FDIC Says Pilot Program Offers Alternative to Payday Loans

The FDIC has announced the results of a two-year pilot program designed to help banks offer alternatives to payday loans that would be “safe, affordable and feasible.” Under the test program, participating banks offered loans of up to $2,500 at maximum interest rates of 36% — instead of the 400% offered by some payday lenders.

The pilot program was developed to show that “banks can profitably offer affordable small-dollar loans as an alternative to high-cost credit products, such as payday loans and fee-based overdraft programs.”

The FDIC said in a statement that the pilot was a success:

“Our pilot banks have demonstrated that safe and affordable alternatives to high-cost forms of emergency credit can fit within their business plans,” said FDIC Chairman Sheila C. Bair. “The FDIC is extremely grateful to the boards of directors, management and employees of all participating pilot banks for the successful execution of the study, and for the development of the Safe, Affordable and Feasible Template for Small-Dollar Loans. Going forward, the FDIC will continue to work with the banking industry, consumer and community groups, nonprofit organizations, other government agencies, and others to research and pursue strategies that could prove useful in expanding the supply of small-dollar loans.”

Implementing the program on a widespread basis could be a challenge. Payday lenders attract customers with immediate cash and minimal ID requirements, but the FDIC program includes loan approval “within 24 hours” and requires proof of identity, address and income. The agency also suggests that banks add a mandatory financial education course as a loan requirement.

And, of course, banks expect to turn a profit. According to the FDIC, those in the pilot program saw it as a “strategy for developing or retaining long-term relationships with consumers.” Many banks have already turned away from that strategy when it comes to underserved communities, which is one reason payday lenders have been so successful.

FDIC’s Small-Dollar Loan Pilot Shows Banks Can Offer Alternatives to High-Cost, Short-Term Credit; Results in Safe, Affordable and Feasible Template for Small-Dollar Loans [FDIC Press Release]

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  1. Riroon13 says:

    Yes, please!

    As someone that had to use these PayDay loan places for a few cases of extreme emergency, I can tell you how slimy they are.

    I’d love to deal an emergency loan directly from my bank. I live in a small town and deal with a locally-owned bank that is wonderful.

    Only thing… manditory financial education course? Does the fact that an air conditioner, a car, and a microwave oven blowing at the same time mean that I suck at finances? (True story, and one that needed more than the $1500 I had in savings)

    Other than that, sounds great. My money stays local and I don’t need to take out another $5 loan for the lube.

    • Oranges w/ Cheese says:

      Yipe! That sucks – I’m glad you found someplace to get the money, but I agree having to resort to a payday place would make me feel grimey. This is why I just upped the limit on my card. They approved me for $11k but knowing that would just be tempting the fates I went for $5k instead. That way I can cover any gross unforseen expense but not blow out my net worth either.

    • Caffinehog says:

      Not to nitpick, but you could have made do without the microwave and probably without the AC unless you had young children or the elderly living with you.

      • scorpionamongus says:

        Try spending a night in the Carolina’s without AC in August and you’ll change your mind fast. It’s also quite possible this person’s only means of cooking at the time was with a microwave. I’m surprised you didn’t point out the car probably wasn’t necessary since he has feet.

        • hypochondriac says:

          I’ve survived in 122 temperatures without an AC. Once in a while i didn’t even have a fan do to rolling blackouts. So I agree with Caffinehog that an AC isn’t really necessary

          • speedwell (propagandist and secular snarkist) says:

            Actually, food other than rice and beans isn’t really necessary. And clothes aren’t necessary, except for a rag to tie around your genitals. And nomads in the Middle East survived 120+ temperatures regularly without A/C, too. And without cars! Why should Riroon13 think they’re any better than illiterate nomadic goatherders?

            OK, back to our usual griping about fast food, airlines, and casinos.

          • El_Red says:

            Good for you. A lot of people need AC to function. How do you stay productive at work if you are so tired from sleepeing in an ”oven”? If you lose your job, you can’t pay your bills.

