Credit 65–66 (1999).

184 See Kenneth A. Snowden, Jr., The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s, in The Panic of 2008: Causes, Consequences and Implications for Reform 51, 58 (Lawrence E. Mitchell & Arthur E. Wilmarth, Jr. eds., 2010) (noting that the affordability of S&L mortgages resulted in the institutions holding a greater market share of one-to-four-family home mortgages “than life insurance companies, commercial banks and mutual savings banks combined”).

185 See Calder, supra note 183, at 66–67.

186Fradette et al., supra note 171, at 645.

187 See Carl Felsenfeld, The Savings and Loan Crisis, 59 Fordham L. Rev. S7, S8 (1991).

188 Mason, supra note 163, at 77–78; see also Todd A. Caraway, Note, The Standard of Review for Financial Institution Conservator and Receiver Appointments and Generally Accepted Accounting Principles: Franklin Savings Association v. Office of Thrift Supervision, 10 J.L. & Com. 263, 266 (1991).

189Federal Home Loan Bank Act, ch. 522, 47 Stat. 725 (1932) (codified as amended in scattered sections of 12 U.S.C.).

190[1 An Examination of the Banking Crises of the 1980s and Early 1990s] Div. of Research & Statistics, FDIC, History of the Eighties—Lessons for the Future 170 (1997) (noting that the FHLBA was the first statute in a series of legislation “driven by the public policy goal of encouraging home ownership”).

191Home Owners’ Loan Act of 1933, ch. 64, 48 Stat. 128 (codified as amended in scattered sections of 12 U.S.C.).

192 Hoffmann, supra note 73, at 172.

193Rodwin, supra note 164, at 293–94 (describing the threat to S&Ls and legislation introduced by the Massachusetts legislature to preserve their purpose).

194 See Banking Act of 1933, ch. 89, 48 Stat. 162 (repealed 1999).

195 See Hoffmann, supra note 73, at 173.

196 Lawrence J. White, The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation 54 (1991).

197 See id.

198 See Hoffmann, supra note 73, at 158, 173.

199 Id. at 177.

200They also used resources of large investors. However, until 1958, the banks were over 95% funded by deposits. See Horace Russell, Savings and Loan Associations 31, 651 tbl.6 (2d ed. 1960).

201 Hoffmann, supra note 73, at 171, 178.

202 See Felsenfeld, supra note 187, at S28–S29.

203 Id.

204 Id. at S20; see also Anita Ingrid Lotz, Deregulation or Regulation: Money Market Mutual Funds and Other Illegitimate Offspring of the Banking and Securities Industry, 1 Ann. Rev. Banking L. 187, 201 (1982) (discussing the “competitive threat” that money market accounts posed to depository institutions, and the “limited” ability of depository institutions to respond).

205Prohibition Against the Payment of Interest on Demand Deposits (Regulation Q), 12 C.F.R. § 217 (2011); see also Mason, supra note 163, at 190 (noting that “thrifts pushed regulators to let them offer innovative savings accounts capable of competing with investments earning market rates”).

206Felsenfeld, supra note 187, at S20.

207Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C. § 1735f-7a(a)(2) (2006); see also Felsenfeld, supra note 187, at S20.

208 See Felsenfeld, supra note 187, at S20–S21.

209 Id.

210 Id.

211Stephen Pizzo, Mary Fricker & Paul Muolo, Inside Job: The Looting of America’s Savings and Loans 11 (1989); Felsenfeld, supra note 187, at S16.

212 See Gail Otsuka Ayabe, Comment, The “Brokered Deposit” Regulation: A Response to the FDIC’s and FHLBB’s Efforts to Limit Deposit Insurance, 33 UCLA L. Rev. 594, 621 (1985) (arguing that “differences in interest rates” offered at different deposit institutions “reflect . . . a competition for deposits [because] [d]epositors seek to place their funds in the financial institution that offers the highest rates”).

213 See Mason, supra note 163, at 241 (noting that efforts to rebuild public confidence in S&Ls after the crisis “involved emphasizing how thrifts were community organizations committed to serving local financial needs”).

214Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, 96 Stat. 1469 (codified as amended in scattered sections of 12 U.S.C.).

215Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 132 (codified as amended in scattered sections of 12 U.S.C.); see also R. Alton Gilbert, Requiem for Regulation Q: What It Did and Why It Passed Away, Fed. Res. Bank St. Louis Rev., Feb. 1986, at 22, 30–33, available at http://research.stlouisfed.org/publications/review/86/02/Requiem_Feb1986.pdf.

216 Depository Institutions Deregulation and Monetary Control Act §§ 401, 402; see Mason, supra note 163, at 216 (noting that the DIDMCA allowed “S&Ls to offer charge cards and NOW accounts,” which are interest-bearing checking accounts).

