Monday, July 6, 2009

New FDIC Report Shows Rate-Limited Short-Term Loans Are Unprofitable and Unsustainable

/PRNewswire/ -- The FDIC's latest report on its Small-Dollar Loan Pilot Program sheds new light supporting the short-term payday loan industry financial model for those needing short-term financing.

Most of the banks that participated in the FDIC pilot program admit that their goal is not to earn profits, but is instead to "generate goodwill" within their respective communities and to qualify for government Community Reinvestment Act credit. Further, the 446 participating bank branches made a mere 8,346 loans over the course of a year, an average of one loan per branch every 20 days. In contrast, the short-term payday loan industry makes more than 100 million loans per year.

An artificial rate cap makes short-term lending unprofitable, as the FDIC report explains: "[g]iven the small size of SDLs (small-dollar loans)... the interest income and fees generated are often not sufficient to achieve short-term profitability." Instead, banks participating in the FDIC program use their low-priced loans to sell customers on other financial services, including checking accounts with extremely expensive overdraft protection fees.

The Small-Dollar loans in the FDIC's program are not comparable to short-term payday loans, as many participating banks have stringent qualification criteria for borrowers. For example, the FDIC cites Citizens Trust Bank as a case study in its report, but the bank requires borrowers to have been at their current address for at least a year, and to meet a fixed credit score requirement and show six months of income. Other banks require a linked savings account and credit report. In contrast, most short-term payday loans simply require a bank checking account and a paystub to qualify for a low-dollar loan.

"Adults are best served when they can choose among many competing lending options," said Samantha O'Neil, Communications Director at the Center for Consumer Freedom. "When Oregon set an APR rate cap, payday lenders left the state in droves and former payday borrowers increased their dependency on more expensive options, including checking account overdrafts." Other reports from the Federal Reserve Board in New York and university economists have echoed that concern.

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