36% “Small-Dollar Loan” Not Profitable For Banks…No Kidding
The FDIC small dollar loan pilot program was a development which was launched as a trial to determine the feasibility of banks offering a short term, small-dollar loan alternative at a 36% annual percentage rate. For many of us who are in the financial services industry, especially those who understand the costs and risks associated with offering small-dollar loans, the preliminary results were no surprise. The FDIC decided to change its focus of the program to observing and reporting how banks can successfully offer affordable small-dollar instead of assessing the profitability. If for-profit lenders are only able to gross $1. 38 for every $100 lent, there is absolutely no way the businesses would be able to stay afloat.
With the FDIC pilot program, there were a number of items and reporting which suggested that a full-fledged program wouldn’t be sustainable long-term in the banking environment. In addition, the program doesn’t seem to appeal to the same customer base as those of payday lenders. In the first year, participating banks originated 16,027 and nearly half of those loans were in amounts in excess of $1,000. The average amount of all loans made under $1,000 was still $659.42, which is about twice the average of loans made by traditional payday loan institutions. Another problem with the pilot program is that banks were pulling FICO scores to determine eligibility which is not a procedure commonly found within the payday loan industry, making it more difficult for individuals to qualify. One of the participating banks only approved 14% of the applications in the first two months of the program, denying 493 of the 574 received.
The preliminary results prompted the FDIC to encouraging the banks to use it as a relationship-building tool in which to suggest other products and services. The FDIC also considered the loans as part of the banks Community Reinvestment Act lending activities. In other words, the service will be used to help expand relationships and expand credit to low and moderate income neighborhoods but is not necessarily considered a profitable product.
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