Small-Dollar Loan Pilot Program
A Safe, Affordable and Feasible Template for Small-Dollar Loans
- The small-dollar loan pilot resulted in a template of essential elements for safe, affordable, and feasible small-dollar loans.
- The template is replicable - it is relatively simple to implement and requires no particular technology or other major infrastructure investment.
- The template could help banks better adhere to existing regulatory guidance regarding offering alternatives to fee-based overdraft protection programs.
- 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.
- Long-term support from a bank's board of directors and senior management was most important for programmatic success.
- Loan terms of 90 days or more and streamlined but solid underwriting were the most important product elements.
- The pilot concluded with twenty-eight (28) volunteer banks with total assets ranging from $28 million to nearly $10 billion.
- Participating banks made more than 34,400 small-dollar loans with a principal balance of $40.2 million.
- Small-dollar loan default rates were in line with default rates for similar types of unsecured loans.
- The FDIC is working with the banking 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.
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Purpose of Small-Dollar Loan Pilot
In February 2008, the FDIC began a two-year pilot project to review affordable and responsible small-dollar loan programs in financial institutions. 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 protection.
The Small-Dollar Loan Template
The small-dollar loan pilot concluded as of the fourth quarter 2009 and resulted in a template of product design and delivery elements for safe, affordable, and feasible small-dollar loans.
|A Safe, Affordable, and Feasible Template for Small-Dollar Loans|
|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|
The template is a best practices illustration of a model for safe, affordable, and feasible small-dollar lending. Pilot banks have demonstrated that the Safe, Affordable, and Feasible Small-Dollar Loan Template is replicable in that it is relatively simple to implement and requires no particular technology or other major infrastructure investment. Moreover, the template could help banks better adhere to existing regulatory guidance regarding offering alternatives to fee-based overdraft protection programs.1 Specifically, this guidance suggests that banks should "monitor excessive consumer usage (of overdrafts), which may indicate a need for alternative credit arrangements or other services, and inform consumers of these available options" that could include small-dollar credit products.
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 of directors 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.
The pilot concluded with twenty-eight (28) volunteer banks. These banks have total assets ranging from $28 million to nearly $10 billion and they are in diverse geographic locations. 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. The study conforms to privacy rules and did not request any information that could be used to identify individual bank customers, such as name, address or account number. All raw data from participating insured institutions will remain confidential.
Since the pilot began, participating banks made more than 34,400 small-dollar loans with a principal balance of $40.2 million. 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. All pilot banks offered only closed end installment loans. Loan characteristics, highlighted below, remained fairly consistent from quarter to quarter:
- 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 (average fee was $31 for SDLs and $46 for NSDLs), and when this fee was added to the interest rate, all banks were within a 36 percent annual percentage rate.
Delinquency ratios for SDLs and NSDLs were at least three times higher than for similar types of unsecured loans, but default rates were in line with industry averages. The cumulative charge-off rate for the pilot was 6.2 percent for SDLs and 8.8 percent for NSDLs. These compare to charge-off ratios of 5.4 percent for unsecured "loans to individuals" and 9.1 percent for "credit cards" according to the fourth quarter 2009 Call Report.
The FDIC has periodically released detailed information regarding the pilot in the FDIC Quarterly.
Final pilot results are available at A Template for Success: The FDIC's Small-Dollar Loan Pilot Program - PDF. (PDF Help)
Results from the first year of the pilot are available at http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_2/smalldollar.html.
Preliminary results from the first quarter data collection were published at: http://www.fdic.gov/bank/analytical/quarterly/2008_vol2_3/2008_Quarterly_Vol2No3.html, and third quarter results are featured in an article about alternative financial services, available at: http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html.
The FDIC is grateful to all of the pilot bankers for their assistance in the successful execution of the small-dollar loan pilot. Going forward, the FDIC is working with the banking 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. Among other things, these strategies include:
- Highlighting the facts about the pilot and other successful small-dollar loan models.
- Studying creation of pools of nonprofit or government funds to serve as "guarantees" for small-dollar loans.
- Encouraging broad-based partnerships among banks, nonprofit, and community groups to work together in designing and delivering small-dollar loans.
- Studying the feasibility of safe and innovative emerging small-dollar loan technologies and business models.
- Considering ways that regulators can encourage banks to offer safe and affordable small-dollar products and that these products can receive favorable Community Reinvestment Act consideration.
Small-Dollar Loan Guidelines
In June 2007, the FDIC issued the Affordable Small Dollar Loan Guidelines (Guidelines) to encourage financial institutions to offer small-dollar credit products that are affordable, yet safe and sound, and consistent with all applicable federal and state laws. Among other things, the Guidelines describe the extent to which a bank's small-dollar loan program may be subject to positive consideration under the Community Reinvestment Act. The Guidelines are at http://www.fdic.gov/news/news/press/2007/pr07052.html.
Comments and questions may 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.
1 "Overdraft Protection Programs, Joint Agency Guidance" Financial Institution Letter, February 18, 2005, http://www.fdic.gov/news/news/financial/2005/fil1105.html.