Small-Dollar Loan Pilot Results Released Pilot Study Results in Creation of Safe, Affordable and Feasible Template for Small-Dollar Loans
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FDIC Quarterly
28
2010, Volume 4, No. 2
cycle for payday loans, or the immediate repayment
often required for fee-based overdrafts.
FDIC Chairman Sheila C. Bair has expressed a desire to
determine how safe and affordable small-dollar lending
can be expanded and become more of a staple product
for all banks.2 Pilot banks have demonstrated that the
Safe, Affordable, and Feasible Small-Dollar Loan
Template is relatively simple to implement and requires
no particular technology or other major infrastructure
investment. Moreover, adoption of the template could
help banks better adhere to existing regulatory guidance
regarding offering alternatives to fee-based overdraft
protection programs.3 Specifically, this guidance
suggests that banks should “monitor excessive consumer
usage (of overdrafts), which may indicate a need for
2 See opening comments from FDIC Chairman Sheila C. Bair at the
December 2, 2009, FDIC Advisory Committee on Economic Inclusion
Meeting, at http://www.vodium.com/MediapodLibrary/index.asp?
library=pn100472_fdic_advisorycommittee&SessionArgs=0A1
U0100000100000101.
3 “Overdraft Protection Programs, Joint Agency Guidance,” Financial
Institution Letter, February 18, 2005, http://www.fdic.gov/news/news/
financial/2005/fil1105.html.
Introduction
The Federal Deposit Insurance Corporation’s (FDIC)
two-year Small-Dollar Loan Pilot Program concluded in
the fourth quarter of 2009. The pilot was a case study
designed to illustrate how banks can profitably offer
affordable small-dollar loans as an alternative to high-
cost credit products such as payday loans and fee-based
overdraft programs.1 This article summarizes the results
of the pilot, outlines the lessons learned and the poten
tial strategies for expanding the supply of affordable
small-dollar loans, and highlights pilot bank successes
through case studies.
Since the pilot began, participating banks made more
than 34,400 small-dollar loans with a principal balance
of $40.2 million
loans and fee-based
overdraft programs.1 This article summarizes the results
of the pilot, outlines the lessons learned and the poten
tial strategies for expanding the supply of affordable
small-dollar loans, and highlights pilot bank successes
through case studies.
Since the pilot began, participating banks made more
than 34,400 small-dollar loans with a principal balance
of $40.2 million. Overall, small-dollar loan default rates
were in line with default rates for similar types of unse
cured loans. A key lesson learned was that most pilot
bankers use small-dollar loan products as a cornerstone
for building or retaining long-term banking relation
ships. In addition, long-term support from a bank’s
board and senior management was cited as the most
important element for programmatic success. Almost all
of the pilot bankers indicated that small-dollar lending
is a useful business strategy and that they will continue
their small-dollar loan programs beyond the pilot.
A Safe, Affordable, and Feasible Template for
Small-Dollar Loans
The pilot resulted in a template of essential product
design and delivery elements for safe, affordable, and
feasible small-dollar loans that can be replicated by
other banks (see Figure 1). While each component of
the template is important, participating bankers
reported that a longer loan term is key to program
success because it provides more time for consumers to
recover from a financial emergency than the single pay
1 See previous articles on the Small-Dollar Loan Pilot Program,
“An Introduction to the FDIC’s Small-Dollar Loan Pilot Program,”
FDIC Quarterly 2, no. 3 (2008), http://www.fdic.gov/bank/analytical/
quarterly/2008_vol2_3/2008_Quarterly_Vol2No3.html; and “The FDIC’s
Small-Dollar Loan Pilot Program: A Case Study after One Year,”
FDIC Quarterly 3, no. 2 (2009), http://www.fdic.gov/bank/analytical/
quarterly/2009_vol3_2/smalldollar.html
llar Loan Pilot Program,
“An Introduction to the FDIC’s Small-Dollar Loan Pilot Program,”
FDIC Quarterly 2, no. 3 (2008), http://www.fdic.gov/bank/analytical/
quarterly/2008_vol2_3/2008_Quarterly_Vol2No3.html; and “The FDIC’s
Small-Dollar Loan Pilot Program: A Case Study after One Year,”
FDIC Quarterly 3, no. 2 (2009), http://www.fdic.gov/bank/analytical/
quarterly/2009_vol3_2/smalldollar.html.
Feature Article:
A Template for Success:
The FDIC’s Small-Dollar Loan Pilot Program
Figure 1
A Safe, Affordable, and Feasible Template
for Small-Dollar Loans
Product Element
Parameters
Amount
$2,500 or less
Term
90 days or more
Annual Percentage
Rate (APR)
36 percent or less
Fees
Low or none; origination and other
upfront fees plus interest charged
equate to APR of 36 percent or less
Underwriting
Streamlined with proof of identity,
address, and income, and a credit
report to determine loan amount and
repayment ability; loan decision within
24 hours
Optional Features
Mandatory savings and financial
education
Source: FDIC.
FDIC Quarterly
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2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
most programs would be consistent with the Affordable
Small-Dollar Loan Guidelines (SDL Guidelines), but it
offered banks some flexibility to encourage innovation.5
The pilot was a case study and does not represent a
statistical sample of the banking universe. Pilot bankers
provided some basic information about their programs
each quarter.6 Some data, such as number and volume
of loans originated, were relatively straightforward to
obtain and aggregate. To obtain more subjective or
5 FDIC, “Affordable Small-Dollar Loan Guidelines,” news release, June
19, 2007, http://www.fdic.gov/news/news/press/2007/pr07052a.html
l sample of the banking universe. Pilot bankers
provided some basic information about their programs
each quarter.6 Some data, such as number and volume
of loans originated, were relatively straightforward to
obtain and aggregate. To obtain more subjective or
5 FDIC, “Affordable Small-Dollar Loan Guidelines,” news release, June
19, 2007, http://www.fdic.gov/news/news/press/2007/pr07052a.html.
The primary product features described in the guidelines included loan
amounts up to $1,000, payment periods beyond a single paycheck
cycle, annual percentage rates below 36 percent, low or no origination
fees, streamlined underwriting, prompt loan application processing,
an automatic savings component, and access to financial education.
6 The information collection request complied with the Paperwork
Reduction Act; it did not include account-level information, in accor
dance with the Right to Financial Privacy Act. See the Federal Register
citation at http://www.fdic.gov/regulations/laws/federal/2007/07notice
June7.html for a description of the information collection process.
alternative credit arrangements or other services, and
inform consumers of these available options” that could
include small-dollar credit products.
Background
The Small-Dollar Loan Pilot Program pilot began with
31 banks, and several banks entered and exited as the
pilot progressed. The pilot concluded with 28 partici
pating banks ranging in size from $28 million to nearly
$10 billion (see Table 1). The banks have more than
450 offices across 27 states. Before being accepted into
the pilot program, banks had to submit an application,
describe their programs, and meet certain supervisory
criteria.4 About one-third of the banks in the pilot had
existing small-dollar loan programs at the time of their
applications, while the rest instituted new programs in
conjunction with the pilot. The FDIC anticipated that
4 “An Introduction to the FDIC’s Small-Dollar Loan Pilot Program”
described pilot program application parameters
n,
describe their programs, and meet certain supervisory
criteria.4 About one-third of the banks in the pilot had
existing small-dollar loan programs at the time of their
applications, while the rest instituted new programs in
conjunction with the pilot. The FDIC anticipated that
4 “An Introduction to the FDIC’s Small-Dollar Loan Pilot Program”
described pilot program application parameters. See footnote 1.
Table 1
Small-Dollar Loan Pilot Program Participants
Bank
Location
Total Assets ($000s)
Number of Branches
Amarillo National Bank
Amarillo, TX
2,792,382
16
Armed Forces Bank
Fort Leavenworth, KS
862,852
52
Bank of Commerce
Stilwell, OK
93,672
3
BankFive
Fall River, MA
708,545
13
BankPlus
Belzoni, MS
2,144,987
61
BBVA Bancomer USA*
Diamond Bar, CA
139,327
25
Benton State Bank
Benton, WI
45,780
3
Citizens Trust Bank
Atlanta, GA
387,130
11
Citizens Union Bank
Shelbyville, KY
715,927
18
Community Bank of Marshall
Marshall, MO
98,478
6
Community Bank - Wheaton/Glen Ellyn
Glen Ellyn, IL
340,628
4
The First National Bank of Fairfax
Fairfax, MN
27,539
1
Kentucky Bank
Paris, KY
676,239
15
Lake Forest Bank & Trust
Lake Forest, IL
1,816,422
8
Liberty Bank and Trust Company
New Orleans, LA
423,624
24
Liberty National Bank
Paris, TX
245,262
3
Mitchell Bank
Milwaukee, WI
73,623
5
National Bank of Kansas City
Overland Park, KS
708,191
6
Oklahoma State Bank
Guthrie, OK
43,228
4
Pinnacle Bank
Lincoln, NE
2,538,702
57
Red River Bank
Alexandria, LA
795,889
16
State Bank of Alcester
Alcester, SD
94,263
1
State Bank of Countryside
Countryside, IL
913,111
6
The Heritage Bank
Hinesville, GA
982,012
32
The Savings Bank
Wakefield, MA
417,081
9
Washington Savings Bank
Lowell, MA
164,724
3
Webster Five Cents Savings Bank
Webster, MA
559,762
8
Wilmington Trust
Wilmington, DE
9,609,666
44
Source: FDIC.
