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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

Unbanked and Underbanked Americans - Who Are They?

Posted by Wendell Brock on Thu, Dec 03, 2009

The U.S. Census Bureau conducted a National survey this year on behalf of the FDIC to ascertain the level of Unbanked and Underbanked households in the United States. The survey was designed to help the FDIC understand who is outside the banking system. The study which is the most comprehensive to date, reveals that just over a fourth (25.6 percent) of the households in the U.S. are unbanked or underbanked and those households are largely low-income and/or minority.

The survey additionally collected more accurate estimates of the Unbanked and Underbanked Households, and reasons why the people remain unbanked or underbanked. The survey estimates, represent the first time this kind of data has been collected in large metropolitan statistical areas (MSA), states, and across the nation.

"Access to an account at a federally insured institution provides households with an important first step toward achieving financial security - the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on affordable terms," stated Sheila Bair, Chairman of the FDIC. "By better understanding the households that make up this group - who they are and their reasons for being unbanked or underbanked, we will be better positioned to help them take that first step."

Terms

Unbanked is determined by households who answered "no" to the question "Do you or does anyone in your household currently have a checking or a savings account?"

Underbanked households were determined by those who have a checking or savings account but rely on alternative financial services. Specifically, using money orders, nonbank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or tax refund anticipation loans at least once in the past five years.

Key Findings of the Study

  • Of the households surveyed, 7.7 percent were unbanked, which translates nationally to 9 million households - approximately 17 million adults. An additional 17.9 percent - or 21 million households nationally (approximately 43 million adults) - were found to be underbanked.
  • The proportion of U.S. households that are unbanked varies considerably across racial and ethnic groups with certain racial and ethnic groups being more likely to be unbanked than the population as a whole. Minorities more likely to be unbanked include blacks (21.7 percent of black households), Hispanics (19.3 percent), and American Indian/Alaskans (15.6 percent). Racial groups less likely to be unbanked are Asians (3.5 percent) and whites (3.3 percent).
  • Certain racial and ethnic minorities are more likely to be underbanked than the population as a whole. Minorities more likely to be underbanked include blacks (an estimated 31.6 percent), American Indian/Alaskans (28.9 percent), and Hispanics (24.0 percent). Asians and whites are less likely to be underbanked (7.2 percent and 14.9 percent, respectively).
  • Households with income under $30,000 account for at least 71 percent of unbanked households. As income increases, the share of households that are unbanked declines considerably. Nationally, nearly 20 percent of lower-income U.S. households - almost 7 million households earning below $30,000 per year - do not currently have a bank account. In contrast, only 4.2 percent of households with annual income between $30,000 and $50,000 and less than 1 percent of households with yearly income of $75,000 or higher are unbanked.
  • Households with an annual income between $30,000 and $50,000 are almost as likely as lower-income households to be underbanked.

This survey goes hand in hand with a survey the FDIC conducted earlier in the year of bankers efforts to serve the unbanked and underbanked households in their community, see FDIC's Unbanked Survey. The survey is of such important information to the FDIC that they created a special website to display the findings at online at www.economicinclusion.gov.

It appears that the unbanked and underbanked households are close to the same number of estimates of those without proper medical insurance. Is there a correlation here? Is this something congress should be addressing - making sure that every American has proper banking and financial services?

Topics: FDIC, underserved communities, underserved areas, Pay Day Loans, Banking, Unbanked customers, FDIC’s, Unbanked, Underbnked, banker's survey

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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