FiSCA Issues Critique of FDIC Small Dollar Loan Program: Shortcomings Cited in the Report Underscore Challenges Banks Face in Serving Consumers Needing Small Dollar, Short-Term Loans Rather than 'Recreate the Wheel,' Marketplace is Better Served by Existing Small Dollar Loan Alternatives
HACKENSACK, N.J., Nov. 16 /PRNewswire/ -- The Federal Deposit Insurance Corporation's (FDIC) two-year small dollar loan pilot program is proving to be a failure after one year, according to a recent critique of the program issued by Financial Service Centers of America (FISCA). As reflected in a mid-term report published by the FDIC, titled "The FDIC's Small-Dollar Loan Pilot Program: A Case Study after One Year," banks are unwilling to and cannot serve the small dollar credit needs of millions of Americans -- many of whom live paycheck-to-paycheck. This is true, despite incentives provided by the FDIC to stimulate participation in its program.
The FDIC pilot program, which was launched in February 2008, was intended to be a stimulus for banks to create a competing product to what the agency perceives as "high-cost financial products," such as payday loans and overdraft protection. The FDIC had hoped that the pilot would serve as a model for replicable business practices that other banks can incorporate into profitable small-dollar loan programs. However, the FDIC's mid-term report reveals quite the opposite. In fact, the report highlights the shortcomings of the program and, by extension, illustrates the continuing advantage of allowing the marketplace to determine how best to satisfy consumers' needs for small dollar credit. The most significant flaws of the FDIC pilot program, as highlighted in FiSCA's critique, include:
- The pilot program's volume of small dollar loans has been extremely low. The 446 participating banks only made approximately 8,346 loans that fell within the FDIC's prescribed limit of $1,000. This is roughly one loan every 20 days per participating branch. In contrast, according to a 2005 study published by the FDIC Center for Financial Research, titled: "Payday Lending: Do the Costs Justify the Price?", a single mature payday loan store makes, on average, 8,743 loans per year.
- A 36% APR ceiling on small dollar loans is a deterrent. Unless a bank is willing to accept a SDL program as a loss leader, a loan product with a 36% APR ceiling generally is not profitable or scalable.
- The pilot program is showing that banks are not interested in cannibalizing their overdraft programs. As the FDIC noted in a November 2008 report ("A Study of Overdraft Programs"), banks rely on fees associated with their overdraft programs -- revenues that would significantly diminish if these traditional lending institutions started offering small dollar loans at scale. Thus, there is little real incentive for banks to participate in this program and to enter the small dollar loan market.
"This pilot program is destined for failure, not success," said FISCA Chairman Joseph Coleman. "If anything, it points to the critical role that financial service centers play in the small dollar credit arena by servicing consumers' need for this type of credit."
The complete FiSCA critique is available by visiting www.fisca.org.
FiSCA, founded in 1987, is the national trade association for more than 6,500 individual financial service centers across the United States. FiSCA members provide a wide variety of financial services and products to their communities, including check cashing, money orders, money transfers, and electronic bill payment services, automatic teller machine access, government benefit and payroll payments, small dollar short-term loans, electronic tax preparation, prepaid debit cards, deposit acceptance services, public transportation fare and token sales, motor vehicle license plate and title distribution, postage stamp sales and numerous other services. For more information, please visit www.fisca.org.