Payday Loans, Government Subsidies and the FDIC’s Small-Dollar Loan Pilot Program

By | Jul 15, 2009

What a joke! The FDIC’s Small-Dollar Loan Pilot Program!

First they state, “It’s a two year study to illustrate how banks
can profitably offer affordable small dollar loans as an
alternative to high-cost credit products, such as payday loans and
fee-based overdraft protection.”

In the next paragraph they write, “Only a few participating banks
have indicated that short-term profitability is the primary goal for
their small-dollar loan programs.”

“Only a few participating banks have indicated that short-term
profitability is the primary goal for their small-dollar loan
programs. Rather, most pilot banks are using the small-dollar loan
product as a cornerstone for long-term relationship-building that
also creates good-will in the community. Moreover, a few banks’
business models focus exclusively on building goodwill and generating
an opportunity for positive Community Reinvestment Act (CRA)
consideration.”

“Regardless of business model, all of the banks have indicated that
small-dollar lending is something they believe they should be doing
to serve their communities.”

So… in other words if the banks in the study didn’t have to deal
with the CRA or have the possibility of feeding these small-dollar
customers to the bank’s over-draft fees and NSF fees products they
would not touch these customers. “There is no profit in actual
small-dollar loans for them!”

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The FDIC Small-Loan Pilot Program featured the following:
The primary loan product features described in the SDL Guidelines
include the following:

– Loan amounts up to $1,000

– Payment periods beyond a single paycheck cycle

– Annual percentage rates (APRs) below 36 percent

– Low or no origination fees

– Streamlined underwriting

– Prompt loan application processing

– Automatic savings component

– Access to financial education

In addition, while several participating banks require automatic
savings linked to small-­dollar loans, others encourage but do not
require savings.

They go on to say, “Given the small size of SDLs (Small Dollar
Loans) and to a lesser extent, NSDLs (Non-Small Dollar Loans), the
interest income and fees generated are often not sufficient to achieve
short-term profitability. Nevertheless, banks with existing programs
have been able to generate long-term profitability through volume and
by using the SDL and NSDL products to cross-sell additional products.”

The above statement makes a lot of sense – NOT! “The interest
income and fees generated are not sufficient to achieve short-term
profitability… banks have been able to generate long-term profitability
through volume…”

So, I guess that means if I sell loaves of bread at $1.00 each and
each loaf costs me $1.50 each I’ll achieve long-term profitability
by increasing my bread loaf sales volume? No, that can’t be right!
Oh wait! I get it. If I received a bank charter from the government
and in order to continue to receive low interest rate government
money I must keep my local consumer protectionist (CRL) off my butt
then I’ll lose money on every loaf of bread BUT long-term I’ll move my
bread customers to my higher priced cup cakes (over draft fees and
NSF fees).

Or, maybe my strategy is to sell my bread loaves at a loss until all
my bread competitors are gone? Then I own the entire bread market (no more
payday loans available so the only micro-loans available are via NSF’s
and overdraft fees from the banks)?

Now, let’s get back to, “Nevertheless, banks with existing programs
have been able to generate long-term profitability through volume
and by using the SDL and NSDL products to cross-sell additional
products.” And what are “these cross-sell additional products?”
“The most commonly cross-sold products were checking accounts.”

Now we’re back to overdraft and NSF fees! WOW! WHAT A SURPRISE!

We know from previous studies, NOT SPONSORED BY CRL
http://www.responsiblelending.org/ of course, NSF fees average $28.23,
according to http://www.bankrate.com .

Moebs Services, an economic research firm, estimates that NSF fees
account for 18% OF THE NET OPERATING INCOME OF BANKS AND 60% OF
CREDIT UNIONS OPERATING INCOME! That is unreal!!
See “Why Banks and Credit Unions Hate Payday Loans” at
http://paydayloanindustryblog.com/why-banks-credit-unions-hate-payday-loans/

Here’s a typical case study of this FDIC Pilot Program as
implemented by Citizens Trust. “Beginning in early 2008, through its
Columbus office only, Citizens Trust Bank targeted military personnel
at Fort Benning exclusively for its SDL product. After several months
of advertising in the Bayonet, the Fort Benning newspaper, and airing
radio advertisements, the bank originated only a few of the military
targeted SDLs.”

“Originations were hampered by competition from programs offered on
the military base that had already gained a large share of the market
among Fort Benning consumers.”