217Depository Institutions Deregulation and Monetary Control Act § 401; Jeffrey W. Allister, Federal Charter vs. State Charter: New Opportunities for Savings Banks, 98 Banking L.J. 908, 909 (1981).

218Depository Institutions Deregulation and Monetary Control Act § 308.

219Implementation of New Powers; Limitation on Loans to One Borrower, 48 Fed. Reg. 23,032, 23,061, 23,070 (May 23, 1983) (codified at 12 C.F.R. §§ 545.33, .75 (1984)).

220 Pizzo, Fricker & Muolo, supra note 211, at 19; Key Federal Regulatory Changes for S&Ls, Banking Pol’y Rep., Aug. 16, 1993, at 7.

221 See Felsenfeld, supra note 187, at S31.

222 Id. at S30–S34.

223Robert J. Laughlin, Note, Causes of the Savings and Loan Debacle, 59 Fordham L. Rev. S301, S310–S311 (1991).

224 Id. at S314.

225Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, § 322, 96 Stat. 1469, 1499 (codified as amended at 12 U.S.C. § 1464 (2006)); Gillian Garcia et al., The Garn-St Germain Depository Institutions Act of 1982, Econ. Persp., Mar. 1983, at 3, 10–11; Jan S. Blaising, Note, Are the Accountants Accountable? Auditor Liability in the Savings and Loan Crisis, 25 Ind. L. Rev. 475, 480 (1991).

226 See Real Estate Lending Standards, 12 C.F.R. § 390.265 (2012).

227Garn-St Germain Depository Institutions Act §§ 311, 325; Henry N. Pontell & Kitty Calavita, White-Collar Crime in the Savings and Loan Scandal, Annals Am. Acad. Pol. & Soc. Sci., Jan. 1993, at 31, 34.

228 Pizzo, Fricker & Muolo, supra note 211, at 12; Edward J. Kane, The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital, J. Econ. Persp., Fall 1989, at 31, 41.

229 Pizzo, Fricker & Muolo, supra note 211, at 12; Barbara Crutchfield George et al., The Opaque and Under-Regulated Hedge Fund Industry: Victim or Culprit in the Subprime Mortgage Crisis?, 5 N.Y.U. J.L. & Bus. 359, 383 (2009); Henry N. Pontell & Kitty Calavita, The Savings and Loan Industry, 18 Crime & Just. 203, 209–10 (1993).

230 Pizzo, Fricker & Muolo, supra note 211, at 12.

231George et al., supra note 229, at 381; see also Div. of Research & Statistics, supra note 190 (describing the internal shortcomings of the Federal Home Loan Bank Board, such as how the regulator was understaffed and underqualified to supervise the industry after passage of the DIDMCA and Garn-St Germain).

232 See Div. of Research & Statistics, supra note 190.

233 Pizzo, Fricker & Muolo, supra note 211, at 312.

234 See generally Pizzo, Fricker & Muolo, supra note 211 (detailing the stories of several unscrupulous owners of S&Ls who recklessly established complicated schemes to launder money from S&Ls with little fear of being caught by regulators); James B. Stewart, Den of Thieves (1991) (narrating the story of the key players in the insider trading and junk bond scandals of the 1980s, including how S&Ls were targeted as vehicles to finance these speculative investments).

235Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 552 (codified as amended in scattered sections of 12 U.S.C.).

236 Id. § 301(e)(1)(B).

237 See Arthur E. Wilmarth, Jr., The Expansion of State Bank Powers, the Federal Response, and the Case for Preserving the Dual Banking System, 58 Fordham L. Rev. 1133, 1245–47 (1990) (attributing “the massive waive of failures that swept over the thrift industry” in part to Congress’s failure to pass a $15 billion recapitalization plan).

238 U.S. Gen. Accounting Office, GAO/AIMD-96-123, Financial Audit: Resolution Trust Corporation’s 1995 and 1994 Financial Statements 9–10 (1996) [hereinafter GAO, Financial Audit].

239 See Kathleen Day, S&L Hell: The People and the Politics Behind the $1 Trillion Savings and Loan Scandal 100 (1993); Wilmarth, supra note 237, at 1143–44; see also Felsenfeld, supra note 187, at S33.

