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Banks Are Allowed To Compete With Pay Day Lenders

Posted by Wendell Brock on Wed, Jun 20, 2007

The FDIC wrote some guidelines which will allow and encourage banks to offer "small dollar loans" to consumers in an effort to help them compete with pay day lenders and other businesses that offer these types of loans.

The Federal Deposit Insurance Corporation (FDIC) today issued final guidelines to state nonmember banks encouraging them to offer affordable small-dollar loan products and to promote these products to their customers. FDIC-supervised institutions that offer products which comply with consumer protection laws, and are structured in a responsible, safe and sound manner, may receive favorable consideration under the Community Reinvestment Act (CRA).

"Despite the tremendous demand for small-dollar, unsecured loans, most products available in the market come at a high cost to consumers," said FDIC Chairman Sheila C. Bair. "Banks have the tools and infrastructure to create products meeting this need that are beneficial to both the banks and their customers."

Key features of a preferred small-dollar lending program include:

  • Loan amounts of up to $1,000;
  • Amortization periods longer than a single pay cycle and up to 36 months for closed-end credit, or minimum payments that reduce principal (i.e., do not result in negative amortization) for open-end credit;
  • Annual percentage rates (APR) below 36 percent;
  • No prepayment penalties;
  • Origination and/or maintenance fees limited to the amount necessary to cover actual costs; and
  • An automatic savings component.

Topics: FDIC, Pay Day Loans, Small Dollar Loans, Bank Policies

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