            And knowing my family history, I’d probably end up with a heart attack in a week. Anuone with previous heart health issues in the family should not overheat himself. Also, one visit to ER is US, due to heat, is a LOT more expensive than any payday loan.

        • Caffinehog says:

          Well, a car is necessary to get to work. But which is wiser: wasting hundreds of dollars in fees and interest or buckling down and eating tuna, PB&J, and cold cuts for a week? And if it’s worth a little sweat to earn money, isn’t it worth a little sweat to keep it?

          It’s precisely the idea of, “I have to have it, and I have to have it NOW!” that leaves people without an emergency fund. It also causes people to take out these loans. And since these loans rob you of hundreds of dollars, you lose money you could throw at the next problem, making you even more likely to take out another loan.

          • Bohemian says:

            If you think you can save $1500 in a few weeks by eating PB&J I wanna see your methodology. The microwave might not have been a must but the other two likely were.

            • Caffinehog says:

              Save $1500 in two weeks? No, that’s not what I’m suggesting. It’s called simply waiting for the next paycheck before you buy something that you can live without for a little while in order to save hundreds of dollars.

              I know… it’s a difficult concept to grasp.

    • Randell says:

      Well lets break down what each of these items cost. Microwaves can be had for well under $100. An AC is really another $100 for a room AC. That leaves you $1300 to fix the car. Is it that you wanted to fix your central air, and buy the fancy model of microwave?
      I realize people have emergencies, but in the real world, these are inconveniences. A car is probably necessary due to work, but maybe you would be better off renting one while yours is being fixed. A rental would be maybe $200 a week. So for under $500 your issue would be solved rather than taking out a payday loan that will cost you a huge amount in interest.

    • techphets says:

      In a word, yes, it does. How much did you have in savings? Where was your emergency fund? If you didn’t have one, why hadn’t you adjusted your lifestyle in order to build one? This could mean moving, doing with less, living with others, working harder, selling property- everyone’s situation is different.

      You said you needed $1500 MORE than what you had in savings for an air conditioner, a car, and a microwave. The air conditioner and car could have been found on craigslist for $50 each. It also sounds like you spent more money on a car than you could afford to spend.

      I don’t think it is fair for you to blame the payday loan establishments. Their interest rates are lower than the rates banks charge for the “convenience of overdraft protection.” Furthermore, if the payday loan was not available to you, you still would have had to have found some way to survive. THEN you would have been looking at the least expensive options available. THEN you would have cut costs. THEN you would have had the right mindset for someone who has no emergency fund.

      With banks or payday loan places handing you money any time you need it you’ll likely end up in perpetual debt.

  2. DanRydell says:

    “Implementing the program on a widespread basis could be a challenge. Payday lenders attract customers with immediate cash and minimal ID requirements, but the FDIC program includes loan approval “within 24 hours” and requires proof of identity, address and income. The agency also suggests that banks add a mandatory financial education course as a loan requirement.”

    Not a problem. You give people a viable alternative that will save them a ton of money, you can’t fault yourself if they don’t take advantage of it.

    • speedwell (propagandist and secular snarkist) says:

      Right, because someone who is, say, trying to take care of children while working two jobs, when faced with a financial emergency that could potentially threaten both jobs and their ability to take care of their children, have all the time in the world to take a mandatory course before they get the lone they needed yesterday. Christ.

      • techphets says:

        Right… Educating people on how to avoid future financial emergencies is a waste of their time. Better to let them sink into debt with no hope of ever getting out.

        • speedwell (propagandist and secular snarkist) says:

          Nice attempt at melodrama. People go to these places because they need money fast, not because they need your sanctimony.

  3. FrugalFreak says:

    Can they do so without requiring credit industry involvement or lack of collateral assets that that segment of the populations rarely have? This is nothing but a study to present to congress to force credit system participation.

    How dare they make do without adhering to our monetary tracking system.