240 Day, supra note 239, at 61.

241 Id.

242 See, e.g., Felsenfeld, supra note 187, at S36 (“Inadequate activity on the part of both federal and state regulators is widely cited as a reason for the S&L crisis . . . .”); George et al., supra note 229, at 380–85; Mark David Wallace, Comment, Life in the Boardroom After FIRREA: A Revisionist Approach to Corporate Governance in Insured Depository Institutions, 46 U. Miami L. Rev. 1187, 1253–63 (1992); Irvine Sprague, Unrelated Series of Events Led to S&L Crisis, Am. Banker (N.Y.), May 3, 1989, at 4 (“[I]f we must point a finger, it would have to be directed toward the Reagan deregulation philosophy of ‘everything goes’ and ‘every man for himself.’”). Others have concluded that the mission of the S&L—to increase home ownership—was the cause of its failure because it did not allow them to diversify into different products when the real estate market suffered. Felsenfeld, supra note 187, at S48.

243 See Calder, supra note 183, at 6567.

244 See O. Emre Ergungor & James B. Thomson, Fed. Reserve Bank of Cleveland, Industrial Loan Companies, Econ. Comment. (Oct. 2006), available at http://www.clevelandfed.org/research/commentary/2006/1001.pdf.

245 See id. Industrial banks today are dramatically different from early Morris Banks and would have been a historical footnote were it not for the shifts in banking that made them the only banking charter that could be owned and controlled by a commercial bank. Today, these banks are referred to interchangeably as industrial loan companies or industrial banks.

246 See Grant, supra note 80, at 76–110.

247 Franklin W. Ryan, Usury and Usury Laws 5–6 (1924).

248Ergungor & Thomson, supra note 244.

249 See, e.g., Paul Hamilton, Jr., “You’ve Changed–We’ve Changed–and We Must Now Change Even More!, Indus. Banker, June–July 1971, at 7.

250 Grant, supra note 80, at 76–77.

251 Inventory of the Papers of Arthur J. Morris: Biographical Sketch, U. Va. L. Sch., http://www.law.virginia.edu/main/Morris,+Arthur+J. (last visited Jan. 19, 2013) [hereinafter Biographical Sketch].

252 Peter W. Herzog, The Morris Plan of Industrial Banking 12–13 (1928). Testifying before Congress, Morris repeatedly explained his desire to supply credit to the poor and working classes. See Control and Regulation of Bank Holding Companies: Hearings on H.R. 2674 Before the H. Comm. on Banking & Currency, 84th Cong. 585 (1955) [hereinafter Control and Regulation of Bank Holding Companies] (statement of Arthur J. Morris, Chairman of the Board, Morris Plan Corporation of America) (“I began the first Morris Plan bank . . . for the sole purpose of making a start in the democratization of credit. By this I mean the making of loans to the individual who had no security to offer for bank credit. I was not long in discovering the fact that more than 80 percent of the American public had no access to credit of any kind except as they resorted to loan sharks or charitable institutions.”); Providing for Control and Regulation of Bank Holding Companies: Hearings on S. 829 Before the S. Comm. on Banking & Currency, 80th Cong. 98 (1947) (statement of Arthur J. Morris, Chairman of the Board, Morris Plan Corporation of America) (“[T]here was no person, firm, or corporation in this country prior to 1910 that [was] interested for 5 minutes in democratizing credit, and giving the honest wage earner any access to credit, regardless of his human necessities or his business opportunities or any other reason. . . . But I just made up my mind that these people deserved an access to monetary credit, and I started the first Morris Plan Bank in Norfolk, Va., in 1910, in which everybody in that community pretty near said I was something sick, lame, and disordered.”); Rural Credits: Joint Hearings Before the Subcomms. of the Comms. on Banking & Currency of the S. & of the H.R. Charged with the Investigation of Rural Credits, 63d Cong. 717 (1914) (statement of Arthur J. Morris) (“The Morris plan is intended to correct . . . the loan-shark evil in the cities, and the present existing misapprehension that prevails in the minds of the laboring classes with respect to capital. One of its fundamental purposes is to teach the laboring classes of this country habits of frugality, the value of systematized thrift, . . . . [and it] was intended to be to the wage earner what the national banks are to the men of commerce.”).

253 Grant, supra note 80, at 92.

254 Herzog, supra note 252, at 17.

255Ergungor & Thomson, supra note 244.

256 Id.

257 See M. R. Neifeld, Neifeld’s Manual on Consumer Credit 371 (1961). For a state-by-state list of statutory maximums extant near the time Morris started his business, see Ryan, supra note 247, at 26–31.

258 Neifeld, supra note 257, at 371; see also Louis N. Robinson, The Morris Plan, 21 Am. Econ. Rev. 222, 22223 (1931).

259 See Neifeld, supra note 257, at 371.

260David Mushinski & Ronnie J. Phillips, The Role of Morris Plan Lending Institutions in Expanding Consumer Microcredit in the United States, in Entrepreneurship in Emerging Domestic Markets 121, 126 (Glenn Yago et al. eds., 2008).