Note: Data as of fourth quarter 2009.
*BBVA Bancomer USA merged into Compass Bank (Birmingham, AL) in September 2009. Data shown are the latest available for BBVA, as of June 30, 2009.
e, GA
982,012
32
The Savings Bank
Wakefield, MA
417,081
9
Washington Savings Bank
Lowell, MA
164,724
3
Webster Five Cents Savings Bank
Webster, MA
559,762
8
Wilmington Trust
Wilmington, DE
9,609,666
44
Source: FDIC.
Note: Data as of fourth quarter 2009.
*BBVA Bancomer USA merged into Compass Bank (Birmingham, AL) in September 2009. Data shown are the latest available for BBVA, as of June 30, 2009.
FDIC Quarterly
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2010, Volume 4, No. 2
Loan Characteristics
While the application process did not preclude open-
ended credit, all banks in the pilot offered only closed-
end installment loans. Basic loan characteristics, such as
interest rates, fees, and repayment terms, did not vary
between large and smaller originators. Therefore, there is
no distinction made for origination volume in the fourth-
quarter loan characteristics data shown in Table 4.
Loan terms remained fairly consistent from quarter to
quarter. For example, the average loan amount for SDLs
was approximately $700, and the average term was 10 to
12 months. The average loan amount for NSDLs was
approximately $1,700, and the average term was 14 to
16 months. Average interest rates for both types of loans
ranged between 13 and 16 percent, and the most
common interest rate charged was 18 percent. About
half of the banks charged an origination fee (the average
fee was $31 for SDLs and $46 for NSDLs), and when
this fee was added to the interest rate, all banks were
within the targeted 36 percent annual percentage rate.
Loan Performance
The delinquency ratio for SDLs climbed to 11 percent
in fourth quarter 2009 from a relatively stable rate of
about 9 percent for much of 2009.7 The fourth quarter
increase in SDL delinquencies is attributed largely to
adverse economic conditions in bank communities. The
delinquency ratio for NSDLs has also been high, though
somewhat volatile, again due to adverse local economic
conditions
e
The delinquency ratio for SDLs climbed to 11 percent
in fourth quarter 2009 from a relatively stable rate of
about 9 percent for much of 2009.7 The fourth quarter
increase in SDL delinquencies is attributed largely to
adverse economic conditions in bank communities. The
delinquency ratio for NSDLs has also been high, though
somewhat volatile, again due to adverse local economic
conditions. As of fourth quarter 2009, the NSDL delin
quency ratio was 9.4 percent compared with 10.9
percent in the third quarter, 6.4 percent in the second
quarter, and 6.6 percent in first quarter 2009. Delin
7 Delinquency refers to loans 30 days or more past due.
otherwise difficult-to-quantify information, the FDIC
held periodic one-on-one discussions and group confer
ence calls with bank management.
The pilot tracked two types of loans: small-dollar loans
(SDLs) of $1,000 or less and nearly small-dollar loans
(NSDLs) between $1,000 and $2,500. Data collection
was initially concentrated in the SDL category, in
accordance with the SDL Guidelines. Data collection
was expanded for the NSDL category after the first year
of the pilot, when some bankers relayed to the FDIC the
importance of these loans to their business plans. In
particular, they indicated that some of their customers
needed and could qualify for larger loans and that these
loans cost the same to originate and service as SDLs, but
resulted in higher revenues. Some bankers conducted
only SDL or NSDL programs, and some conducted both
types. In this article, the terms “small-dollar lending”
and “small-dollar loans” refer to banks’ overall programs,
regardless of which category of loan they originated.
Pilot Results
During the two-year pilot, participating banks made
more than 18,100 SDLs with a principal balance of
$12.4 million and almost 16,300 NSDLs with a princi
pal balance of nearly $27.8 million (see Table 2)
d both
types. In this article, the terms “small-dollar lending”
and “small-dollar loans” refer to banks’ overall programs,
regardless of which category of loan they originated.
Pilot Results
During the two-year pilot, participating banks made
more than 18,100 SDLs with a principal balance of
$12.4 million and almost 16,300 NSDLs with a princi
pal balance of nearly $27.8 million (see Table 2). As
of the end of the pilot in fourth quarter 2009, 7,307
SDLs totaling $3.3 million and 7,224 NSDLs totaling
$9.2 million were outstanding. Quarterly origination
volumes were affected by seasoning of newer programs,
periodic changes some banks made to their programs,
banks exiting and entering the pilot, seasonality of
demand, and local economic conditions.
Loan Volume
Table 3 shows loan volume data for fourth quarter 2009
by originator size. Because several banks with long-
standing programs had disproportionately large origina
tion volumes, results for banks originating 50 or more
loans per quarter were isolated from the rest of the group
to prevent skewing the loan volume. Interestingly,
several banks with new programs produced enough
volume to move into the large originator category.
Smaller originators made, on average, 10 SDLs in
fourth quarter 2009, compared with 9 SDLs in the third
quarter, 13 SDLs in the second quarter, and 15 SDLs in
the first quarter. Smaller originators made, on average,
11 NSDLs in fourth quarter 2009, versus 18, 13, and 13
loans in the third, second, and first quarters of 2009,
respectively
gh
volume to move into the large originator category.
Smaller originators made, on average, 10 SDLs in
fourth quarter 2009, compared with 9 SDLs in the third
quarter, 13 SDLs in the second quarter, and 15 SDLs in
the first quarter. Smaller originators made, on average,
11 NSDLs in fourth quarter 2009, versus 18, 13, and 13
loans in the third, second, and first quarters of 2009,
respectively.
Table 2
Small-Dollar Loan Pilot Program
Cumulative Statistics
SDL Originations
NSDL Originations
Number
Amount ($)
Number
Amount ($)
1Q08
1,523
1,013,118
1,617
2,696,996
2Q08
2,388
1,495,661
1,918
3,202,358
3Q08
2,225
1,502,456
2,113
3,651,934
4Q08
2,210
1,492,273
2,033
3,434,906
1Q09
1,650
1,079,999
1,745
2,943,952
2Q09
2,229
1,553,296
2,389
4,135,785
3Q09
2,928
2,135,767
2,178
3,744,603
4Q09
3,010
2,168,295
2,301
3,972,694
Total
18,163
$12,440,864
16,294
$27,783,227
Source: FDIC.
FDIC Quarterly
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2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
age. For SDLs, the final, cumulative charge-off ratio was
6.2 percent as of fourth quarter 2009 versus 5.7 percent
in the third quarter, 5.2 percent in the second quarter,
and 4.3 percent in the first quarter.8 These compare
with ratios of 5.4 percent, 5.4 percent, 5.3 percent,
and 4.9 percent for unsecured “loans to individuals,”
8 Cumulative charge-off ratios for SDLs are calculated from the begin
ning of the pilot period.
quency ratios for both SDLs and NSDLs are much
higher than for general unsecured “loans to individu
als.” According to the FDIC Call Report, delinquency
ratios for those loans were 2.5 percent in fourth quarter
2009, 2.6 percent in the third quarter, 2.4 percent in
the second quarter, and 2.5 percent in the first quarter
atios for SDLs are calculated from the begin
ning of the pilot period.
quency ratios for both SDLs and NSDLs are much
higher than for general unsecured “loans to individu
als.” According to the FDIC Call Report, delinquency
ratios for those loans were 2.5 percent in fourth quarter
2009, 2.6 percent in the third quarter, 2.4 percent in
the second quarter, and 2.5 percent in the first quarter.