    Unless the loan terms are equal, it is like comparing apples and oranges.

    • DanRydell says:

      The loan terms are not equal; it’s like comparing apples (loans from a bank) to dog shit (loans from a payday loan place).

  4. kaseyk85 says:

    I am a manager at a payday advance center and this kinda scares me…the gov already tried to shut down all small loans for people including payment plans on things such as dentist fees, credit cards and even do away with layaway. but really if banks start doing this, am i going to have a job or am i going to have to apply as a bank manager soon? and danrydell, we require full ID, SS#, bank info, check stubs, referances, car info, home info, everything. same thing the banks are going to want.

    • FrugalFreak says:

      I havent had to use these services in years, but you have many customers behind you. Just keep that “No Credit Check” Ad in the window!

      Thank You

    • Randell says:

      Some jobs are good to have removed from society. I have no problem watching people who kill baby seals for their living be required to look for new work. Those who prey on the poor and less educated deserve to lose their jobs as well.

      • techphets says:

        You do realize that banks collected something like $27 billion in overdraft fees in 2009, right? A year where the economy was in the tank. And you also realize that these fees are usually paid from the “poor and less educated” that you speak about, right?

        There has been reformation in overdraft fees but this wasn’t something the banks asked for. If you stuck interest rates on their overdraft fees, many of them would dwarf the interest rates of payday loan lenders.

        Why am I even bothering trying to explain.

  5. chuckv says:

    This still doesn’t fully address the reason why many people get loans from Payday lenders. Not having ID, a permanent address, or proof of income is one of the reasons why many people are forced to use Payday lenders, even when these alternatives exist.

  6. ss60 says:

    I dislike how everyone paints these payday lenders as scum….. they are not that evil when you put it into perspective….

    the people who go their usually already have horrid credit, no bank will lend them money…, putting the fee as an interest rate is misleading as well, it’s a FEE, if we consider this interest we should do the same with credit cards and other late payment fees.

    not saying it’s a wise decision, but if you have worked yourself into a whole where you risk paying a $20 fee now, or paying a $50 fee to have your power turned back on…. well then they aren’t so evil….

    the people running these places aren’t rolling in the dough, once you consider modest wages, store cost, trouble with people who don’t pay, advertising etc…

    • kaseyk85 says:

      exactly, we are not rolling in the dough. it takes alot to run these kind of places. and trust me, putting a name tag on that says “manager” doesnt mean im makin a ton of money. I like my job and the people that come into my center, they are good, mostly honest people that need help. I really hope we can stick around.

    • DanRydell says:

      An unavoidable fee is no different from interest. A late payment fee is not unavoidable, it’s not the same as interest.

    • El_Red says:

      Only they serve as a point to resell stolen merchandise. I’ve seen payday loans places opening in front of senior centers, to be able to easily get into seniors pockets and keep ripping them off. Seniors feel often guily, and even if the interest rates are out of the roof, they will pay every penny to these sharks.

      Honest payday lenders are like honest politicians : hard to find.
      I’m not saying there are none, but most of these places are pure scams.

  7. Eat The Rich -They are fat and succulent says:

    You can bet that this has the banking industry salivating. Think about it. Basically it would be government approved and supported loan sharking.

    If I were a big bank, I would kill for the chance to rope in all the folks who don’t meet standard loan requirements. Even at 36%, by borrowing from the Fed, I would be making a freaking killing. And of course I would initiate all kinds of fees and penalties.

    Oh, and create a second, lower tier of credit ratings. So eventually you could have a credit rating of say 100-150 at which point nobody would touch you unless you had cash.

