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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

Small-Dollar Loan Pilot Program

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
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

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.

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 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.

Pilot Results

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:

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.

Pilot Reports

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.

Next Steps

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:

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.

Contact

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.