261 Id. at 127.

262 Biographical Sketch, supra note 251.

263 Grant, supra note 80, at 92; see also Ralph N. Larson, The Future of Installment Banking, Indus. Banker, Aug. 1962, at 12.

264 See Evans Clark, Financing the Consumer 6970 (1930).

265 See id.

266 See id.

267 See Calder, supra note 183, at 286.

268 Id.; cf. A United Industry and One Strong Association, Indus. Banker, June–July 1971, at 5. This last article announced the merger of the American Industrial Bankers Association (AIBA), publisher of the Industrial Banker, with the National Consumer Finance Association (NCFA). Significantly, the joined associations would maintain the name National Consumer Finance Association, while the AIBA would be subsumed as a section within the NCFA. Symbolic of the closeness that the personal finance industry (which had partially grown out of the entities regulated by the Uniform Small Loan Law) maintained with Morris’s original consumer, the industrial worker, this last edition of the Industrial Banker ran an article entitled, Mobile Home Financing. See Leslie M. Jones, Mobile Home Financing, Indus. Banker, June–July 1971, at 9.

269 Raymond J. Saulnier, Industrial Banking Companies and Their Credit Practices 30 (1940).

270 Id. at 54.

271 Id. at 53.

272 Id. at 169–71.

273 Calder, supra note 183, at 361 n.70. “In both New York and in the rest of the country, loan volume and outstandings of industrial banks fell dramatically from 1931 to 1934. . . . By 1936, co-maker loans comprised less than 50 percent of total extensions of Morris Plan banks in New York State.” David H. Rogers, Consumer Banking in New York 24–25 (1974) (footnote omitted). “Throughout the late 1930s, their average loan sizes were similar; and although the [industrial banks’] rates were somewhat higher than those of personal loan departments, the industrial bank was unquestionably a specialist in personal credit.” Id. at 37.

274 Calder, supra note 183, at 285.

275 Neil H. Jacoby & Raymond J. Saulnier, Business Finance and Banking 23 (1947).

276 Id. at 116–17.

277 Id. at 213.

278Rogers, supra note 273, at 37–38; cf. Fred H. Clarkson et al., Consumer Credit and Its Uses 33–34 (Charles O. Hardy ed., 1938) (listing eighteen different services the Morris Plan Industrial Bank of New York offered in 1938, which included Cunard-White Star Line Travel Loans, a plan to purchase furs, and a plan to finance memorials).

279 See Clarkson et al., supra note 278, at 33–34.

280 Neifeld, supra note 257, at 380 (“[T]he dual plan institutions have departed widely from the original ideal which was to limit such an institution’s facilities to the individual with modest credit requirements. They now serve business and professional people as well. They have come more and more to resemble commercial banks and to employ conventional bank lending techniques and types of loans.”).

281T. D. MacGregor, Lending on Character Plus—the Modus Operandi of the Morris Plan Banks, 103 Bankers’ Mag. 863 (1921).

282 Neifeld, supra note 257, at 371; Ernst A. Dauer, Radical Changes in Industrial Banks, 25 Harv. Bus. Rev. 609, 617 (1947).

283 See Morris Plan Bankers Convention, 105 Bankers’ Mag. 924, 924 (1922) (detailing the assessment of Thomas Coughlin—the Morris Plan Bankers Association’s new president—regarding Morris Banks’ difficulties and the Banks’ new direction).

284 Id.

285 See Control and Regulation of Bank Holding Companies, supra note 252, at 578 (statement of Ellery C. Huntington, President, Morris Plan Corporation of America).

286 See Morris Plan Bankers Convention, supra note 283, at 924.

287 U.S. Gov’t Accountability Office, GAO-05-621, Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in Regulatory Authority 17 (2005) [hereinafter GAO, Industrial Loan Corporations] (explaining that owning a bank exempt from the BHCA prior to CEBA would allow these banks to escape certain regulations).

288 Id.

289 Id. A letter from former Federal Reserve Board Chair Alan Greenspan to Congressman Jim Leach suggests that perhaps the reason CEBA exempted ILCs from the definition of banks was because at the time CEBA was enacted the number of ILCs was small, their total assets were small, and most states were not chartering or had a moratorium on chartering new ILCs. Randall Dodd, Fin. Policy Forum, Special Policy Report 13, Industrial Loan Banks: Regulatory Loopholes as Big as a Wal-Mart 7–8 (2006), available at http://www.financialpolicy.org/fpfspr13.pdf.

290 Dodd, supra note 289, at 7–8. The FDIC summarized it this way: “[I]n 1988, the first commercially owned ILC applied for FDIC insurance. Once the precedent had been set, more applications followed.” See Mindy West, The FDIC’s Supervision of Industrial Loan Companies: A Historical Perspective, Supervisory Insights, Summer 2004, at 5, 9, available at http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum04/sisum04.pdf.