    In addition, they would be able to seriously dent an industry which has siphoned off a lot of business and money from them. The banking industry has spent millions to kill of payday loans because it weakens their control over the public and provides a (admittedly bad) alternative to their own legalized loan sharking (also known as credit cards and signature loans)

    • DanRydell says:

      It will benefit banks some, but it will benefit the poor people who currently deal with predatory lenders a LOT MORE

      • FrugalFreak says:

        It won’t.
        It will not help the poorer consumers one bit. The payday lenders are not predatory. They have never came to my house and forced me to buy their products. The banking credit systems have caused me to find and use alternative financial institutions. Sorry, even if alt lenders get forced under, I WILL not give the financial and credit systems that are in control any access to my money. I will find other means to borrow if the need arises.

        Sorry Charlies, I will not pay for your credit card bonus points or support your lavish lifestyles or help your low CC interest rates built on backs of others.

        • DanRydell says:

          Yeah I get it, you’re afraid of the banking system in this country. You can continue to cause yourself financial harm by avoiding it if you want, but you’re clueless if you think that being able to borrow money at a lower interest rate will not benefit all of the poor people who are not afraid of banks.

          • Eat The Rich -They are fat and succulent says:

            Perhaps they are “afraid” of banks because they have had bad experiences with them. I am not poor. I am solidly middle class. I have accounts at 2 separate banks and 1 CU, decent credit etc.

            However that does not change my opinion that the banking industry and the financial “services” industry have IMHO become one of the most rapacious, greedy, money sucking machines out there.

            I resent every account fee, $3.00 ATM fee, etc. which I am forced to pay as a result of the “services” a bank provides. And before you go defending the bank need for profit of some kind, keep in mind that in the past 40 years, bank profits margins have skyrocketed. Most of this due to instituting creative fee schedules, deposit policies which increase the potential for overdrafts, and questionable investing rather than the traditional point spread loans.

            Banks have again become greedy, powerful, amoral and monopolistic. The difference between now and back in the 30’s when this last happened is that our politicians today have no backbone to stand up to the industry and do what is right for the members of a fast fading middle class America.

            • mac-phisto says:

              an example to make your point – that $3 ATM fee? completely superfluous. when you put your card in an ATM, whether you type the wrong PIN, check your balance, take a withdrawal, transfer money or are even denied a transaction, your bank pays a fee to the ATM owner to cover the transaction cost (anywhere from 25¢ to over $1).

              that fee is what we in the financial services industry call a “dumbass fee”, as in, “you’re the dumbass for paying it.”

              please don’t take that the wrong way – i’m not calling you, specifically, a dumbass. i’m just trying to show that banks look at customers as one thing & one thing only: little walking money bags just waiting to be pilfered.

              • Eat The Rich -They are fat and succulent says:

                Very good example, and I agree with your statement that banks view customers as walking money bags waiting to be pilfered.

                • the_wiggle says:

                  yes they surely do. ALL banks. especially the ones claiming NOT to view their marks, ahem – customers as walking money machines

            • DanRydell says:

              Wow, you’re forced to pay fees on your bank accounts? I haven’t paid any fees on my checking or savings accounts in years. In fact, they refund fees that other banks charge me (ATM fees at ATMs they don’t own).

              If you’re paying fees on a checking or savings account, it’s probably because of your own habits or mistakes.

              I do pay fees on my brokerage accounts (trading fees), but I don’t think that’s what you’re referring to.

              You’re missing the point, man. No matter how much you hate banks, payday lenders will rape you harder and without lube.

              • Eat The Rich -They are fat and succulent says:

                So you have never used an ATM and been charged $3.00 to access your money?

                Never had to pay for a single bounced check? Ever?

                I salute you sir/madam. Your are truly an exception.

                The rest of us rabble will just have to wallow in our own filth of struggling to pay our bills every month while watching our incomes fall behind the inflation curve every year.

        • Randell says:

          Find ONE way that a payday lender HELPS poor people? It only delays the inevitable. The interest rate throws all chance to improve their situation at all. Maybe you have not heard of the term usury. It is illegal for the mob to lend at an extraordinarily high rate. The payday lenders are no better than the mafia, except the mafia actually has some honor.