However, charge-off ratios for SDLs and NSDLs,
although climbing, are in line with the industry aver
Table 3
Small-Dollar Loan Pilot 4Q09: Origination Data by Program Size
Number of Banks
Reporting
Total
Average
Minimum
Maximum
Loans up to $1,000 (SDLs)
All Banks
# of Notes
22
3,010
111
1
1675
Note Volume
22
$2,168,295
$98,559
$500
$1,140,660
Banks Originating Fewer Than 50 Loans
# of Notes
15
146
10
1
26
Note Volume
15
$99,880
$6,659
$500
$15,800
Banks Originating More Than 50 Loans
# of Notes
7
2,864
409
51
1,675
Note Volume
7
$2,068,415
$337,437
$38,700
$1,140,660
Loans over $1,000 (NSDLs)
All Banks
# of Notes
12
2,301
192
1
1,151
Note Volume
12
$3,972,694
$331,058
$1,200
$1,942,837
Banks Originating Fewer Than 50 Loans
# of Notes
7
78
11
1
38
Note Volume
7
$135,064
$19,295
$1,200
$64,868
Banks Originating More Than 50 Loans
# of Notes
5
2,223
445
109
1,151
Note Volume
5
$3,837,630
$767,526
$193,355
$1,942,837
Source: FDIC.
Table 4
Small-Dollar Loan Pilot 4Q09: Summary of Loan Characteristics
Number of
Banks Reporting
Average
Minimum
Maximum
Loans up to $1,000
Loan amount
22
$724
$445
$1,000
Term (months)
22
12
2
24
Interest rate
22
13.09%
4.00%
31.90%
Non-zero fees
9
$31
$8
$70
Loans over $1,000
Loan amount
12
$1,727
$1,200
$2,070
Term (months)
12
15
10
24
Interest rate
12
13.99%
4.00%
33.53%
Non-zero fees
6
$46
$15
$70
Source: FDIC.
r Loan Pilot 4Q09: Summary of Loan Characteristics
Number of
Banks Reporting
Average
Minimum
Maximum
Loans up to $1,000
Loan amount
22
$724
$445
$1,000
Term (months)
22
12
2
24
Interest rate
22
13.09%
4.00%
31.90%
Non-zero fees
9
$31
$8
$70
Loans over $1,000
Loan amount
12
$1,727
$1,200
$2,070
Term (months)
12
15
10
24
Interest rate
12
13.99%
4.00%
33.53%
Non-zero fees
6
$46
$15
$70
Source: FDIC.
FDIC Quarterly
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2010, Volume 4, No. 2
Program and product profitability calculations are not
standardized and are not tracked through regulatory
reporting. Profitability assessments can be highly subjec
tive, depending on a bank’s location, business model,
product mix, cost and revenue allocation philosophies,
and many other factors. Moreover, many of the banks
in the pilot are community banks that indicated they
either cannot or choose not to expend the resources to
track profitability at the product and program level.
Nevertheless, as a general guideline, pilot bankers indi
cated that costs related to launching and marketing
small-dollar loan programs and originating and servic
ing small-dollar loans are similar to other loans.
However, given the small size of SDLs and to a lesser
extent NSDLs, the interest and fees generated are not
always sufficient to achieve robust short-term profit
ability. Rather, most pilot bankers sought to generate
long-term profitability through volume and by using
small-dollar loans to cross-sell additional products.
Board and Senior Management Support Was Most
Important Element Related to Program Feasibility
According to interviews with pilot bankers, several
overarching elements directly affect the feasibility of
small-dollar loan programs. Banks indicated that strong
senior management and board of director support over
the long term is the primary factor in ensuring the
success of small-dollar loan programs
and Senior Management Support Was Most
Important Element Related to Program Feasibility
According to interviews with pilot bankers, several
overarching elements directly affect the feasibility of
small-dollar loan programs. Banks indicated that strong
senior management and board of director support over
the long term is the primary factor in ensuring the
success of small-dollar loan programs. They also cited
the importance of an engaged “champion” in charge
of the program, preferably with lending authority,
significant influence over bank policy decisions, or
both. One of the champion’s key challenges was to
convince branch staff, local loan officers, or similar
personnel to promote the small-dollar loan product
among the bank’s many products and services.
Location was also linked to program feasibility. Banks
with offices in communities with large populations of
low- and moderate-income, military, or immigrant
households tended to benefit from greater demand for
small-dollar loan products. Banks in rural markets with
few nonbank alternative financial services providers
also benefitted from limited competition for SDL and
NSDL products.
Banks, particularly those in suburban locations with less
demand at the branch level, cited the importance of
strong partnerships with nonprofit community groups to
refer, and sometimes qualify, potential borrowers. These
partnerships were especially useful for fostering word-of-
mouth advertising for their small-dollar loan products.
according to fourth, third, second, and first quarter
2009 Call Reports, respectively.
The cumulative charge-off rate for NSDLs, at 8.8
percent, is higher than for SDLs and general unsecured
loans to individuals.9 However, the charge-off rate for
these larger loans compares favorably with other types
of unsecured credit
stering word-of-
mouth advertising for their small-dollar loan products.
according to fourth, third, second, and first quarter
2009 Call Reports, respectively.
The cumulative charge-off rate for NSDLs, at 8.8
percent, is higher than for SDLs and general unsecured
loans to individuals.9 However, the charge-off rate for
these larger loans compares favorably with other types
of unsecured credit. For example, the charge-off rate for
“credit cards” on bank balance sheets was 9.1 percent as
of the fourth quarter 2009 Call Report, and defaults on
managed credit cards exceeded 10 percent throughout
2009.10 Performance statistics of loans originated during
the pilot show that while small-dollar loan borrowers
are more likely to have trouble paying loans on time,
they have a default risk similar to those in the general
population.
Lessons Learned
Best practices and elements of success emerged from the
pilot and underpin the Safe, Affordable, and Feasible
Small-Dollar Loan Template. In particular, a dominant
business model emerged: most pilot bankers indicated
that small dollar loans were a useful business strategy for
developing or retaining long-term relationships with
consumers. In terms of overall programmatic success,
bankers reported that long-term support from a bank’s
board and senior management was most important.
The most prominent product elements bankers linked
to the success of their program were longer loan terms,
followed by streamlined but solid underwriting.
Long-Term, Profitable Relationship Building
Was Predominant Program Goal
About three-quarters of pilot bankers indicated that
they primarily used small-dollar loans to build or retain
profitable, long-term relationships with consumers and
also create goodwill in the community
ankers linked
to the success of their program were longer loan terms,
followed by streamlined but solid underwriting.
Long-Term, Profitable Relationship Building
Was Predominant Program Goal
About three-quarters of pilot bankers indicated that
they primarily used small-dollar loans to build or retain
profitable, long-term relationships with consumers and
also create goodwill in the community. A few banks
focused exclusively on building goodwill and generating
an opportunity for favorable Community Reinvestment
Act (CRA) considerations, while a few others indicated
that short-term profitability was the primary goal for
their small-dollar loan programs.11
9 The cumulative charge-off ratio for NSDLs was calculated only for
fourth quarter 2009 because data regarding NSDL charge-offs were
not collected until 2009. The cumulative ratio for NSDLs is calculated
from the beginning of 2009.
10 “Credit Card Charge-Off Rate on the Rise Again,” Washington Post,
December 30, 2009. This article reports the results of Moody’s Inves
tor Service’s Credit Card Index.
11 The extent to which a bank’s small-dollar loan program may be
subject to positive CRA consideration is described in the “Affordable
Loan Guidelines.” See footnote 3.
FDIC Quarterly
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2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
to choose this payment method. It is difficult to draw
empirical conclusions about the effect of automatic
payments on performance because not all borrowers
chose this option. Nevertheless, pilot bankers in general
believed that automatic repayments can improve perfor
mance for all credit products, not just small-dollar loans.
Pilot Bankers Had Mixed Views on Optional Linked
Savings and Financial Education
As part of the pilot application process, the FDIC
specifically sought to test whether savings linked to
small-dollar credit and access to financial education
would improve loan performance, and ultimately, build
a savings cushion to reduce future reliance on high-cost
emergency credit
t just small-dollar loans.
Pilot Bankers Had Mixed Views on Optional Linked
Savings and Financial Education
As part of the pilot application process, the FDIC
specifically sought to test whether savings linked to
small-dollar credit and access to financial education
would improve loan performance, and ultimately, build
a savings cushion to reduce future reliance on high-cost
emergency credit. Cumulatively, pilot banks reported
opening more than 4,000 savings accounts linked to
SDLs with a balance of $1.4 million. These numbers are
likely understated because of the limited ability of some
banks to track this information.
On the surface, it appears that default rates for loans
made under programs featuring savings and financial
education are lower than for programs without those
features. To illustrate, about one-half of pilot banks
required or strongly encouraged SDL customers to open
savings accounts linked to SDLs.13 About 80 percent of
the SDL funds originated during the pilot were made by
banks that offered and encouraged, but did not require,
a linked savings account. The cumulative charge-off
rate on SDLs was 6.4 percent at banks with optional
linked savings versus 11.4 percent at banks that did not
feature linked savings as part of their programs. Slightly
more than 10 percent of SDL funds were originated by
banks that required linked savings accounts; these
banks had the lowest cumulative charge-off rate during
the pilot period, at just 1.6 percent.
