FDIC Pilot Program Explores Alternatives to Payday Loans

By Jordan Weissmann
Washington Post Staff Writer
Tuesday, August 12, 2008

Banks around the country have issued more than 3,000 small loans as part of a pilot program by the Federal Deposit Insurance Corp. exploring alternatives to payday lending.

Banking industry experts are calling it a significant first step in an attempt to find a less-predatory way to provide short-term credit. Payday loans require borrowers to sign over their next paycheck in return for a cash advance of a few hundred dollars with an interest rate often exceeding 390 percent.

Since January, the FDIC has tracked lending programs at 31 small to mid-size banks throughout out the United States, with the goal of figuring out how to make the loans profitable enough for more commercial banks to start marketing them.

"Our hope and our belief is that this can be done in a profitable way that works for even large institutions," said Andrew Stirling, who manages the program for the FDIC.

The loans, $2,500 or less, are issued under FDIC guidelines that cap their interest rates at 36 percent.

In the first quarter of 2008, the banks issued 3,140 loans, 1,535 of which were for less than $1,000. The average term was 10 months with a 15.05 annual percentage rate. The FDIC plans to announce its findings Thursday but previewed them to The Washington Post.

Banking industry experts are encouraged by the early numbers. "It's suggesting that these are customers who have some kind of roots, some kind of stability, people who are demonstrating an ability to keep making payments," said Wayne Abernathy, executive vice president for financial institutions policy at the American Bankers Association.

That sort of stability is important, Abernathy said, because bankers tend to view the low-income customers who need these products as risky, unreliable investments. He said the looming question is how many of these borrowers eventually will default.

Cutting through regulators' red tape will be another key to making the programs work, said Robert Rowe, senior regulatory counsel with the Independent Community Bankers of America.

Underwriting a $500 loan costs the same as a $50,000 loan, Rowe said, which makes it prohibitively expensive. Lending less than $5,000 can lose a bank money on administrative expenses. The FDIC is working with the banks to figure out ways to make sure the loans are profitable, including possibly changing the underwriting rules.

"There's a lot of potential here," Rowe said, referring to the FDIC program. "You want to protect the consumer. And you want to protect the bank. It's not going to work if they're losing money on it."

The banks in the study took different approaches to making the loans and vetting customers. Several required that borrowers open a checking or savings account.

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