291 Dodd, supra note 289.

292 Id.

293Total assets grew from $3.8 billion to over $140 billion from 1987 to 2004. GAO, Industrial Loan Corporations, supra note 287, at 5.

294 See FDIC, Mandate for Change: Restructuring the Banking Industry 17–35 (1987) (discussing the declining market share of banks at the hands of unregulated financial innovations); Joseph C. Shenker & Anthony J. Colletta, Asset Securitization: Evolution, Current Issues and New Frontiers, 69 Tex. L. Rev. 1369, 1389–90 (1991) (noting banks’ struggles on both the asset and liability sides of the balance sheet).

295 Carl Felsenfeld, Banking Regulation in the United States 47–48 (2004). Under these circumstances, bankers became increasingly resistant to government regulations that kept them from competing with non-banking entities and looked for ways to shed their regulatory chains. See Ebonya Washington, The Impact of Banking and Fringe Banking Regulation on the Number of Unbanked Americans, 41 J. Hum. Resources 106, 111–12 (2006).

296 Joseph E. Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy 14 (2010).

297 Id. at 84.

298 Id. at 5–6.

299 Caskey, supra note 4, at 88–89.

300 See supra Part II.A–B.

301 See Caskey, supra note 4, at 86. See generally Burhouse & Osaki, supra note 3.

302 Caskey, supra note 4, at 87.

303 See id. at 86 n.3, 88–90.

304 Id.

305 Id. at 87, 90–91.

306 Id. at 94–95.

307 See supra Part I.C and accompanying notes.

308Washington, supra note 295, at 111–12.

309 See Richard B. Freeman, Reforming the United States’ Economic Model After the Failure of Unfettered Financial Capitalism, 85 Chi.-Kent L. Rev. 685, 685–86 (2010) (discussing the development of banking deregulation throughout presidential administrations).

310 See Troy S. Brown, Legal Political Moral Hazard: Does the Dodd-Frank Act End Too Big to Fail?, 3 Ala. C.R. & C.L. L. Rev. 1, 8 (2012) (describing pro-market fundamentalism as “the basis for the incremental deregulation of the U.S. banking system”). See generally Thomas F. Cargill & Gillian G. Garcia, Financial Deregulation and Monetary Control: Historical Perspective and Impact of the 1980 Act (1982). Cargill and Garcia argued that the problem with the structure of the financial system in the United States, beginning with reform legislation following the Great Depression through the 1970s, was that it constrained competition. Id. at 11–12.

311 See James J. White, Introduction to the Banking Law Symposium: A 200 Year Journey from Anarchy to Oligarchy, 50 Ohio St. L.J. 1059, 1063 (1989) (arguing that the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA) would speed the “ultimate assimilation [of savings and loans] into commercial banks”); Daniel E. Feder, Comment, Should Loan-to-Value Ratio Restrictions Be Reimposed on National Banks’ Real Estate Lending Activities?, 6 Ann. Rev. Banking L. 341, 34454 (1987) (positing that a main goal of the Garn-St Germain Depository Institutions Act of 1982 was “to deregulate and homogenize the deposit-taking financial institutions market”).

312 See White, supra note 311, at 1063; Arthur E. Wilmarth, Jr., The Transformation of the U.S. Financial Services Industry, 1975–2000: Competition, Consolidation, and Increased Risks, 2002 U. Ill. L. Rev. 215, 476.

313Banks and policy makers fought against tax advantages and other special privileges for credit unions and S&Ls. See G. Allen Hicks, Comment, Common Sense on the Common Bond: Banks, Federal Credit Unions, and Field of Membership Rules, 66 Tenn. L. Rev. 1201, 1219–20 (1999).

314 See, e.g., id. at 1207 (noting studies showing that banks made more mortgage loans to low-income individuals than credit unions).

315 See Neil Fligstein & Adam Goldstein, A Long Strange Trip: The State and Mortgage Securitization, 1968–2010, in The Oxford Handbook of the Sociology of Finance (forthcoming 2013) (manuscript at 1011), available at http://www.history.ucsb.edu/projects/labor/documents/Fligstein_ALongStrangeTrip_UCSB.pdf.

316 See, e.g., Richard A. Posner, A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression 45–46 (2009); Brian J.M. Quinn, The Failure of Private Ordering and the Financial Crisis of 2008, 5 N.Y.U. J.L. & Bus. 549, 55562 (2009) (arguing that a root cause of the financial crisis of 2008 was “financial innovation and the corresponding long-term move towards liberalization and self-regulation”).

317Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified in scattered sections of the U.S. Code).

318 See id. § 312, 124 Stat. at 152123 (codified at 12 U.S.C. § 5412 (2006 & Supp. IV 2010)).

319Mark S. Littman, Poverty in the 1980’s: Are the Poor Getting Poorer?, Monthly Lab. Rev., June 1989, at 13, 13, 17; Hope Yen & Liz Sidoti, Poverty Rate in U.S. Saw Record Increase in 2009: 1 in 7 Americans Are Poor, Huffington Post (Sept. 12, 2010, 12:14 AM), http://www.huffingtonpost.com/2010/09/11/poverty-rate-in-us-saw-re_n_713387.html.

320Sabrina Tavernise, Poverty Rate Soars to Highest Level Since 1993, N.Y. Times, Sept. 14, 2011, at A1.

321 Id.

322 See generally Gary Rivlin, Broke, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business (2010) (discussing the variety of financial services offered by the multibillion-dollar fringe banking industry).

323 See Marie Frederichs & Andrea Rohrke, Fed. Reserve Bank of S.F., Guide to Financial Literacy Resources 1 (Lena Robinson ed., 2002), available at http://www.frbsf.org/community/webresources/bankersguide.pdf (“Consumers who understand the merits of responsibly managing their financial resources are more likely to effectively and profitably utilize the services of a traditional financial institution.”); Getting It Right on the Money, Economist, Apr. 5, 2008, at 73, 73 (stating “[t]hat many poor people do not have a bank account—and that few of them understand why this puts them at a disadvantage (let alone other essentials of personal finance)”).

324 Frederichs & Rohrke, supra note 323, at 1 (“Financial literacy can also break the cycle of poverty, which is often associated with the unbanked.”); Annamaria Lusardi, Financial Literacy: An Essential Tool for Informed Consumer Choice? 2 (June 2008) (unpublished manuscript), available at http://www.dartmouth.edu/~alusardi/Papers/Lusardi_Informed_Consumer.pdf (linking financial illiteracy to failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior).

325 See Light & Pham, supra note 50, at 37.

326 See Ignacio Mas & Mireya Almazan, Viewpoint: Transaction-Based Model Best for Poor, Am. Banker (N.Y.), Nov. 5, 2010, at 9 (explaining how the poor require as much or more financial activity because of their volatile income and financial position).

327 Id. (explaining how the poor are often more experienced in the number of transactions they must undertake because of their changing income and financial position).

328 Caskey, supra note 4, at 103, 105.

329 Id. at 100, 108.

330 Id. at 106 (“[T]he decline in account ownership mainly reflected a deterioration in the economic situation of households in the lower end of the income distribution.”).

331 Small-Dollar Loan Pilot Program, Fed. Deposit Ins. Corp., http://www.fdic.gov/smalldollarloans/ (last updated June 23, 2010).

332 Id.

333 Id.

334 The Availability of Credit Hearing, supra note 2, at 9–10, 16–17.

335 Id. (statement of Robert W. Mooney, Deputy Director, Consumer Protection and Affairs).

336 Id.

337 Id. at 19, 24, 30 (comments of Rep. Luetkemeyer, Rep. Pearce, and Rep. Scott); see also id. at 44–45 (statement of Michael A. Grant, President, National Bankers Association).

338Many of the banks volunteered for the program because they were told that they would be fulfilling their CRA requirements. See id. at 44–45 (statement of Michael A. Grant, President, National Bankers Association).

339 See Cao, supra note 53, at 852.

340 Id.; Anthony D. Taibi, Banking, Finance, and Community Economic Empowerment: Structural Economic Theory, Procedural Civil Rights, and Substantive Racial Justice, 107 Harv. L. Rev. 1463, 1485–89 (1994).

341 Jonathan R. Macey & Geoffrey P. Miller, The Community Reinvestment Act: An Economic Analysis, 79 Va. L. Rev. 291, 295 (1993).

342 Id.

343 See Barr, supra note 30, at 517, 561–66, 623.

344 See id. at 603 (“CRA’s broad standards and ‘enforcement’ mechanisms . . . have long been derided by both proponents and detractors of CRA. Community advocates urge stricter rules and harsher consequences of failure. Bankers lament the lack of clear rules or safe harbors and the intrusive role of the public.”); Charles W. Calomiris et al., Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor, 26 J. Money, Credit & Banking 634, 637 (1994) (stating that “the vagueness of the CRA has led to arbitrary enforcement”); Keith N. Hylton, Banks and Inner Cities: Market and Regulatory Obstacles to Development Lending, 17 Yale J. on Reg. 197, 203 (2000) (explaining that enforcement of the CRA has been uneven and unpredictable); Macey & Miller, supra note 341, at 326–29 (describing the view that enforcement of the CRA is subjective and uncertain).

