The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) recently approved a two-year pilot project to review affordable and responsible small-dollar loan programs in financial institutions. The purpose of the study is to identify effective and replicable business practices to help banks incorporate affordable small-dollar loans into their other mainstream banking services. Best practices resulting from the pilot will be identified and become a resource for other institutions.

To participate in the study, the FDIC selected an initial group of 31 participating banks of varied sizes and diverse locations and settings. In choosing participants, our selection panel looked at current or planned products offered by the bank and determine how closely they met the recently released guidelines on small-dollar lending (see FDIC Press Release: FDIC Issues Final Guidelines on Affordable Small-Dollar Loans )

Key features of a preferred small-dollar lending program may include:

• Loan amounts of up to $1,000;
• Amortization periods longer than a single pay cycle and up to 36 months for closed-end credit, or minimum payments that reduce principal (i.e., do not result in negative amortization) for open-end credit;
• Annual percentage rates (APR) below 36 percent;
• No prepayment penalties;
• Origination and/or maintenance fees limited to the amount necessary to cover actual costs; and
• An automatic savings component.

Application Process and Selection Criteria

Small Dollar Loan Reporting
In May 2008, the FDIC will begin collecting information about each institution's experience with its small-dollar lending program.

The study will conform to privacy rules and will not request any information that could be used to identify individual bank customers, such as name, address or account number. All data from participating insured institutions will remain confidential. The FDIC plans to publish only general findings of the study.

Participation in this program will be strictly voluntary; however, it is anticipated that participating institutions will realize some benefits. For example, a state nonmember bank that establishes a loan program that provides small, unsecured consumer loans consistent with the Affordable Small-Dollar Loan Guidelines would warrant favorable consideration by the FDIC under CRA as an activity responsive to the credit needs of the institution's community. Other institutions will also likely be entitled to similar favorable consideration after review by their primary federal regulator.

Also, programs that transition low- or moderate-income borrowers from higher cost loans to lower cost loans would be considered particularly responsive to community needs. Therefore, state nonmember banks offering lower-cost alternatives to such borrowers would also be viewed by the FDIC as particularly responsive in the CRA examination, as would be likely for other institutions upon review by their primary federal regulator. Where small-dollar loan products are combined with a low-cost savings account, institutions may also qualify for favorable consideration for providing community development services.

Institutions can potentially use the small-dollar loan pilot to tap into new markets by expanding relationships with individuals who currently may not be fully utilizing the mainstream financial system. An intangible benefit is community goodwill that would likely be created as a result of offering consumers credit products with significant savings over payday loan fees.

We believe that affordable small-dollar lending is a win/win for institutions and consumers. We appreciate your interest and welcome any questions you may have to be sent to: SmallDollarPilot@FDIC.gov.

U.S. OMB control number 3064-0157, expiring October 31, 2010. A federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.