BankNotes ...

Small-dollar Loan -- Pilot Study Results Are In

Posted by Wendell Brock on Wed, Jul 07, 2010

Creation of Safe, Affordable and Feasible Template for Small-Dollar Loans

Small-dollar loan pilot

The Small-dollar Loan Pilot Project was a study to find if it is profitable for banks to offer small-dollar loans to their customers. Small-dollar loans were created as an option to expensive payday loans, or heavy fee-based overdraft programs.  This study opened up opportunities for small-dollar loans to be more affordable.    

Small-dollar loans have created a way to maintain associations with current costumers and opportunities to attract unbanked new customers.

Goals: The main goal the FDIC had in mind for small-dollar loans was for banks to create long-lasting relationships with their customers using the product of small-dollar loans. Many banks had another goal in mind in addition to the FDIC’s goal. Some banks wanted to become more profitable by producing the product while other banks produced the product to create more goodwill in their community. 

Where and how the study started: The FDIC found 28 volunteer banks with total assets from $28 million to nearly $10 billion to use the new product, offering of small-dollar loans. All were found in 450 offices in 27 states. Now, in the pilot study there have been over 34,400 small-dollar loans that represent a balance of $40.2 million. 

Template for small-dollar loans: Loans are given with an amount of $2,500 or less, with a term of 90 days or more. The Annual Percentage Rate is 36 percent or less depending on the circumstances of the borrower. There are little to no fees and, underwriting follows with proof of identity, address, income, and credit report to decide the loan amount and the ability to pay. The loan decision will usually take less than 24 hours. There are also additional optional features of mandatory savings and financial education.  

Long loan term success: Studies found that having a longer loan term increased the amount of success in small-dollar loans. This allowed the customer to recover from any financial emergency by going through a few pay check cycles before it was time to start paying the loan back.  Liberty Bank in New Orleans, Louisiana offered loan terms to 6 months in order to avoid continuously renewed “treadmill” loans.  The pilot decided that a minimum loan term of 90 days would prove to be feasible.

Often the bank will require the customer to place a minimum of ten percent of the loan in a savings account that becomes available when the loan is paid off.

Delinquencies: In 2009 the delinquency rates by quarter for small dollar loans were 6.2 in the fourth, 5.7 in the third, 5.2 in the second, and 4.3 in the first.

How to be most successful when producing small-dollar loans: The FDIC is reporting that the participating banks have found much success through small-dollar loans. But the most success came from long term support from the bank’s board, and the senior management. It is critically important to have strong support coming from senior management.

The small-dollar loan pilot has proven to be a great addition to bank’s loan portfolio, the FDIC hopes that it will spread to banks outside the pilot.

Profitability may depend on location: The FDIC has found the most successful programs are in banks located in communities with a high population of low- and moderate-income, military, or immigrant households. Banks in rural areas that did not have many other financial service providers also saw feasibility because of the low amount of competition.

Improving performance: Automatic repayments are a way to improve performance for all products not just the small-dollar loans.



Topics: Bank, FDIC, banks, Pay Day Loans, Banking, Bank Risks, Small Dollar Loans, Bank Executives, Loans, market opportunity, bank customers, Bank Asset

Major Opportunity for De Novo Banks

Posted by Wendell Brock on Sat, May 03, 2008

According to a recent article by Douglas McIntyre on 247wallstreet a number of large banks are going to be closing branches, which makes good-sense, as the overhead can be a heavy burden. Closing branches for these mega banks is a good idea easing their cash flow and saving them money.

This can be a phenomenal opportunity for de novo bank projects in the industry.

One critical challenge in starting a bank is finding the real estate - some groups spend months, up to a year, to secure the right space. Many of these ‘closed' branches offer an opportunity to obtain ideal locations at lower price points. Depending upon the location you may be able to save quite a bit on your build out as well. Either way, organizers in the de novo market need to move smartly and capitalize on this opportunity

Aside from great locations during this industry adjustment there are going to be great bank employees and many customers searching for greener pastures.

By Wendell Brock 

April 28, 2008
Large Banks Beginning To Close Branch Locations (C)(WB)(WFC)(BAC)

Consumers and businesses are faced with two difficult problems as a result of major banks taking huge write-offs. The first is that, even though the Fed is chopping rates, lower interest loans are not making it to consumer or business lending departments. The banks have elected to use the money they get inexpensively from the Fed to improve their own balance sheets. They want to take as little lending risk as possible while the economy is still in trouble.