345 Compare Barr, supra note 30, at 513, 519, 522 (arguing that in comparison with similar regulations, the CRA has been relatively successful in addressing market failure through increased availability of lending to low-income communities), with Macey & Miller, supra note 97, and Michael Klausner, Market Failure and Community Investment: A Market-Oriented Alternative to the Community Reinvestment Act, 143 U. Pa. L. Rev. 1561, 1561, 1564–65 (1995) (suggesting alternatives to the ambiguity and ineffectiveness of the CRA).

346Taibi, supra note 340, at 1513.

347 Id.

348 See Ben S. Bernanke, Chairman, Fed. Reserve Sys., The Community Reinvestment Act: Its Evolution and New Challenges, Speech at the Washington D.C. Community Affairs Research Conference (Mar. 30, 2007), available at http://www.federalreserve.gov/newsevents/speech/bernanke20070330a.htm.

349 Id.

350Patricia Hanrahan & Katharine Rankin, Ignoring the Homeless: An American Pastime, Hum. Rts., Summer 1990, at 36, 37.

351Sharon Stangenes, South Shore Bank Thrust into Spotlight, Chi. Trib., Nov. 15, 1992, § 7 (Business), at 1.

352Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-325, 108 Stat. 2160 (codified as amended in scattered sections of 12 U.S.C.).

35312 U.S.C. § 4701(b) (2006).

35412 U.S.C. § 4702(5)(A)(i)–(iii) (2006).

355 Lash, supra note 77, at 397 tbl.1, 398. The Fund was also brought within the purview of the Treasury Department in 1996 and has been mentioned as one of the accomplishments of the Clinton Administration. Id. at 398.

356 See Sarah Molseed, Note, An Ownership Society for All: Community Development Financial Institutions as the Bridge Between Wealth Inequality and Asset-Building Policies, 13 Geo. J. on Poverty L. & Pol’y 489, 509 (2006); Katie Kuehner-Hebert, CDFI Fund Appropriation Could Increase to $100M, Am. Banker (N.Y.), June 13, 2007, at 4 (indicating that the Bush Administration sharply reduced funding from its peak in 2001, however, it requested an increase for fiscal year 2008); David Morrison, Bush Administration Lowballs CDFI Fund Once Again, Credit Union Times, Feb. 4, 2008, at 2 (stating that the proposed budget under the Bush Administration was an almost 70% cut to the CDFI Fund).

357 See Benjamin et al., supra note 159, at 179 (explaining that the existing analysis is limited because the existing groups are so diverse and hard to classify).

358 Id. at 178–88.

359Lash, supra note 77, at 399.

360Lawrence H. Summers, U.S. Sec’y of Treasury, Building Emerging Markets in America’s Inner Cities, Remarks to the National Council for Urban Economic Development (Mar. 2, 1998), available at http://www.treasury.gov/press-center/press-releases/Pages/rr2262.aspx.

361 Id.

362Lash, supra note 77, at 401.

363 See, e.g., Rochelle E. Lento, Community Development Banking Strategy for Revitalizing Our Communities, 27 U. Mich. J.L. Reform 773, 790 (1994) (“Shorebank presents a success story in the community development banking world. As of May 1991, its total loan portfolio was $125 million, with a delinquency rate of 1–2%, a bit lower than the national average of 3–5%. In 1992, it had $244 million in assets and a net income of $1.6 million. Shorebank demonstrates that deliberate investment in disinvested communities can revive a local economy, rekindle the imagination of its people, and restore market forces to health and interdependency.” (footnotes omitted)); see also Hanrahan & Rankin, supra note 350, at 37.

364Dave Carpenter, “Bank with a Heart” Thrives, Spokesman-Review (Spokane), June 12, 2007, at A13.

365 See, e.g., Robert Barba, Deal Shows ShoreBank Was Savvy to the End, Am. Banker (N.Y.), Aug. 24, 2010, at 1.

366 See Nick Carey, Regulators Close Well-Connected ShoreBank, Reuters, Aug. 20, 2010, available at http://www.reuters.com/article/2010/08/20/us-shorebank-failure-idUSTRE67J5AE20100820.

367Benjamin et al., supra note 159, at 189.

368 See Cao, supra note 53, at 877.

369Id. at 884–88; Light & Pham, supra note 50, at 39, 47 n.8.

370 See Cao, supra note 53, at 884–88.

371Rashmi Dyal-Chand, Reflection in a Distant Mirror: Why the West Has Misperceived the Grameen Bank’s Vision of Microcredit, 41 Stan. J. Int’l L. 217, 220 (2005).