Almost one-half of pilot banks strongly encouraged or
required formal financial education. Because many of
the largest SDL programs had educational components,
more than 90 percent of SDLs were made by banks that
featured education as part of their lending programs.
The cumulative SDL charge-off rate was 5.7 percent
where financial education was featured compared with
12.0 percent where it was not
one-half of pilot banks strongly encouraged or
required formal financial education. Because many of
the largest SDL programs had educational components,
more than 90 percent of SDLs were made by banks that
featured education as part of their lending programs.
The cumulative SDL charge-off rate was 5.7 percent
where financial education was featured compared with
12.0 percent where it was not.
Given the limited sample size and variances in the
program requirements and other features, it is unclear
13 Performance data for linked savings and financial education compo
nents are limited to SDLs, as data for NSDLs were not collected until
later in the pilot, which limited their usefulness.
While some banks used mass media, Web page links,
and targeted promotional efforts, word of mouth
emerged as the dominant form of advertising for small
dollar loans, particularly for established programs.
Longer Loan Term and Streamlined but Solid
Underwriting May Have Been Key Performance
Determinants
Pilot bankers indicated that a longer loan term was criti
cal to loan performance because it gave consumers more
time to recover from a financial emergency than a single
pay cycle for payday loans, or the immediate repayment
often required for fee-based overdrafts. Several banks
experimented with relatively short loan terms, largely in
an attempt to mimic the customer’s experience with
payday lenders. For example, as described in the text
box on page 39, Liberty Bank in New Orleans, Louisi
ana, initially required that loan terms coincide with
three paycheck cycles, but found that borrowers often
could not repay the loans on time and returned to the
bank for multiple renewals.12 To avoid the cycle of
continuously renewed “treadmill” loans, Liberty Bank
extended loan terms to a minimum of six months. For
the pilot overall, a 90-day loan term emerged as the
minimum time needed to repay a small-dollar loan
t loan terms coincide with
three paycheck cycles, but found that borrowers often
could not repay the loans on time and returned to the
bank for multiple renewals.12 To avoid the cycle of
continuously renewed “treadmill” loans, Liberty Bank
extended loan terms to a minimum of six months. For
the pilot overall, a 90-day loan term emerged as the
minimum time needed to repay a small-dollar loan.
Underwriting processes varied somewhat among pilot
banks and were streamlined compared with other loans,
but bankers reported that some basic elements were
important in minimizing defaults. Notably, most pilot
banks required a credit report to help determine loan
amounts and repayment ability and to check for fraud
or recent bankruptcy. Few banks used credit scoring in
the underwriting process, but those that did had low
minimum thresholds, such as a Fair Isaac Corporation
(FICO) score in the low to mid-500s. In addition to the
credit report, all pilot banks required proof of identity,
address, and income.
Virtually all of the pilot banks could process loans
within 24 hours, and many processed loans within an
hour if borrowers had the proper documentation. Banks
tended to have strong opinions about the merits of
centralized versus decentralized loan approval processes,
based on the bank’s size and business model, but no
clear link to performance under either method emerged.
About three-fourths of banks offered borrowers the
option of automatically debiting payments, and some
provided interest rate discounts to encourage borrowers
12 Financial institutions, companies, community groups, and other
organizations mentioned in this article are for illustration only. The
FDIC does not endorse any individual organization or specific products.
der either method emerged.
About three-fourths of banks offered borrowers the
option of automatically debiting payments, and some
provided interest rate discounts to encourage borrowers
12 Financial institutions, companies, community groups, and other
organizations mentioned in this article are for illustration only. The
FDIC does not endorse any individual organization or specific products.
FDIC Quarterly
34
2010, Volume 4, No. 2
Strategies to Scale Small-Dollar Loans
Banks other than those in the pilot provide small-dollar
loans, but it is likely that most banks do not offer these
loans.14 Pilot bankers and other banks that have started
or have expressed interest in starting a small-dollar loan
program indicated that the primary obstacles to entry
are the cost of launching and maintaining the program
and concerns about defaults. The strategies described
below could help overcome these obstacles and increase
the supply of small-dollar loans.
Highlight Facts about Existing Models
A straightforward way to encourage more banks to
offer small-dollar loans is to emphasize the facts about
successful programs. The key facts are that safe, afford
able, and feasible small-dollar lending does occur in
mainstream financial institutions; that small-dollar
lending can be part of a cornerstone for creating profit
able relationships; and that defaults on these loans are
in line with other types of unsecured credit. Indeed,
other small-dollar loan programs have reported loan
performance results similar to those of the pilot.
For example, the Pennsylvania Credit Union Associa
tion’s Credit Union Better Choice program reported an
approximate 5 percent default rate as of third quarter
2009.15 This program was launched in early 2007 in
partnership with the Pennsylvania Credit Union
Association and the State Treasurers’ Office, and about
80 credit unions are currently participating. The maxi
mum loan amount is $500, the maximum fee is $25,
and the maximum interest rate is 18 percent
n Better Choice program reported an
approximate 5 percent default rate as of third quarter
2009.15 This program was launched in early 2007 in
partnership with the Pennsylvania Credit Union
Association and the State Treasurers’ Office, and about
80 credit unions are currently participating. The maxi
mum loan amount is $500, the maximum fee is $25,
and the maximum interest rate is 18 percent. The loan
term is 90 days, and financial counseling is offered but
not required. At disbursement, an amount equal to 10
percent of the loan is placed in a mandatory savings
account.
In another example, the country’s largest microlender,
ACCION Texas, also indicated its loss rate is about
14 The FDIC Survey of Banks’ Efforts to Serve the Unbanked and
Underbanked, published in December 2008 (http://www.fdic.gov/
unbankedsurveys/), included a question regarding whether banks offer
small-dollar loans. However, the response to this question was materi
ally skewed, apparently by widespread misinterpretation by banks that
believed small-dollar loans included standard overdraft lines of credit.
This question will be clarified in subsequent survey efforts.
15 Data regarding the Better Choice Program were reported to the FDIC
Committee on Economic Inclusion on December 2, 2009, http://www.
vodium.com/MediapodLibrary/index.asp?library=pn100472_fdic_
advisorycommittee&SessionArgs=0A1U0100000100000101. See also
the Better Choice Program Web site at http://www.pacreditunions.
com/betterchoice.html.
whether linked savings or formal financial education
directly affected loan performance. Moreover, it is
uncertain whether these factors reduced future reliance
on high-cost credit, particularly since reducing reliance
on credit is a long-term goal that may extend beyond
the pilot period and it is difficult to track based on data
available to banks. Anecdotally, some pilot bankers
indicated that some small-dollar loan borrowers subse
quently used linked savings or financial management
skills in positive ways
er these factors reduced future reliance
on high-cost credit, particularly since reducing reliance
on credit is a long-term goal that may extend beyond
the pilot period and it is difficult to track based on data
available to banks. Anecdotally, some pilot bankers
indicated that some small-dollar loan borrowers subse
quently used linked savings or financial management
skills in positive ways.
All of the pilot bankers recognized the importance of
both savings and financial education, but perhaps the
most interesting finding regarding program design was
the difference in opinion among bankers about the
effectiveness of requiring or even strongly encouraging
these features. Some bankers felt that linked savings
and formal financial education must be hardwired into
the small-dollar loan product to break the cycle of high-
cost lending. Others believed that requiring extra
features for a loan complicates the process and can drive
an already stressed consumer to the ease of the payday
lending process; these bankers thought that financial
education counseling should be provided during the
application process.
Small-dollar loan programs at two of the pilot banks—
BankPlus in Belzoni, Mississippi, and Liberty Bank and
Trust Company, of New Orleans, Louisiana—illustrate
these differences in opinion. BankPlus required both
formal education seminars and a significant savings
component to qualify for its small dollar loan program
(see text box on page 38). The bank strongly believed
that these components were the driving factor in mini
mizing defaults and rehabilitating small-dollar loan
customers with problematic credit histories into what it
believes will be future mainstream banking customers.
On the other hand, Liberty Bank and Trust Company
believed that its program’s initial formal financial
education and linked savings requirements introduced
an unwanted level of complexity for borrowers already
facing a financial emergency (see text box on page 39)
small-dollar loan
customers with problematic credit histories into what it
believes will be future mainstream banking customers.
On the other hand, Liberty Bank and Trust Company
believed that its program’s initial formal financial
education and linked savings requirements introduced
an unwanted level of complexity for borrowers already
facing a financial emergency (see text box on page 39).
Liberty reported a surge in loan demand when it
removed these requirements. A common theme that
Liberty and other banks cited was the importance of
informal financial education and counseling as part of
the loan closing process. For many small-dollar loan
consumers, obtaining a loan from a bank is an exciting
and sometimes life-changing event, and part of relation
ship building is capitalizing on a teachable moment—
explaining the importance of repaying the loan—when
the loan is delivered.