  8. sjb says:

    The payday loan defenders show up flapping their jaws.

  9. Skankingmike says:

    mmmmm default pay day loan swaps arrgllll….

  10. Grabraham says:
  11. speedwell (propagandist and secular snarkist) says:

    I’ve been in a situation where I needed a loan for upcoming major non-elective surgery (I’ll spare you the details except to say I was stabilized and able to get around a little on my own, but the underlying problem wasn’t addressed yet). I had insurance, but the hospital would not commence surgery until I had paid them what was left of my deductible plus the 20 percent co-pay for the surgery plus hospital stay. Finally I got them down to about 800 dollars, which I still did not have at the time, having just had to deplete my savings for the immediately previous round of medical treatment. As far as they were concerned I could go without the surgery and just die instead (which is not an exaggeration; the surgery saved my life).

    I don’t use debt, except for limited pre-arranged installment payment contracts for specific items, so I was in a bind. I had no credit cards and no solvent family or friends. If my credit union turned me down for a loan, it was going to have to be one of these “predatory” places. Fortunately my credit union did not turn me down, though it would not let me have the loan unless I let them pay themselves first out of my directly deposited paycheck each pay period. Fine by me. Maybe after I finish paying this off I’ll have something that resembles a credit rating.

    But the whole situation looks like one of those philosophy puzzles. Say I had to get a loan from a loan place. What would have been most responsible for “victimizing” me, the payday loan place, my insurance coverage, the hospital, the surgeon, or my infection?

    • El_Red says:

      Your country’s health system. Per capita USA spends more money for health than Canada. However, Canada somehow managed to offer universal health care. So where did USA’s money went? Pay more and get less?

      • El_Red says:

        Argh, pardon my grammar. Need. More. Coffee.

        • speedwell (propagandist and secular snarkist) says:

          Here. (hands you quite a good espresso) I knew what you meant. :)

          I’d emigrate, seriously I would, I could even keep my job… but I fail on points despite being a good, smart, productive citizen. Makes me see red when I see the kind of scum your country’s immigration bureau lets slip through.

    • Randell says:

      Actually, this shows the need for this type of loan as opposed to payday loans. You probably needed an education about finances and why having credit might be a benefit to you in this emergency situation.

      • speedwell (propagandist and secular snarkist) says:

        Thank you for your sanctimonious bullshit. People who are in debt over their heads need an education in finances, not me. Except for this loan, which I will have completely paid off in a few months because I am demonstrating a consistent payment history (realistically I could pay it off tomorrow otherwise), I am completely free from debt and doing fine, thank you.

  12. PupJet says:

    I personally wouldn’t mind this. The 36% vs 400%+ interest is actually nice. I DO like that they make you go through a financial education course as well. You really shouldn’t be taking out money that you can’t pay back. If you can’t live inside your means, then you really shouldn’t be purchasing all those fancy items…

    • Syntania says:

      If by “fancy items”, you mean food, utilities, and rent, then yeah, by all means, be homeless and starving. A good portion of the people who use payday advance places are unable to pay for basic necessities. That’s why they fall into this trap of using these places so easily.

  13. Syntania says:

    Good, those “payday advance” places are pure evil. They prey on people who need cash now, and have to pay those outrageous interest fees. At one time I got caught up in that payday advance downward spiral, and it took drastic measures to get off of my feet once. It was mainly due to my ex, who wanted to handle our finances but had no idea how to do it properly, and payday advance places were his big idea. Once we managed to get out, believe me, it was a weight off of my shoulders. Once he decided to start using them again, I had enough. I left, and never looked back. I never want to get stuck in that trap again.

