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FDIC pursues payday loan alternatives

August 14, 2008|Jordan Weissmann | The Washington Post

WASHINGTON — Banks around the country have issued more than 3,000 small loans as part of a pilot program by the Federal Deposit Insurance Corp. exploring alternatives to payday lending.

Banking industry experts are calling it a significant first step toward finding a less-predatory way to provide short-term credit. Payday loans require borrowers to sign over funds from their next paycheck in return for a cash advance of a few hundred dollars with an annual interest rate often exceeding 390%.

Since January, the FDIC has tracked lending programs at 31 small and midsize banks throughout the United States, with the goal of figuring out how to make the loans profitable enough for more commercial banks to start marketing them, yet at attractive rates for borrowers.

"Our hope and our belief is that this can be done in a profitable way that works for even large institutions," said Andrew Stirling, who manages the program for the FDIC.

The loans, $2,500 or less, are issued under FDIC guidelines that cap their interest rates at 36%.

In the first quarter of 2008, the banks issued 3,140 loans, 1,535 of which were for less than $1,000. The average term was 10 months with a 15.05% annual percentage rate. The FDIC plans to announce its findings today but previewed them to the Washington Post.

Banking industry experts are encouraged by the early numbers. "It's suggesting that these are customers who have some kind of roots, some kind of stability, people who are demonstrating an ability to keep making payments," said Wayne Abernathy, executive vice president for financial institutions policy at the American Bankers Assn.

That sort of stability is important, Abernathy said, because bankers tend to view the low-income customers who need these products as risky, unreliable investments. He said the looming question was how many of these borrowers eventually would default.

Cutting through regulators' red tape will be another key to making the programs work, said Robert Rowe, senior regulatory counsel with the Independent Community Bankers of America.

Underwriting a $500 loan costs the same as a $50,000 loan, Rowe said, which makes it prohibitively expensive. Lending less than $5,000 can lose a bank money on administrative expenses. The FDIC is working with the banks to figure out ways to make the loans profitable, including possibly changing the underwriting rules.

The banks in the study took different approaches to making the loans and vetting customers. Several required that borrowers open a checking or savings account.

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