FDIC Quarterly
35
2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
$20 million in state operating funds are deposited in a
corporate federal credit union and receive a market rate
of return. The difference between that rate and the
corporate credit union’s earnings on the deposit is used
to fund a loan loss reserve pool. Participating credit
unions can apply to the pool to have up to 50 percent
of their losses offset. While it is not a guarantee fund
per se, the Pennsylvania Credit Union Association
helps offset the cost of entry into small-dollar lending
by paying for traditional advertising for credit unions
that wish to enroll in the Better Choice Program.
In addition to guarantee programs, opportunities may
exist to create larger and more broadly available guaran
tees
percent
of their losses offset. While it is not a guarantee fund
per se, the Pennsylvania Credit Union Association
helps offset the cost of entry into small-dollar lending
by paying for traditional advertising for credit unions
that wish to enroll in the Better Choice Program.
In addition to guarantee programs, opportunities may
exist to create larger and more broadly available guaran
tees. For example, recently proposed legislation would
amend the Community Development Banking and
Financial Institutions Act of 1994 to provide financial
assistance to help defray the costs of operating small-
dollar loan programs.18 Elements of the Safe, Afford
able, and Feasible Small-Dollar Loan Template were
incorporated into this proposed legislation.
Encourage Partnerships
Pilot bankers and other successful small-dollar lending
programs reported that partnerships with community
groups were crucial to the success of their programs.
Among other things, these partnerships can serve as an
incentive to banks by providing client referrals and the
opportunity for other parties to share in program costs.
In some instances, the partnerships are direct and one-
on-one relationships, such as the Wilmington Trust and
WENH partnership described above. Other models,
such as the state and local “Bank On” campaigns, use
broad-based coalitions and strategies, which often
include the provision of short-term emergency credit, to
increase access to the financial mainstream.19
The Alliance for Economic Inclusion (AEI) is the
FDIC’s national initiative to establish coalitions of
financial institutions, local policymakers, community-
based and consumer organizations, and other partners
in 14 markets across the country to bring unbanked and
underserved populations into the financial mainstream
rt-term emergency credit, to
increase access to the financial mainstream.19
The Alliance for Economic Inclusion (AEI) is the
FDIC’s national initiative to establish coalitions of
financial institutions, local policymakers, community-
based and consumer organizations, and other partners
in 14 markets across the country to bring unbanked and
underserved populations into the financial mainstream.
The focus is on expanding basic retail financial services,
including savings accounts, affordable remittance prod
ucts, small-dollar loan programs, targeted financial
education programs, and asset-building programs, to
underserved populations. The number of AEI members
18 S. 3217, 111th Cong. § 1206 (2010).
19 See the National League of Cities Web site for a general description
of Bank On campaigns at http://www.nlc.org/ASSETS/7E6FA32D3A364
733B3172E44818A0CE3/IYEF_BankOnOnePagerFinal_4-10.pdf.
5 percent.16 Its maximum loan amounts are higher,
up to $100,000, and the average amount is about
$10,000, but 75 percent of its loans are for $1,500 or
less. ACCION Texas’s active portfolio was $24 million
as of third quarter 2009, and loans are targeted to
Latina women seeking to start or expand small busi
nesses. Most applicants do not have a credit history,
and the average FICO score is 575.
The FDIC has taken steps to highlight the facts about
the small-dollar loan pilot program by releasing program
results and lessons learned, as well as setting forth the
Safe, Affordable, and Feasible Small-Dollar Loan
Template. In addition, the FDIC has been discussing
the pilot and template in speeches and public forums
with a number of groups, including banks; other regula
tors; policymakers; academics; nonprofit, community,
and philanthropic groups; and innovators in the small-
dollar lending area
results and lessons learned, as well as setting forth the
Safe, Affordable, and Feasible Small-Dollar Loan
Template. In addition, the FDIC has been discussing
the pilot and template in speeches and public forums
with a number of groups, including banks; other regula
tors; policymakers; academics; nonprofit, community,
and philanthropic groups; and innovators in the small-
dollar lending area.
Study Creation of Pools of Nonprofit Funds or
Government Operating Funds to Serve as
“Guarantees” for Safe Small-Dollar Loan Programs
Several existing small-dollar loan programs feature
“guarantees” in the form of loan loss reserves or linked,
low-cost deposits provided by government bodies or
philanthropic groups. These guarantees provide impor
tant assurances to banks that are interested in offering
small-dollar loans but are concerned about the costs of
doing so.
For example, pilot bank Wilmington Trust in Wilming
ton, Delaware, originates small-dollar loans solely to
clients of West End Neighborhood House (WENH), a
social services nonprofit organization. WENH screens
applications, performs loan underwriting (based on
bank-approved criteria), and provides a full range of
counseling and social services for prospective borrowers.
In addition, all of the loans are fully guaranteed by
WENH and backed by a loan loss reserve funded by
grants and donations from other program partners.17
In another example, as part of the Better Choice
Program, the Pennsylvania State Treasurers’ Depart
ment has established a loan guarantee pool whereby
16 Ibid. See also ACCION Texas’s Web site at http://www.acciontexas.
org/.
17 The partnership between Wilmington Trust and WENH was profiled
in “The FDIC’s Small-Dollar Loan Pilot Program: A Case Study after
One Year,” page 38. See footnote 1. See also WENH’s Web site at
http://www.westendnh.org/financial-management-services/# for more
information about the program.
oan guarantee pool whereby
16 Ibid. See also ACCION Texas’s Web site at http://www.acciontexas.
org/.
17 The partnership between Wilmington Trust and WENH was profiled
in “The FDIC’s Small-Dollar Loan Pilot Program: A Case Study after
One Year,” page 38. See footnote 1. See also WENH’s Web site at
http://www.westendnh.org/financial-management-services/# for more
information about the program.
FDIC Quarterly
36
2010, Volume 4, No. 2
Virginia Credit Union. An Internal Revenue Code
§501(c) 3 nonprofit organization called the Virginia
State Employee Assistance Fund (VSEAF) provided a
$10,000 guarantee to fund a loan loss reserve. Previ
ously, the VSEAF was being used for direct emergency
aid to state workers, and the VSELP provided a way to
leverage those funds to assist more employees who
might need emergency funds.
VSELP loans are for amounts up to $500, and terms are
up to six months with an interest rate of 24.99 percent.
Loans are also conditioned on taking a short computer-
based financial education course and passing a ten-
question financial education quiz. After about three
months, more than 2,000 VSELP loans had been origi
nated with a cumulative balance of over $1 million; this
represented about 2 percent of Virginia’s 100,000 state
employees who were using the loans. According to the
Commonwealth of Virginia, borrowers are dispropor
tionately minority, female, and low-income.
E-Duction is a for-profit company that offers open-
ended loans through employers with credit lines deliv
ered through MasterCard®. The maximum loan amount
is 2.5 percent of annual pay, which, for example, would
be $1,000 for an employee earning $40,000 per year.23
There is no interest rate; rather, the company charges
an annual fee, which as of late 2009 was $36 to $40 per
year. Equal payments are made through payroll deduc
tion over two to six months, depending on the type of
expense. The company has been in business since 2002
and reports that it has about 18,000 accounts
ich, for example, would
be $1,000 for an employee earning $40,000 per year.23
There is no interest rate; rather, the company charges
an annual fee, which as of late 2009 was $36 to $40 per
year. Equal payments are made through payroll deduc
tion over two to six months, depending on the type of
expense. The company has been in business since 2002
and reports that it has about 18,000 accounts. Accord
ing to E-Duction, about two-thirds of its borrowers earn
between $20,000 and $40,000, and more than half have
been employed for five or more years. Their average
FICO score is 568.
Several pilot banks have been experimenting with
innovative program features. For example, as described
in the text box on page 40, Lake Forest Bank & Trust,
of Lake Forest, Illinois, began working with a local
municipality to offer small-dollar loans to city workers.
These loans are structured along the terms of the bank’s
standard small-dollar loan but are repaid through auto
matic payroll deductions. As described on page 41
Mitchell Bank, Milwaukee, Wisconsin, created a
unique low-cost financial education aspect to its loan
program in which borrowers sign a pledge that they will
not incur another payday loan during the term of their
Mitchell Bank loan.
23 Ibid. See also e-Duction’s Web site at http://www.e-duction.com/
html2.0/index.html for more information.
nationwide is 967, and 35 banks offer or are developing
small-dollar loan programs.20
Study Feasibility of Safe and Innovative Small-Dollar
Loan Business Models
The relationship-building small-dollar loan model is as
costly to originate as other, larger loans because of the
“high-touch” nature of the loan delivery process.
Emerging technologies and delivery channels could
reduce handling costs and, potentially, credit losses.
