FDIC Launches Program Encouraging Banks To Offer Small Dollar Loans

The FDIC has announced a program designed to study and encourage small dollar lending programs designed to compete with payday lenders. Under the program banks would offer “loan amounts of up to $1,000, mandatory savings components, payment periods that extend beyond a single pay cycle, interest rates below 36 percent, low or no origination fees, no prepayment penalties, prompt loan application processing, and access to financial education to help with asset building.”

The results of the study will be made available to other banks as a resource. “There is a tremendous appetite for small-dollar loans, but there are far too few low-cost alternatives for consumers to choose from,” said FDIC Chairman Sheila C. Bair. “The pilot project our Board approved will be an important first step in filling the void that exists today.”

We already know that banks bankroll payday lenders, will they step up and lend to the same people in a responsible fashion?

FDIC Board Approves Small-Dollar Loan Pilot Project (Press Release) [FDIC via Credit Slips]

PREVIOUSLY: Why Don’t Banks Offer Padayesque Loans, Just With Lower Interest?

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  1. tedyc03 says:

    Interest rates below 36 percent?!?!?! Why doesn’t the government just legalize extortion of poor people?!

  2. Nick says:

    @TEDYC03 – 36% is a hell of a lot better than the 400% that is charged by payday lenders. This would actually be a very good thing, and could drive the scummy payday lenders out of business.

  3. nequam says:

    @tedyc03: They do. In Massachusetts, it’s called the Lottery.

  4. royal72 says:

    that’s fantastic news!… let me guess, 19.99% interest (39% for default), set-up fee, processing fee, auto-payment fee, non-customer fee, etc. in the end you pay 45-58% interest with a smile.

  5. lmedsker says:

    There is some confusion here…payday loans are two week loans so applying annual percentage rates don’t really work.

    At a 36% APR, the MAXIMUM fee a bank could charge per $100 payday loan is $1.38. They’ll be offering the product at a loss. Sounds like a great business plan to me.

    According to the Federal Reserve Banks 1999 Commercial Bank National Average Report, the cost for a small bank to originate and maintain a loan for one month is $174. And now the FDIC wants them to loan $100 for $1.38?

    I just read a great piece on this:

    A Bad Solution to a Non-Problem The FDIC’s misguided new consumer loan guidelines

    [www.bankstocks.com]

  6. nequam says:

    @schwnj: I agree that a 36% ceiling, while high, is not outrageous. I would imagine that anybody needing a bank loan for $1000 or less is likely a credit risk. If not, they could get that much from a credit card. Not that I would advise either approach.

  7. Vicky says:

    I guess it depends on what you consider a loan. I once received a survey phone call from my bank, Washington Mutual, which was inquiring about different features I might like to see added to my debit card. Most of the features had to do with fraud protection, but one was a feature to schedule the debit date for purchases made with the card for cash-flow purposes. The idea, as I understood it, was that transactions would be held until your next direct deposit or until a scheduled date. Practically speaking this would mean that the bank was loaning you money for any amount you spent above your deposit. A $4.76-per-month fee for this service with a limit of $1000 in time-shifted purchases would probably fit the FDIC description.

    I thought at the time that with some improvements it could be a substitute for a pay-day advance loan, with a high probability of overdraft revenue for the bank (bringing the nominal 36% APR back into the 400% range for undisciplined spenders). I also thought it would be an interesting way for an organized person to earn more interest on their everyday checking balance (i.e., keep money in savings until the day before the debit draw), but only if it was fee-free.

  8. mac-phisto says:

    @lmedsker: there are assumptions within this report that most likely would not apply here. a paydayesque loan does not go thru the same scrutiny as other loan types, so origination fees should be greatly minimized. also, the key to this whole program is this sentence in the press release:

    Participating financial institutions in the study that offer these products in a safe and sound manner may receive favorable consideration under the Community Reinvestment Act (CRA).

    effectively, the FDIC is mandating the practice for banks to be compliant with their CRA guidelines. so, whether or not it costs them a loss, they may be more inclined to offer it to avoid a particularly high level of regulatory scrutiny.

  9. Anonymous says:

    36%… I’m reminded of an ancient term: Usury.

  10. ageshin says:

    Gee I remember a time when there were usury laws prohibiting banks from doing what they now do so well. I remember a song about a hole in the arm where all the money goes. I think that the same goes for the banks! When interest rates of thirty six per cent seem resonable we are in the “big muddy” over our heads.