FDIC Pilot Program: Banks Make Low-Cost Small Loans
As battles over abusive payday lending continue in Wisconsin and in Congress, and as the National Consumer Law Center reports that some banks have begun making similar ultra-high-cost loans themselves, innovative efforts to provide truly affordable small loans are also moving forward.
Last month, we highlighted the nation’s only statewide program offering alternatives to payday loans – Credit Union Better Choice Loans – jointly sponsored by the Pennsylvania Treasury Department and the Pennsylvania Credit Union Association.
Today, we want to call attention to the FDIC’s progress report on its “small dollar loan pilot program.” In 2008, the program’s first year, the 39 participating banks made over 16,000 loans for a total of about $18 million. About half of the loans were for $1,000 or less. The average interest rate was about 15%, and the average APR (which includes the impact of fees) was less than 20%. The loan periods ranged from three to twenty-four months, with the average being about twelve months. Loans repayments are made in a series of installments rather than in a single payment. Some of the banks reported that the loans were profitable in the short-run, while most regarded them as an investment in customer relationships and community good will that will increase future profits.
While most of the participating banks developed new loan products for the FDIC program, Amarillo (Texas) National Bank, which made more than a thousand loans of $1,000 or less in 2008, began its small dollar loan program more than a century ago. This bank is the subject of one of the four detailed case studies included in the FDIC’s report.
To be sure, the $18 million loaned through this program is barely a drop in the bucket compared to the volume of high-cost payday lending, which the FDIC estimates at $48 billion in 2006. But the FDIC’s pilot program offers proof that it is indeed possible for banks offer small loans in a responsible and affordable manner.