For example, employer-based lending is an emerging
model whereby loans are delivered through the work
place as an employee benefit, like medical insurance or
401(k) plans
del is as
costly to originate as other, larger loans because of the
“high-touch” nature of the loan delivery process.
Emerging technologies and delivery channels could
reduce handling costs and, potentially, credit losses.
For example, employer-based lending is an emerging
model whereby loans are delivered through the work
place as an employee benefit, like medical insurance or
401(k) plans. Banks or credit unions could process loans
using employment information as a proxy for most of its
underwriting criteria. That is, the employee’s name,
address, social security or tax identification number,
salary, and length and status of employment would
already be known, potentially reducing or eliminating
the time a bank employee would spend gathering that
information. Moreover, payments would be made auto
matically from payroll deduction, and features such as
financial education screens and required savings could
be factored into the loan origination process.
There are no large-scale examples of employer-based
lending, but some organizations are experimenting with
the concept. For example, Employee Loan Solutions
(ELS) is a start-up company that has a patented process
for delivering closed-end installment loans as an
employee benefit.21 According to ELS, underwriting
costs would fall to virtually zero because of an auto
mated process with no consumer interaction. Defaults
also would be limited through automated payroll deduc
tion for payments. While ELS has not had any practical
application of its process yet, there are a few operating
examples of employer-based small-dollar lending.
In July 2009 the Commonwealth of Virginia launched
a pilot program, the Virginia State Employees Loan
Program (VSELP), to deliver loans to state employees
through its payroll system.22 The program does not
involve any state funds, and loans are funded by the
20 Some of the AEI member banks offering small-dollar loans are also
in the pilot
ing
examples of employer-based small-dollar lending.
In July 2009 the Commonwealth of Virginia launched
a pilot program, the Virginia State Employees Loan
Program (VSELP), to deliver loans to state employees
through its payroll system.22 The program does not
involve any state funds, and loans are funded by the
20 Some of the AEI member banks offering small-dollar loans are also
in the pilot. See the FDIC’s Web site at http://www.fdic.gov/consumers/
community/AEI/index.html for more information about the AEI.
21 Information regarding Employee Loan Solution’s proposed business
model was reported to the FDIC Committee on Economic Inclusion on
December 2, 2009.
22 Ibid. See also the State of Virginia’s Web site for more information
about the loan program at http://www.dhrm.virginia.gov/vaemploan/.
FDIC Quarterly
37
2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
Authors: Rae-Ann Miller, Special Advisor to the Director
Division of Insurance and Research
Susan Burhouse, Senior Financial Economist
Division of Insurance and Research
Luke Reynolds, Chief, Outreach and
Program Development Section
Division of Supervision and Consumer
Protection
Aileen G. Sampson, Financial Economist
Division of Insurance and Research
The authors would like to thank Jack Webb, Senior Execu
tive Vice President and President–South Region, BankPlus;
Kelly Dixon, Manager of E-Commerce and Howard
Brooks, Executive Vice President, Liberty Bank and Trust
Company; Cassandra Slade, Vice President, Lake Forest
Bank & Trust Company; and James Maloney, President,
Mitchell Bank for their contributions to this article, and all
of the volunteer pilot bankers for their assistance in the
successful execution of the pilot
dent–South Region, BankPlus;
Kelly Dixon, Manager of E-Commerce and Howard
Brooks, Executive Vice President, Liberty Bank and Trust
Company; Cassandra Slade, Vice President, Lake Forest
Bank & Trust Company; and James Maloney, President,
Mitchell Bank for their contributions to this article, and all
of the volunteer pilot bankers for their assistance in the
successful execution of the pilot.
Consider Ways That Regulators Can Encourage
Banks to Offer Affordable and Responsible Products
and That Small-Dollar Loan Programs Can Receive
Favorable CRA Consideration
Pilot bankers and others have reported that a more flex
ible regulatory environment could encourage more
banks to offer small-dollar loans. The SDL Guidelines
and the pilot application process indicated that small-
dollar loan programs can already receive favorable
consideration for CRA purposes. However, several pilot
bankers believe that small-dollar lending should receive
more emphasis in CRA examinations, even if the
program is relatively small. The FDIC is reviewing this
suggestion and other types of regulatory and supervisory
incentives to encourage small-dollar lending.
Conclusion
The FDIC small-dollar loan pilot program, conducted
between December 2007 and December 2009, demon
strated that banks can offer alternatives to high-cost,
emergency credit products, such as payday loans or over
drafts. The pilot resulted in a Safe, Affordable, and
Feasible Small-Dollar Loan Template that other banks
can replicate. Loans originated under the program have
a default risk similar to other types of unsecured credit.
Small-dollar loan programs can be an important tool in
building and retaining customers, can be eligible for
favorable CRA consideration, and could help banks’
consistency with regulatory guidance regarding offering
customers alternatives to fee-based overdraft protection
programs
n replicate. Loans originated under the program have
a default risk similar to other types of unsecured credit.
Small-dollar loan programs can be an important tool in
building and retaining customers, can be eligible for
favorable CRA consideration, and could help banks’
consistency with regulatory guidance regarding offering
customers alternatives to fee-based overdraft protection
programs. The FDIC continues to work with the bank
ing industry, consumer and community groups, nonprofit
organizations, other government agencies, and others to
research and pursue strategies that could prove useful in
expanding the supply of small-dollar loans.
FDIC Quarterly
38
2010, Volume 4, No. 2
BankPlus
Belzoni, Mississippi
BankPlus is a $2.1 billion institution headquartered in
Belzoni, Mississippi. In addition to its main office, the
bank has 61 branches throughout northwest, central,
and southeastern Mississippi. BankPlus operates in a
largely nonmetropolitan environment; of the bank’s
four designated assessment areas, only one is in a metro
politan statistical area (Jackson). The bank’s business
strategy of placing branches near businesses may provide
banking services to residents of rural, sparsely populated
environments who commute to work. For example,
BankPlus operates a branch inside the Nissan plant in
Canton, Mississippi.
The bank learned that there was a strong need for a
small-dollar loan program after it opened branches in
Jackson. As a result of the bank’s community outreach
and partnerships, it soon discovered that many local
residents had not received financial education and, as a
result, were unaware of the high costs of using alterna
tive financial services. The bank studied the predomi
nate users of payday loans in the local community and
found that public servants such as teachers, firefighters,
and police officers were particularly vulnerable to a
cycle of high-cost lending.
The bank launched its CreditPlus program in April 2008
ived financial education and, as a
result, were unaware of the high costs of using alterna
tive financial services. The bank studied the predomi
nate users of payday loans in the local community and
found that public servants such as teachers, firefighters,
and police officers were particularly vulnerable to a
cycle of high-cost lending.
The bank launched its CreditPlus program in April 2008.
CreditPlus is a small, short-term loan product designed
to encourage participants to break the cycle of high-cost
debt while developing a regular savings plan. BankPlus
opens a new checking and savings account for those
approved for a CreditPlus loan. One-half of the loan
proceeds are deposited into an interest-bearing personal
savings account, and these funds are “on hold” until the
loan is repaid. The bank encourages participants to use
the remaining loan proceeds to eliminate outstanding
debts to alternative financial services providers.
BankPlus reported that the educational component has
been the “key to [the program’s] success.” Consumers
must complete a three-hour seminar based on the
FDIC’s Money Smart financial education curriculum
before they can apply for a small-dollar loan.* Owing to
the popularity of the seminars, the bank capped regis
trations at 50 people per class. In fourth quarter 2009,
the bank held 21 seminars and reached 667 people.
Slightly more than half (51 percent) of those who
attended the financial education workshops came to
the bank for a small-dollar loan.
CreditPlus applicants also receive one-on-one credit
counseling so they can better understand their credit
report at the time of application. Bank staff also encour
ages CreditPlus customers to save 10 percent of their
income each pay period through electronic transfer
from the checking account into the savings account.
CreditPlus loans range from $500 to $1,000, and all are
closed-end with a 12- or 24-month term (the average
being 21 months). The interest rate is fixed at 5 percent
their credit
report at the time of application. Bank staff also encour
ages CreditPlus customers to save 10 percent of their
income each pay period through electronic transfer
from the checking account into the savings account.
CreditPlus loans range from $500 to $1,000, and all are
closed-end with a 12- or 24-month term (the average
being 21 months). The interest rate is fixed at 5 percent.
No fees are charged, and proof of recurring income (for
at least 60 days), identity, and address is required. A
credit report is obtained as part of the underwriting
process, but the bank does not require a particular credit
score. Rather, those with a FICO score above 500
receive a $1,000 loan, while those with a FICO score
below 500 receive a $500 loan. If the customer’s docu
ments are in order, a loan can be underwritten in less
than one hour after the financial education workshop is
completed. The bank conducted training for loan offi
cers so that the underwriting process could be decen
tralized and made in the community.
