The Federal Deposit Insurance Corporation last week approved a two-year pilot project to review “affordable and responsible” small-dollar loan programs in financial institutions, aiming to find replicable business models that other banks can follow.
“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 in a statement. The pilot project, called the Affordable and Responsible Consumer Credit initiative, “will be an important first step in filling the void that exists today.”
Key features of the pilot will include 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 FDIC said.
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. In order to participate, banks would have to be highly rated, well managed and well capitalized, and confirm that their proposed product meets consumer credit needs at a reasonable cost.
Participants will be selected from interested institutions based on information describing their small-dollar loan programs. They are expected to be named in the fall.
Also last week, the FDIC issued final guidelines to state nonmember banks in an attempt to encourage them to offer affordable small-dollar loan products to customers.
“Most products available in the market come at a high cost to consumers,” said Bair said in another statement. “Banks have tools and infrastructure to create products meeting this need that are beneficial to both the banks and their customers.”
The guidelines, which discuss tools such as financial education and linked savings accounts, explore several aspects of product development, including affordability and streamlined underwriting. According to a news release on the guidelines, FDIC’s goal is to help insured institutions better serve an “underserved and potentially profitable market while helping consumers avoid, or transition away from, reliance on high-cost debt.”
The guidelines also call for the encouragement of principal reduction; streamlined, risk-based underwriting; maximization of technology to lower the cost of providing credit; and collaboration with other financial institutions.
Established by Congress in 1933, the FDIC insures deposits at the nation’s 8,650 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The agency is financed entirely by fees from the insured institutions.