  14. macruadhi says:

    I have used these payday loan folks, and I hated it each and every time. That said all I have to say is: Anyone who uses them, unless you’re mentally or physically handicapped, it’s your choice. You’ve made some random set of choices in your life that set you down this road you’re on now. Maybe it was something major, like skipping college, or intentionally cutting that important class so many times that you couldn’t graduate school, or minor choices like oversleeping the night before that big interview. The rich keep getting richer and the poor keep getting poorer, because the rich keep on doing what made them rich, and the poor keep on doing what made them poor

    • speedwell (propagandist and secular snarkist) says:

      Oh, right, that’s so goddamned realistic and enlightened of you. What planet do you live on? “Skipping college,” for Christ’s sake, many people never even get the choice to go in the first place for reasons your privileged self probably can’t even comprehend. And what “random choices” gave me a kidney infection so severe I had to have the entire organ removed? Did I somehow choose not to pee? Asshole.

  15. madanthony says:

    I’m not sure if this is an exact equivalent to a payday lender. The linked press release lists terms as “90 days or more”, while payday lenders are typically, I believe, 2 weeks (ie a typical pay period). That’s why the APR is so high – because it’s an interest rate for a two-week loan converted to an annual percentage rate. Granted, a lot of payday borrowers keep rolling their loans into new loans, so maybe it doesn’t matter, but I don’t think it’s quite the same.

    The other thing that separates these loans from payday lenders is accessibility. Payday lenders are open long hours and located in the neighborhoods that their borrowers are in. Banks often aren’t. My credit union’s hours are so bad that I pretty much need to either rearrange my schedule or take off from work if I actually need to do something in person.

    While it would be great if banks could find a way to make a profit on low dollar short term loans and provide a cheaper alternative to payday lenders, I can’t help but suspect if they could, they would have done it already.

    • DanRydell says:

      Yeah man, I remember hearing one woman tell her story on Suze Orman’s show. This woman would get a payday loan for $250 with $40 in interest and fees because she was depressed that she had no money, and she wanted to shop. She’d pay it back when she got her paycheck, but before the next paycheck she’d run out of money and she’d get another loan. So over a year she’d pay $1440 in interest to get $250 just a little earlier. It really was just one $250 loan that she had for the whole year; all she had to do was NOT take the loan one time to break the cycle, because then the next pay cycle she’d still have the $250 (+$40) that she would have used to pay back the previous loan. It still would have been stupid for her to blow that money on shopping, but it would have cost her a lot less.

      This woman was just terrible with finances in general. She also owed $50k on a Ford Expedition because she rolled a previous loan into her current car loan (that does not include future interest, which IIRC was 10+%). The vehicle was worth far less than that, but she HAD to sell it to get out from under that huge loan because her income was in the mid 30s.

  16. Greely says:

    I recently got 2100 dollars at 52% with like a 500 something credit score.

    I might be confused, but I was under the impression practically anyone could go to a bank and grab an unsecured loan.. Hence credit cards.

  17. JeremieNX says:

    I work for one of the major banks that offers what we call “Checking Account Advance”. The only customers eligible are people with a history of direct deposit and the loans never exceed $500 at any given time (amont customer qualifies is determined based upon amount of recent direct deposits with $500 as the max). Customers may only use it for up to 9 consecutive statement cycles before being cutoff.

    At 120% APR (think $10 for $100 borrowed), it is much cheaper and controlled than a payday lender.

  18. smo0 says:

    After having my life ruined by these places after my accident – I can say – it’s awesome there’s a safer alternative, and hopefully people will avoid my mistakes.

    Ultimately – I hope this will run these loan sharks out of business.

    • techphets says:

      Did the payday loan places ruin your life or did the way in which you used them do it?

      • smo0 says:

        I was in an accident and I took out loans to pay rent/bills.
        Two of them I had issues paying back due to my being on disability from my job and fighting with them to get a paycheck.

        When it came time for me to work out a payment arrangement (unlike everyone else) these two opted to garnish my wages, later, when I returned to work (having to get a new job).

        They refused to work with me and the laws were on their side, there was nothing I could do. Come to find, if you take out a loan – they can, at any given time, set up a wage garnishment to get their money back… THAT I was told by the Constable’s office.