• COMMENTARY: FDIC Small Loan Program A Complete Failure

    In an effort to prove that payday lenders could be driven out of business and the big banks would fill the niche’ the FDIC tried a two year “Small Loan Program”. The political powers that be had already decided that online lending, short term lending, and payday loans had to go. The claim that these successful American business entities were “predatory” and hurting the people who they served is the mantra implemented to try to crush an entire small dollar loan industry.

    Payday lenders pushed back exposing the cronyism and political paybacks between the big banks government agencies like the Consumer Financial Protection Bureau (CFPB) and Federal Deposit Insurance Corp. (FDIC). The banks need government to do its dirty work.

    The FDIC Small Loan Program was spawned in an effort to prove the banks can do it better. I have written several times that the citizen who really needs these loans will be hurt the worst by this government overreach. The big banks want to get rid of their competition and are using government to do it.

    They are wrong in the fact that these other forms of small dollar lending don’t really compete with the big banks at all. Big banks don’t offer loans to the underserved and less desirables needing the short term loan to fix their car. It’s just not who they are.

    The FDIC acting as a good government lap dog set out to prove that the big banks could indeed provide Small Loans. They just released a report on how “not so well” the program is going.

    The report illustrated beautifully the failure of this mindset. Here are some bullet points from the report. You can read the  full study here.

    Even with the FDIC Small Loan Program in place participating banks gave out very few small-dollar loans.

    • Few banks wanted to participate at all. Only 31 banks participate in the program. Those banks represent a mere 446 locations in only 26 states.
    • Banks without a small-dollar loan product prior to this program issued “on average, only nine Small Dollar Loans in the fourth quarter.”
    • The program in one year has only “originated 8,346 SDLs with a balance of $5.5 million,” whereas the payday loans industry originates more than 150 million loans each year.
    • The FDIC program doesn’t save consumers any money. By offering loans over a longer period of time, interest rates in the FDIC pilot program appear lower. However, in terms of actual cost, 15 percent interest paid over a 12 month period equals $15 per $100 borrowed, similar to payday loans.
    • Additionally, where the average amount of a payday loan is $300, the banks in the FDIC program are lending, on average, double or triple that amount (depending on the type of loan), and so are ultimately making more money on the process.
    • “The average size of SDLs has hovered around $675, the interest rate has remained at about 15 percent, and loan terms have ranged from 10 to 12 months in each of the first four quarters. Similarly, for NSDLs, the average size has been close to $1,700, the interest rate has remained between 14 and 15 percent, and the term has ranged from 14 to 16 months.”
    • “Only a few participating banks have indicated that short-term profitability is the primary goal for their small-dollar loan program…Most pilot banks are using the small-dollar loan product as a cornerstone for long-term relationship building that also creates goodwill in the community.”
    • “Banks with existing programs have been able to generate long-term profitability through volume and by using the SDL and NSDL products to cross-sell additional products.”
    • “All pilot banks require…a credit report to determine loan amounts and repayment ability.”
    • “Ten banks require SDL customers to open a savings account linked to SDLs, while nine encourage… customers to open a savings account.”

    The facts are in. Banks cannot serve this product successfully. They don’t do it cheaper than a payday loan operation would. They don’t make it easier. In fact, they make the process much harder by forcing more paperwork and credit reports upon borrowers. They also increase the amount people borrow on average. Rather than just getting the $300 needed, borrowers were encouraged to take out more. Doesn’t adding more debt to the people who are struggling sound rather “predatory”?

    It’s time for the big banks to get off their high horse and realize that there is room enough for everyone in the money lending market. Payday lenders do it better than a big bank ever could. It’s not predatory and it’s not abusive. It’s the American way.

    S.C. Sherman

    Senior Editor

    Steve Sherman is an author, popular radio commentator, and former Iowa House candidate. His articles have appeared nationally in both print and online for Townhall, Human Events, Clash Daily, Washington Times, Washington Examiner, Red Alert Politics, Forbes, NRATV and others. All of his novels including his most recent tome, Lone Wolf Canyon, a modern day western that infuriates the left and all "Snowflakes," are available here.

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