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.