For Banks, Little Progress on Loans to the Unbanked

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WASHINGTON — Despite years of encouragement by their regulators to provide small-dollar loans to people without access to traditional forms of credit, banks largely remain reluctant to enter the field.

At a congressional hearing Thursday, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency could point to little progress on the issue since 2009.

The resistance by banks to lending to people without bank accounts or with poor credit histories brings many low-income Americans to payday lenders who are frequently accused of predatory practices.

In addition to poor economic conditions that are hindering bank lending more broadly, factors such as regulatory inconsistency and uncertainty, the stigma associated with small-dollar loans, and insufficient methods of assessing risk were cited as reasons that many lenders are not lending to the unbanked or to the underbanked.

"At some level, restrictions that are too tight on providers could make it unviable to offer small-dollar loans to the underserved, causing regulated companies to exit the market," testified Melissa Koide, vice president of policy at the Center for Financial Services Innovation. "Conversely, placing too little emphasis on consumer protections leaves open the door for unaffordable and abusive products."

Witnesses at the hearing made clear that banks and their regulators have not resolved this conflict, at least on a large scale. The testimony led Rep. Shelley Moore Capito, who chairs the House financial institutions and consumer credit subcommittee, to declare, "I'm not sure that we're solving this problem."

In 2008 and 2009, the FDIC ran a pilot program with 31 banks which made consumer loans of $2,500 or less, loan terms of 90 days or more, and annual percentage rates that averaged 14%-16%. While 26 of the 31 banks continue to offer the loans today, the lending was not profitable in the short term, according to Robert Mooney, the FDIC's deputy director of consumer protection and community affairs.

He said that the program allowed participating banks to develop long-term customer relationships that would become profitable eventually. "And that was the primary reason they engaged in the program."

The FDIC continues to encourage banks to make these kinds of small-dollar loans in accordance with regulatory guidance that caps annual percentage rates at 36%.

"The fact is that banks have the infrastructure currently in place, and the capacity, to make these small-dollar loans to their customers," Mooney said.

Mooney also testified that the FDIC is studying the creation of pools of funds — from the government or from non-profit organizations — to serve as guarantees for small-dollar loans.

That idea drew flak from some Republicans, who showed concern about the idea that taxpayer funds might be used. "Private enterprise is willing to take that risk," said Rep. Blaine Luetkemeyer, R-Mo.

One of the key questions about small-dollar lending is whether banks can meet their profit targets while avoiding the stigma associated with payday lending. The difficulty in threading this needle came into focus when Rep. Melvin Watt, D-N.C., took issue with the fact that banks participating in the FDIC's pilot program were allowed to charge APRs of up to 36%.

"That's a pretty good return if someone's actually paying the loan back," Watt remarked. "And last time I checked, most of these banks were borrowing money from the Fed at 0%."

Similar concerns were raised by Rep. Luis Gutierrez, D-Ill., who singled out Wells Fargo & Co. and U.S. Bank for offering small-dollar loans that he said resemble payday loans.

According to Wells Fargo's website, borrowers who use direct-deposit can receive an advance of up to $500 on their next paycheck. They pay a fee of $1.50 for every $20 advanced. At U.S. Bank, the limit is a $500 advance, and the fee is $2 for every $20 advanced.

"Sounds like a payday loan to me," Gutierrez said.

If banks are considering entering the small-dollar loan business, they will also need to pay close attention to a number of innovative firms that are providing an alternative to payday lenders.

For example, Flexwage Solutions LLC offers a product that makes available wages that workers have earned but not yet been paid. Customers pay a flat fee for the pre-disbursement of their wages. Because there is no loan, they have nothing to repay.

BillFloat, Inc., based in San Francisco, provides 30-day to 60-day loans that its customers can only use to pay their bills — for example, for cable TV, phone service, or insurance. Annual percentage rates on the loans are 36%.

"This is exactly the kind of short-term, small-dollar credit solution that has been abandoned by many banks, yet is sorely needed by consumers to make ends meet," testified BillFloat chief executive Ryan Gilbert.

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