Small-Dollar Loan Pilot Produced Valuable Insights, Profits

The op-ed "We Met with the CFPB and Were Pleasantly Surprised" by Robert L. Johnson and Ken Rees misstated the facts about the FDIC’s small-dollar loan demonstration project and drew inaccurate conclusions.

The pilot project explored how such loans can be made safe and affordable for consumers, and also feasible for banks. It provided an opportunity for all stakeholders to learn from a variety of banks' real-world experiences.

Banks in the pilot project that had existing small-dollar programs were the most likely to report that their overall relationships with small-dollar loan customers are profitable. These banks indicated that their small-dollar loan origination and servicing costs are similar to those of traditional loans. However, given the small size of these loans, the interest income and fees generated were not always sufficient to achieve short-term profitability. Nevertheless, some banks with long-standing programs were able to generate longer-term profitability through volume and by using the small-dollar loans to cross-sell additional products. 

Some banks did achieve short-term profitability. These banks were primarily in Census tracts with high concentrations of consumers who have a need for small-dollar loan products, and the banks were able to generate higher transaction volumes. 

It is, of course, imperative that small-dollar loans be underwritten in a safe-and-sound manner, taking into account the borrower’s ability to repay the loan without leading to additional debt. In the end, underwriting that was streamlined but solid led to default rates that were in line with industry averages on similar types of loans, such as unsecured personal loans and credit card loans.

Importantly, at the end of the pilot, almost all of the participating bankers indicated that small-dollar lending was a useful business strategy and that they were continuing their programs.

The FDIC continues to believe that the small-dollar loan model is replicable and that these loans can be cost-effective and responsive to the needs of both consumers and bankers.

Mark Pearce is the director of the FDIC’s division of depositor and consumer protection.