Did you pick up on this? “Originations were hampered by
competition…”
How @#$%$%%^% ridiculous! The Citizens product
didn’t appeal to the military personnel. They preferred payday loans!
Why you ask? Look at this!

“As a result of low loan volumes, management decided to
significantly change its program by expanding the target market
beyond military personnel to include the general public. In December
2008, the bank began offering a new small-dollar product called the
“Community Relief Loan” at all of its branches. Citizens Trust Bank
primarily used radio advertising and signs in bank branches to
promote the product. According to Citizens Trust Bank’s Assistant
Vice President and Director of Consumer Lending Sharnell W. Reynolds,
in the first two months of the program, the Community Relief Loan
campaign had generated 574 applications and 81 originations totaling
more than $116,000. “

That’s a pathetic 14% approval rate! Why were only 14% of the
applicants approved?

Let’s take a look at the Citizen’s Trust loan requirements and
procedures:
“The Community Relief Loan ranges from $500 to $1,500.
Each loan carries a $48 origination fee, and the interest rate is 15
percent. The maximum term on a $500 Community Relief Loan is six
months; one year is the maximum term on larger loans. To qualify,
borrowers must have a FICO credit score of at least 500, proof of
regular income for six months, no outstanding liens or judgments, and
have been at their current address for at least one year. The bank
also has alternative under-writing processes to accommodate
prospective borrowers with thin or no credit histories. The maximum
loan amount for these applicants is $500, and they must provide proof
of employment for the previous six months and show an alternate form
of good credit history. For instance, borrowers might provide proof
that they have paid their rent or utility bills on time for the
previous six months.”

“The loan approval process is decentralized and managed at each of
the bank’s ten branches by Financial Relationship Managers. Each
Financial Relationship Manager has Community Relief Loan approval
authority and uses a standard underwriting checklist to guide routine
application determinations. Those who recommend exceptions to the
checklist guidelines route their requests to the corporate offices in
Atlanta. With or without an exception, it generally takes less than
24 hours from the time an application is submitted to deliver a check
to an approved borrower. If all of the required borrower documentation
is on hand at the time an application is submitted, same-day delivery is
possible.”

“Unlike the military-focused loan program that required linked
savings accounts, linked savings are optional under the Community
Relief Loan program.”

“Nevertheless, in the first two months of the program, Community
Relief Loan customers had opened a total of 52 new savings and
checking accounts. Borrowers are strongly encouraged to authorize
automatic debits of loan payments from a savings or checking account.
Although none of the loans were delinquent or in default as of the
fourth quarter, the program is still very new.”

DOES OUR TYPICAL PAYDAY LOAN CONSUMER, LOOKING FOR A QUICK,
NO-HASSLE, SHORT-TERM FINANCIAL PRODUCT REALLY WANT TO DEAL WITH
ALL THIS?

OK, so here is their Conclusion:

“After one year, the FDIC’s Small-Dollar Loan Pilot Program has
provided evidence that banks can offer reasonably priced
alternatives to high-cost, short-term credit. Most participating banks
have determined that using SDL and NSDL products as a cornerstone for
building long-term profitable relationships is the most feasible
business model. Some banks believe that their location, underwriting
processes, and pricing structures will allow for short-term
profitability. Others focus solely on providing a service to the
community by ensuring that reasonably priced credit is available to
a broad range of consumers. The FDIC will continue to explore the
feasibility of participant banks’ programs as the pilot continues
over the next year. Banks and others interested in the pilot can
contact the FDIC at smalldollarpilot@fdic.gov.”

I wonder if it ever occurred to the FDIC to simply interview actual
customers as they leave real payday loan stores and those leaving
any of the banks participating in this FDIC Pilot Program? Nope!
They’re fearful of what will be revealed! Payday loans, rent-to-own,
buy-here-pay-here, pawn shops, checkcashers… in other words,
Micro-Lenders know their customers and will continue to offer products
and services that serve them! That is if we’re allowed to! And if
our products and services don’t make sense to our customers, we’ll be
out of business.

We don’t need government subsidies to exist! Our customers, by the
millions every year, prove we have products and services they want!

What do you think? Should the government be involved? Should the
government subsidize your competitors?

Let me know!
Jer@PaydayLoanIndustry.com

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1 Comment so far
  1. Bill July 17, 2009 12:23 am

    Government can’t run anything! Stop subsidizing specific players in the market place and let consumers decide which companies will prosper and which ones will fail.

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