Archive for July, 2010
The Results Are In
I actually commend the FDIC for its efforts in creating a banking product that is less expensive than accumulating overdraft fees as well as attempting to accommodate those with short-term and temporary lending needs. Of course the perceived success of the program is most definitely relative, especially since the goals and focus were abruptly changed when the program was still in its infancy. There was no way that the FDIC would let the program fail by their definition and thus recreated their descriptions relating to the Small-Dollar Loan Pilot. In the most basic sense, the Small Dollar Loan Pilot was not profitable and seemed to be considerably higher maintenance than its traditional counterpart the payday loan. The pilot program is labeled as being safe, affordable and feasible but based on the requirements and approval procedures what it is not is convenient, practical or non-invasive.
In summary, the Small Dollar Program allows individuals who are in need of small amounts of cash to apply for loans of $2500 or less at a maximum APR of 36%. However, there were several requirements which I believe made the program inconvenient, impractical and invasive, not to mention the forced relationship building aspect of it which, according to the FDIC warrants it being labeled a success. One of the most unattractive components of the Small-Dollar Loan Program is that applicants are subject to a credit check for this short-term loan, so if you’re not fortunate enough to have a fair credit score, this product wouldn’t even be an option for you. If the product is truly intended for cash-strapped individuals with few other credit options, then it seems unfair to base denial or approval on credit worthiness. The typical small dollar payday loan provides more ease because it does not require a credit check.
Another potential flaw with the design of the Small-Dollar Loan Program is that it is assuming that those who are in need of short-term credit don’t understand their finances and aren’t financially literate. This is not always the case and the applicant’s need may be a result of sudden reduction in income, unexpected increase in expenses for the month or a family emergency. It may not be because of financial neglect or misunderstanding. The hoops that potential customers had to jump through for a small loan may not have been worth the effort.
In addition to financial literacy classes and having to submit to a credit check, it was also procedure for some of the participating banking institutions to require applicants to open a savings account which is probably more for the purpose of solidifying the relationship than for customer security. It would be interesting to know what percentage of customers actually kept a balance in the savings account or made additional deposits to them.
It is also quite possible that the needs of those consumers who took advantage of the small dollar loan are different from those who take out payday loans. There were two loan categories that were created; the SDL or small dollar loan and the NSDL or nearly small dollar loan. SDL’s are principle loan amounts for less than $1,000 and NSDL’s are principle loan amounts for more than $1,000 but less than $2,500. The average SDL loan amount was around $700, which is about two times more than what payday loan customers take out. Check out the report at http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/FDIC_Quarterly_Vol4No2_SmallDollar.pdf