372Solomon, supra note 28, at 206.

373 See Dean Karlan & Jonathan Zinman, Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts, 23 Rev. Fin. Stud. 433 (2010).

374Cao, supra note 53, at 843 n.6, 887.

375David Bornstein, The Barefoot Bank with Cheek, Atlantic Monthly, Dec. 1995, at 40, 40–41.

376Cao, supra note 53, at 887.

377 Id. at 880–81.

378 See Carlos G. Vélez-Ibañez, Bonds of Mutual Trust: The Cultural Systems of Rotating Credit Associations Among Urban Mexicans and Chicanos (1983); Cao, supra note 53, at 898.

379Cao, supra note 53, at 863 (emphasis omitted).

380Light & Pham, supra note 50, at 41–42.

381Cao, supra note 53, at 877–78.

382 See Alexa Vaughn, Mission District Lending Circle Helps Low-Income Earners Pursue Dreams, S.F. Gate (June 6, 2011), http://www.sfgate.com/cgi-bin/blogs/kalw/detail?entry_id=90450; accord Lending Circles: The Program, Lending Circles Mission Asset Fund, http://www.lendingcircles.org/lending-circles/the-program (last visited Jan. 19, 2013).

383 Lending Circles, supra note 382.

384 See id.

385 See Jen Haley, The Mission Asset Fund: A Bridge Between Informal and Formal Banking, Dowser (Feb. 17, 2011, 11:00 AM), http://dowser.org/the-mission-asset-fund-a-bridge-between-informal-and-formal-banking/.

386 See Lending Circles, supra note 382; Jose Quinonez, Microfinance: Bringing the Unbanked into the Financial Mainstream, Citigroup (May 23, 2011, 3:27 PM), http://new.citi.com/2011/05/microfinance-bringing-the-unbanked-into-the-financial-mainstream.shtml.

387Vaughn, supra note 382.

388 See Bay Area Partners, Lending Circles Mission Asset Fund, http://www.lendingcircles.org/partner-with-us/current-partners/bay-area (last visited Jan. 19, 2013).

389Two other scholars have concurrent projects suggesting reenlisting the Postal Service to meet certain banking customer demands. See Adam J. Levitin, Going Postal: Financial Inclusion via Postal Banking (Jan. 2011) (unpublished manuscript) (on file with author) (describing the history of postal banking in the United States and suggesting the possibility of postal banking serving certain needs of the unbanked); Sheldon Garon, A Savings Account at the Post Office, CNN (Jan. 12, 2012, 8:38 AM), http://globalpublicsquare.blogs.cnn.com/2012/01/12/garon-bring-back-postal-savings/ (making the case for post office savings accounts that are already in use in other countries).

390Maria Aspan, No Charter? No Problem for Wal-Mart, Am. Banker (N.Y.), Nov. 12, 2009, at 1.

391Katherine E. Howell-Best, Note, Universal Charter Options: Providing a Competitive Advantage for State Financial Institutions, 6 N.C. Banking Inst. 487, 511–12 (2002); see also Jean Ann Fox, Consumer Fed’n of Am., Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank Charters to Peddle Usury 11 (2004), available at http://www.consumerfed.org/pdfs/pdlrentabankreport.pdf.

392Jeff Jordan, Avoiding Financial Armageddon at the Post Office, Atlantic (Oct. 29, 2012, 10:25 AM), http://www.theatlantic.com/business/archive/2012/10/how-to-save-the-us-postal-service-through-innovation/264221/.

393Ian Ayres, Market Power and Inequality: A Competitive Conduct Standard for Assessing When Disparate Impacts Are Unjustified, 95 Calif. L. Rev. 669, 674–75 (2007) (“‘[T]he poor pay more’ not just because of higher costs of supply but often because sellers prey on consumers’ limited access to information and competitive alternatives. . . . [S]tudy after study has shown—in car negotiations, predatory lending, rent-to-own markets, and dozens of other contexts—that sellers are able to extract disproportionate profits from poor and disproportionately minority consumers.” (footnote omitted)); see also David Caplovitz, The Poor Pay More: Consumer Practices of Low-Income Families 18–20 (1967).

394 See Edmund Mierzwinski & Jean Ann Fox, Show Me the Money!: A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures 1 (2000) (highlighting success of payday lender lobby in seeking enactment of pro-industry legislation).

395 See Timothy A. Canova, The Transformation of U.S. Banking and Finance: From Regulated Competition to Free-Market Receivership, 60 Brook. L. Rev. 1295, 1297–98 (1995).

396Stephen Wexler, Practicing Law for Poor People, 79 Yale L.J. 1049, 1049–50 (1970).