The other by-product of troubles at large money center banks like Citigroup (C), Wachovia (WB), Wells Fargo (WFC), and Bank of America (BAC) is that closing local branches is a fast way to bring down costs. Doing this without losing customers is somewhat easier because of online banking and ATMs.

Banks in the deepest have already begun the process. Washington Mutual (WM) plans to take out over 3,000 jobs in the short-term and Citigroup has said it will lay-off 9,000. Some of those jobs will be administrative, but these financial firms have huge numbers of people in location through-out the regions which they serve.

Bank of America operates 6,200 branches. Operating a local office can cost $1 million a year when employees, overhead, and rent are factored in. If the bank shuts 10% of its locations it can save over $600 million a year.

Mid-sized regional banks may be under even more pressure to cut costs. National City Corp (NCC) recently reported a huge loss and had to raise over $7 billion. It has eliminated its dividend and must now look for new places to take out costs. Regional bank Peoples recently closed 20 branches in one small section of Connecticut. Banks usually look for locations outside where their core customer "foot prints" are and shutter locations there.

To a large extent banks are willing to let some consumer and smaller business customers go. These groups tend to have high default rates in a recession. Individuals and companies with relatively small revenue often are in no position to weather a downturn in the economy and lending to these groups has already slowed to a crawl.

Businesses which have been under-served by banking institutions are about to see that situation get worse as banks which invested in risky assets try to save themselves from insolvency. Borrowing money has gotten tough, and it is about to get worse.

By Douglas A. McIntyre

Topics: Bank Opportunities, Community Bank, Bank Executives, Commercial Bank

Bank Executive Survey

Posted by Wendell Brock on Sat, Apr 26, 2008

Survey by Grant Thornton

The results are in and the outlook is bleak. Grant Thornton's 15th annual survey of bank executives indicates that bankers are gloomier than ever about the economy. Only 1 in 10 bankers surveyed claimed to be optimistic about the economy, while 54 percent were pessimistic. In the survey's 15-year history, the numbers have never been this extreme. Just three years ago, for example, only 3 percent of bankers said they were pessimistic.
Many bankers are waiting for the real estate market to hit bottom and for the credit crisis to pass. At the same time, they're hoping they will be able to weather the storm. Sixty-four percent of bankers believe that the bottom will come after May, 2008. Another 17 percent are looking to 2009, indicating that the bottom won't come until after the close of this year. The housing bubble has been damaging to the banks. Homeowners have borrowed all their equity out through home equity loans; when the home values dropped, the equity was erased and banks were left under-collateralized. For March, the ABA reported a housing price decline of 3.6 percent from February, the fifth consecutive monthly decline.
George Mark and John Ziegelbauer of Grant Thornton predict that bankers will "tighten down the ship-tightening the underwriting and build liquidity." Many are getting back to the basics, citing the need to get to know their customers better as part of the solution. It's a smart move, one that will help the banks comply with the regulations, while enhancing cross-selling efforts.
Bankers are concerned about obtaining new customers while taking care of the ones they have. Credit unions pose a competitive threat, particularly with respect to business customers, which have traditionally been a core customer segment for banks. Maybe a renewed bank focus on customer service will result in depositors and borrowers feeling truly valued by their bank once more!
Bank capital is also in short supply and it is harder to raise capital in this difficult environment. Investors are looking for full disclosure of all the risks, including the loan portfolio and liquidity risks. When capital dries up, it's more expensive to acquire. Many banks are trading at or below book value, which, to the banker, makes it very hard to sell stock and let people in for such a discount.
All of these factors and many more are putting pressure on bank boards to understand what is going on in their own banks. Directors need to be proactive about uncovering any problems, rather than waiting for the regulators to find them. If the regulators find problems, it says two things: 1) the board does not understand what is happening at the bank, and 2) the bank does not have proper controls in place.
To download a full copy of the survey, simply click on the link.

Summary by Wendell Brock, MBA, ChFC 

Topics: Bank Executives, Commercial Bank, Grant Thornton

Subscribe by Email

Most Popular

Browse By tag

To Obtain a White Paper


BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at