Dodd-Frank: Title XII - Improving Access to Mainstream Financial Institutions

INTRODUCTION:

Title XII authorizes the
Secretary of the United States Department of the Treasury to create multi-year grant programs designed to encourage Title XII’s targeted group, low-to-moderate income individuals, to utilize mainstream financial products and services. Title XII also authorizes participating institutions to issue small-dollar loans to targeted individuals and provide them with the financial counseling necessary to conduct transactions and manage their accounts. In effect, Title XII attempts to minimize the exposure of low-to-moderate income individuals to predatory lenders by diminishing their need to use non-traditional financial products and services, such as pay-day loans and cash advances

 

PURPOSE:

Title XII was enacted to provide millions of low-to-moderate income individuals living in the United States the opportunity to access and utilize appropriate mainstream financial products and services. See 12 U.S.C. § 5621.

 

 

Provisions:

 Title XII authorizes the Secretary of the United States Department of the Treasury to create multi-year grant programs designed to encourage Title XII’s targeted group, low-to-moderate income individuals, to establish accounts at federally insured banks. See 12 U.S.C. § 5623(a). The grants are also designed to improve the targeted group’s access to such accounts on reasonable terms. See id

Title XII also authorizes participating institutions to issue small-dollar loans to targeted individuals and provide recipients with the financial counseling and education necessary to conduct transactions and manage their accounts. See 12 U.S.C. § 5623(b). These loans provide low-cost alternatives to non-traditional forms of financing that often impose excessive interest rates and fees. See id. The small-dollar loans can only be made pursuant to terms, conditions and practices that are reasonable for the individual consumer purchasing the loan. See id.

 

Program participation is restricted to eligible institutions, which are limited to organizations listed in Internal Revenue Code (“IRC”) § 501(c)(3) and exempt from tax under IRC § 501(a), federally insured depository institutions, community development financial institutions and state, local, or tribal government entities. See 12 U.S.C. § 5622(3).

 

Title XII also amends the Community Development Banking and Financial Institutions Act by authorizing grants to create loss reserves for small-dollar loans made by community development financial institutions. See 12 U.S.C. § 4719(b). The loan-loss reserves will encourage community development financial institutions to establish small-dollar loan programs by subsidizing related losses. See 12 U.S.C. § 4719(a).


IMPLEMENTATION:

 

According to Title XII’s legislative history, Congress estimated that 25% of the families living in the United States were either “unbanked or under-banked” prior to Dodd-Frank’s enactment (CCH Attorney-Editor 563). Individuals that did not use mainstream financial products and services often relied on non-traditional forms of financing, such as pay-day loans and cash advances. These non-traditional products and services often carry high interest rates and fees, and leave consumers unable to save for life’s necessities, such as medical or educational expenses. See id. Thus, Title XII creates programs that allow targeted individuals to sever their reliance on predatory financial products and services by providing them with small-dollar loans on reasonable terms.

Additional Sources:

CCH Attorney-Editor. Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis. Chicago, IL: Wolters Kluwer Law & Business/CCH, 2010. Print.