It was nearly two years ago that the Federal Deposit Insurance Corp. set out to examine if banks could make money offering small consumer loans, and with the pilot program set to conclude in February, the answer seems clear: not in the short term.
But for many of the 31 banks participating in the FDIC pilot, turning a profit on small-dollar loans is beside the point. Their goal in fronting funds to borrowers who otherwise might have turned to payday lenders is to build relationships that can be profitable down the road.
"Our philosophy is that we're actually growing customers who will be using all the other services and products that we offer at some point in time, but you have to have the patience to do that," says Lilia Escajeda, the Community Reinvestment Act officer at the $2.7 billion-asset Amarillo National Bank in Texas.
FDIC chairman Sheila Bair has long been interested in providing cash-strapped consumers with alternatives to payday lenders and check cashers. In tracking demand and repayment patterns at the 31 participating banks, the FDIC intends to develop best-practices guidelines that, it hopes, will ultimately encourage more banks to make small loans.
The participating banks are offering small-dollar loans of $1,000 or less and nearly small-dollar loans that range from $1,000 to $2,500. The banks were free to design their own programs as long as the annual percentage rate on the loans stayed below 36 percent; payment periods were beyond a single paycheck cycle; and they charged little or no origination fees. The data collection will end in February, though the agency has set no timetable for the release of the guidelines.
Rae-Ann Miller, special advisor to the FDIC's Director of the Division of Insurance and Research, says that through June 30, participating banks had made 24,000 loans of less than $2,500, for a total of $24 million. Delinquencies are higher than average, which Miller says is not surprising since the borrowers generally have low incomes and sub-600 credit scores. But Miller says banks have taken some comfort in the fact that chargeoffs are in line with the national average.
The $785 million-asset National Bank of Kansas City had no small-dollar loan program in place when it was asked by the FDIC to participate in the pilot. Chief lending officer Stacy Nickel said the bank originates about five to 10 such loans a month at a 22 percent annual percentage rate. The loans are only available to borrowers in the Kansas City Metropolitan area, and most are already bank customers, Nickel says.
So far, the payoff has been minimal. Only about 15 borrowers have opened deposit accounts through the program, and while a handful of others looked into first-time homeowner opportunities, the truth is that many of the borrowers can't yet qualify for a mortgage.
"We don't really see a profit due to the underwriting, the credit reports we have to pull, and time spent reviewing the documents," Nickel says.
Still, the bank intends to continue offering the loans even after the pilot program expires because it believes they help build loyalty, according to Nickel.
That's not to say small-dollar loans can't be profitable from the get-go. The $92 million-asset Bank of Commerce in Stilwell, Okla., has been making money on the loans since it started offering them in early 2008 by keeping its overhead low, says Jason Garhart, a vice president.
Bank of Commerce makes loans up to $1,000 at APR of 13.75 percent. (There is an origination fee of $25 to $50.) It also requires borrowers to open a savings or checking account - a key step to improving their financial standing. So far, only two of the loans have been charged off.
Garhart says that the bank originates about 10 loans a month. It could make more but it has kept volume to a minimum so that it wouldn't have to add more staff. "It's profitable because we don't have to add overhead," he says. "If we had to hire somebody else, that would be different."
The largest institution participating in the pilot is the $10 billion-asset Wilmington Trust in Delaware. Under its program, the bank collaborates with a local nonprofit to offer small-dollar loans to low-income consumers in need of quick cash.
Wilmington Trust has originated about 500 loans totaling $200,000. It is protected from chargeoffs because grants given to the nonprofit cover the cost of any chargeoffs, says Rebecca DePorte, the senior vice president of personal financial services.
"If we were looking at this as an independent project and a way to generate profit, would we do it? Probably, but it wouldn't be prioritized," she says. "It's more important for the community that we do this."