BankPlus joined the pilot in 2009 and originated 610
SDLs in fourth quarter 2009. At the conclusion of the
pilot, 1,404 SDLs with a cumulative balance of about
$1 million were outstanding. Only 58 SDLs totaling
$34,000 were 30 days or more delinquent at the end of
the pilot. The bank’s cumulative charge-off rate during
the pilot period was 1.8 percent.
Bank management indicated that SDLs are not profit
able on a stand-alone basis but can help establish
customer relationships and improve the bank’s commu
nity, which benefits the bank over the long term.
According to Senior Executive Vice President and
President–South Region Jack Webb, “We see Credit
Plus as an investment in the future—it is about building
a relationship over the long term
Bank management indicated that SDLs are not profit
able on a stand-alone basis but can help establish
customer relationships and improve the bank’s commu
nity, which benefits the bank over the long term.
According to Senior Executive Vice President and
President–South Region Jack Webb, “We see Credit
Plus as an investment in the future—it is about building
a relationship over the long term. Financial education
improves habits, and the change of habits improves the
future of customers.” One of many success stories the
bank cites is of a customer who had bad credit, received
a CreditPlus loan, improved her credit score by making
timely repayments, and was later able to qualify for a
mortgage through BankPlus and become a first-time
homebuyer.
Financial Education, Savings, and Small-Dollar Lending
at Work for Public Servants
* See the FDIC’s Web site at http://www.fdic.gov/consumers/
consumer/moneysmart/ for more information on Money Smart.
FDIC Quarterly
39
2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
Liberty Bank and Trust Company
New Orleans, Louisiana
Liberty Bank and Trust Company is a minority-owned
$424 million bank headquartered in New Orleans, Loui-
siana. Liberty has 24 branches in six states. Ten branches
are in New Orleans; four are in Baton Rouge; one is the
New Orleans suburb of Harahan, Louisiana; and one is
in Opelousas, Louisiana. The bank has two branches
each in Jackson, Mississippi; Detroit, Michigan; and
Kansas City, Kansas. It also has one branch in Kansas
City, Missouri; and one in Houston, Texas. Most of the
small-dollar loans made by Liberty are originated out of
the New Orleans and Kansas City, Missouri, branches.
With the exception of the Harahan branch, all of Liber-
ty’s branches are in urban areas, and most of the branches
are in low- and moderate-income neighborhoods.
The bank did not have an active small-dollar loan
product when it applied for the FDIC pilot
in Houston, Texas. Most of the
small-dollar loans made by Liberty are originated out of
the New Orleans and Kansas City, Missouri, branches.
With the exception of the Harahan branch, all of Liber-
ty’s branches are in urban areas, and most of the branches
are in low- and moderate-income neighborhoods.
The bank did not have an active small-dollar loan
product when it applied for the FDIC pilot. In its initial
application, the bank cited providing affordable “anti-
payday” loans to the qualified public, attracting new
clientele, and increasing future cross-selling opportuni-
ties as its objectives for offering small-dollar loans. The
pre-launch, conceptual product outlined in its applica-
tion was called the Payday Assistance Loan. It featured
a $300 to $1,000 line of credit, a $15 initial saving
deposit, a $15 refundable financial literacy course fee,
a $10 processing fee, a 17.99 percent interest rate, and
a three-payment term structure incorporating a $15
savings deposit into each payment. The financial liter-
acy fee was to be refundable upon completion of a
literacy class within 30 days of application.
By the launch of the bank’s small-dollar loan program in
April 2008, the Payday Assistance Loan had been
rebranded as the Liberty Bank Fast Cash Loan. The Fast
Cash loan required a minimum FICO score of 525, the
opening of a Liberty checking account with direct
deposit, deposit of 9 percent of the loan amount into a
Liberty savings account, completion of a 90-minute
financial literacy course, and a $4.50 application fee.
The loan had an 18 percent interest rate and was payable
in three installments commensurate with the borrower’s
paycheck schedule. The minimum loan size remained
$300, while the maximum was increased to $2,500. If all
required customer documents were provided at the time
of application, the Fast Cash approval process, featuring
localized underwriting authority in most cases, was
designed to take 15 minutes on average
interest rate and was payable
in three installments commensurate with the borrower’s
paycheck schedule. The minimum loan size remained
$300, while the maximum was increased to $2,500. If all
required customer documents were provided at the time
of application, the Fast Cash approval process, featuring
localized underwriting authority in most cases, was
designed to take 15 minutes on average. A complete
application consisted of the applicant’s two most recent
pay stubs, most recent mortgage statement, utility bills,
and proper identification.
In response to customer needs, Liberty refined the Fast
Cash program over the remaining quarters of the pilot.
According to Kelly Dixon, Liberty Bank’s manager of
E-commerce, the savings component proved too
complicated for potential borrowers. Thus, it was
dropped before the end of 2008. Similarly, potential
borrowers viewed the financial education requirements
as too burdensome, and the bank modified them to
allow customers to take out and repay two Fast Cash
loans before completing a literacy class to qualify for a
third loan. The three-payment term structure was
dropped in favor of 6- to 12-month terms for loans up
to $1,000 and 18-month terms for loans up to $2,500,
to give borrowers more time to repay. Also, the small-
dollar loan approval process was centralized and the
underwriting guidelines were made more flexible. Rates
on Fast Cash loans are 18 percent and fees are $4.50.
After implementing the program refinements, Liberty
originated more SDL and NSDL loans in the first quar-
ter of 2009 than it had in the previous three quarters
combined. Liberty’s marketing efforts initially included
media advertising, point-of-sale displays, Web site
advertising, and dissemination of information at local
churches. As the pilot progressed, Liberty came to rely
more on word of mouth and the dissemination of
brochures at gatherings to market the program.
Subsequently, the Fast Cash program continued to
evolve
previous three quarters
combined. Liberty’s marketing efforts initially included
media advertising, point-of-sale displays, Web site
advertising, and dissemination of information at local
churches. As the pilot progressed, Liberty came to rely
more on word of mouth and the dissemination of
brochures at gatherings to market the program.
Subsequently, the Fast Cash program continued to
evolve. By November 2009, the financial education
component had been dropped altogether. The program
was modified to accommodate more credit history
“glitches,” such as payment problems due to medical
issues, job losses, hourly employment cutbacks, unex-
pected spikes in expenses affecting household budgets,
and divorce, and to give greater consideration to borrow-
ers using small-dollar loans to support educational
purposes or to military families. According to Liberty
Bank and Trust’s Executive Vice President Howard
Brooks, “We needed more flexibility to avoid pushing
our low- and moderate-income consumers to high-cost-
debt products such as payday loans. In particular, our
customers told us that they don’t have the time or the
resources to fulfill mandatory financial literacy or savings
requirements.” He believes that the modifications to the
Fast Cash program allowed Liberty Bank and Trust to be
of greater service to its communities.
During the pilot, Liberty originated 102 SDLs and 82
NSDLs. In all, Liberty originated approximately
$217,000 in small-dollar loans during the pilot. The
bank did not report any charge-offs, and its 30-day
delinquency rate was about 5.60 percent. The bank
reported a positive net income on small-dollar loans.
Product Simplification Leads to Small-Dollar Loan Success
ervice to its communities.
During the pilot, Liberty originated 102 SDLs and 82
NSDLs. In all, Liberty originated approximately
$217,000 in small-dollar loans during the pilot. The
bank did not report any charge-offs, and its 30-day
delinquency rate was about 5.60 percent. The bank
reported a positive net income on small-dollar loans.
Product Simplification Leads to Small-Dollar Loan Success
FDIC Quarterly
40
2010, Volume 4, No. 2
Lake Forest Bank & Trust
Lake Forest, Illinois
Lake Forest Bank & Trust is a $1.8 billion institution
headquartered in Lake Forest, Illinois, in the northern
suburbs of Chicago. In addition to the main office, the
bank has seven branches throughout the state. It is
owned by the Wintrust Financial Corporation holding
company, which also owns 14 other banks serving the
Chicago, Illinois, and southern Wisconsin metropoli
tan areas.
To expand the bank’s community reinvestment activi
ties, Lake Forest initiated a small-dollar lending program
in late 2008. The program was designed to meet the
FDIC’s Guidelines on Affordable Small-Dollar Loans,
and the bank joined the ongoing pilot program in fourth
quarter 2008. All seven of the bank’s branches offer the
small-dollar loan product. Lake Forest has encouraged
its sister banks—which, including Lake Forest, have 84
branches—to offer the product as well, and many have
started their own programs. Although Lake Forest was
a relatively late entrant into the pilot program, the
program has grown quickly, from 5 loans originated in
its first quarter of participation to 51 in the final quarter
of the pilot.
