Viewpoint: FDIC’s Bad Bet on Small-Dollar Lending – American Banker Article (subscription required)

This summer the FDIC issued a report documenting the first year of loan activity under its Small Dollar Loan Pilot Program. Despite the FDIC’s public relations posturing within the report, the actual data demonstrates a program that is destined for
failure.

…Rather than continuing to promote a program that seems destined to fail, the FDIC should use its experience from the pilot program to illustrate to members of Congress and the Obama administration that an arbitrary cap on small-dollar loans, such as a 36% APR ceiling, is unrealistic and would merely harm the industry segment that is already ably serving this market need. That, in turn, would cause considerable harm to consumers who choose small-dollar loans, such as payday advances, to address their credit needs when unexpected or emergency financial shortfalls occur. No one stands to gain if a void is created in the small-dollar-loan marketplace.

Much ado is being made about the FDIC’s pilot program to offer payday loan alternatives.  While the Payday Pundit believes consumers are better off when they have more options, not fewer, the alternatives being offered through the pilot program are by no means a silver bullet. We’ve been tracking these and here’s some of what we’ve found:

• All of the participating banks are small, community-based banks.
• When all fees and interest are added, the total cost of the loan is similar to that of traditional payday loans.  One bank charges a $10 fee to file the application, $15 for the financial literacy class (required) and 18% APR.
• Most, if not all, of the banks in program admit they are not making any money on the payday loan alternatives.
• Requirements and restrictions limit the number of customers who have access.  These include:
  • Minimum credit scores
  • Asking borrowers to pledge cars or other collateral
  • Attending Saturday afternoon financial literacy seminar
  • Opening a checking or savings account with a minimum balance