Lake Forest’s small-dollar loans range from $250 to
$1,000. One of the most successful changes the bank
made to its program over the past year has been reduc
ing the minimum loan amount to accommodate borrow
ers who did not need large amounts of credit. The bank
charges a fixed interest rate of prime plus 5 percent,
which has hovered around 8.5 percent since it imple
mented the loan product, with no fees
small-dollar loans range from $250 to
$1,000. One of the most successful changes the bank
made to its program over the past year has been reduc
ing the minimum loan amount to accommodate borrow
ers who did not need large amounts of credit. The bank
charges a fixed interest rate of prime plus 5 percent,
which has hovered around 8.5 percent since it imple
mented the loan product, with no fees. Interest rates are
reduced by 0.25 percent if the borrower chooses to use
auto-debit payments or payroll deduction. Loans must
be repaid within 24 months, but are paid off in 18
months, on average. The underwriting process allows
for loan decisions within 24 hours at the branch level.
There are no minimum credit score requirements.
While the bank initially required a minimum credit
score, it found this requirement was an obstacle for too
many applicants. Underwriting processes now consist of
completing the application for credit, which collects
information on employment history, income, assets,
and debts. A credit report is also ordered to help deter
mine the borrower’s ability to repay.
Since joining the pilot program, Lake Forest has made
more than 100 SDLs for nearly $86,000. Forty-four loans
had been paid off by the end of 2009. With just one loan
delinquent and 11 loans charged off by fourth quarter
2009, the bank reports that losses on the SDL product
are no higher than those on other consumer loans. In
addition to the positive effect the SDL program has had
on community development, the bank has been able to
earn a small profit on the loans and intends to develop
long-term relationships with performing SDL borrowers.
Lake Forest is also involved in several innovative
approaches to its small-dollar lending. In fourth quarter
2009, the bank began working with a local municipality
to offer workplace-based loans to city employees to
reduce their reliance on payday loans and other alterna
tive financial services
profit on the loans and intends to develop
long-term relationships with performing SDL borrowers.
Lake Forest is also involved in several innovative
approaches to its small-dollar lending. In fourth quarter
2009, the bank began working with a local municipality
to offer workplace-based loans to city employees to
reduce their reliance on payday loans and other alterna
tive financial services. City workers can get a loan
application directly from their employer, can fax the
complete application to the bank, and will go in to the
bank only to close the loan. The loans are structured
along the terms of the bank’s standard small-dollar loan
but are repaid through automatic payroll deductions.
In addition, the bank is working with the State of Illi
nois on the Micro Loan Program and was the first bank
approved by the state as a lender under this program.
This program is designed to provide affordable capital
to credit unions and community banks so they can
make micro loans to low-income residents who might
otherwise turn to payday lenders. If a bank is accepted
into the program, the Micro Loan Program will deposit
up to $250,000 at a reduced rate at the bank for one
year. These funds are then used to make loans to borrow
ers. The bank plans to work on modifying its product to
meet the state guidelines, and the state program will
become a subset of the small-dollar loan program.
While these partnerships are successful in providing loan
prospects for the bank, the majority of the small-dollar
loan borrowers come from outside of these relationships.
Lake Forest consistently advertises the small-dollar loan
in a community newspaper, which is the biggest driver
of applications. Program information and the loan appli
cation are also available on the bank’s Web site, which
is becoming a more important channel for applicants.
Also, the bank’s successful track record with the program
is generating positive word of mouth that is reaching
increasing numbers of potential borrowers
he small-dollar loan
in a community newspaper, which is the biggest driver
of applications. Program information and the loan appli
cation are also available on the bank’s Web site, which
is becoming a more important channel for applicants.
Also, the bank’s successful track record with the program
is generating positive word of mouth that is reaching
increasing numbers of potential borrowers.
Innovating to Build Profitable Relationships
FDIC Quarterly
41
2010, Volume 4, No. 2
Small-Dollar Loan Pilot Program
Mitchell Bank
Milwaukee, Wisconsin
Mitchell Bank is a $74 million institution headquar
tered in Milwaukee, Wisconsin. In addition to the main
office, the bank has four branches. The bank’s main
office and branches are located in communities with
concentrations of Latino and low- and moderate-in
come households.
Mitchell Bank’s small-dollar loan program was new
when the pilot began in February 2008. The bank’s
goals for the program were to provide consumers with
an alternative to high-cost credit, build multiple account
relationships, and provide opportunities for financial
education. Initially, loans were offered only to existing
customers who had had an account for six months or
more and also had a Social Security number. In 2009,
Mitchell Bank relaxed the existing customer require
ment but required borrowers who were new customers
to open a Mitchell Bank deposit account and to have
their payroll or benefits check direct deposited into the
account. Because of its large immigrant customer base,
the bank also altered its program requirements to allow
customers who had only an Individual Taxpayer Identi
fication Number (ITIN) to apply for a loan.
Loans range from $300 to $1,000, although loans up to
$2,500 may be made on a case-by-case basis. The inter
est rates range from 15 to 22 percent, depending on the
borrower’s credit score; the average rate is about 19
percent. Each loan application requires a credit report
m requirements to allow
customers who had only an Individual Taxpayer Identi
fication Number (ITIN) to apply for a loan.
Loans range from $300 to $1,000, although loans up to
$2,500 may be made on a case-by-case basis. The inter
est rates range from 15 to 22 percent, depending on the
borrower’s credit score; the average rate is about 19
percent. Each loan application requires a credit report.
Generally, the bank requires borrowers to have a mini
mum FICO score of 570 but will extend loans to those
below that threshold if the borrower agrees to a single
financial counseling session. An $8 fee is charged to
cover the cost of the credit report. Loan terms range
from 6 to 12 months, with an average of 9 months. In
addition, borrowers must have a minimum income of
$1,000 per month and are required to provide Mitchell
Bank with two months’ evidence of payroll or other
recurring income.
A unique aspect of Mitchell Bank’s program is that
borrowers must sign a pledge that they will not incur
another payday loan during the term of their Mitchell
Bank loan. The bank also requires that the borrower set
aside 10 percent of loan proceeds in a savings account
that is restricted until the loan is paid. The interest rate
on the savings account is three times higher than
Mitchell Bank’s regular accounts to encourage small-
dollar loan customers to add to savings and avoid future
reliance on short-term credit. The bank also offers a 2
percent discount for customers who agree to have
payments automatically debited from their accounts.
The bank made 84 SDLs and one NSDL during the
pilot, with cumulative balances of about $56,000. Eight
loans were charged off. The bank found that a borrow
er’s status as an existing customer (versus a new customer)
had little effect on loan performance. However, the lack
of credit history, as opposed to a poor credit history, was
correlated to performance. Of the eight loans charged
off, six were ITIN loans whose borrowers, for the most
part, had no credit score
nces of about $56,000. Eight
loans were charged off. The bank found that a borrow
er’s status as an existing customer (versus a new customer)
had little effect on loan performance. However, the lack
of credit history, as opposed to a poor credit history, was
correlated to performance. Of the eight loans charged
off, six were ITIN loans whose borrowers, for the most
part, had no credit score. Mitchell Bank also reported
that loans that became 30 days delinquent were
frequently charged off. Management attributed the
correlation between late payments and default to state
laws that limit the penalty for late charges.* Recent
collection efforts have resulted in recovery and payment
of three of the previously charged-off loans, and the
bank anticipates collecting on several more.
In terms of successful program components, Mitchell
Bank reported that extended loan terms significantly
reduced the incidence of repeat customers. Several
customers have taken two loans per year (the bank’s
maximum), but all have paid as agreed. The program
also provides for a discount on subsequent loans if
initial loans performed as agreed. Mitchell Bank indi
cated that the savings component was well received by
consumers and resulted in substantial savings balances.
Sixty-two percent of savings accounts opened by loan
customers remained open at the end of the program,
and most were active. Most accounts are in the $250 to
$300 range, but several accounts are in the five-figure
range. Overall, Mitchell Bank reported that its small-
dollar loan program was profitable and met the emer
gency credit needs of the community it serves. Mitchell
Bank plans to continue to offer small-dollar loans and
will continue to develop and refine its program.
* The Wisconsin Consumer Act (§422.203(1) Wis. Stats.) limits late
charges to the lesser of 5 percent of the payment or $10. A late
charge may be assessed only once on an installment, however long
it remains in default
nd met the emer
gency credit needs of the community it serves. Mitchell
Bank plans to continue to offer small-dollar loans and
will continue to develop and refine its program.
* The Wisconsin Consumer Act (§422.203(1) Wis. Stats.) limits late
charges to the lesser of 5 percent of the payment or $10. A late
charge may be assessed only once on an installment, however long
it remains in default. A borrower who misses a $30 installment
payment on a small-dollar loan will be charged a $1.50 penalty.
A Pledge to Break the High-Cost Lending Cycle
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