Often perceived as a bank for the wealthy, Wilmington Trust Corp. in Delaware has rolled out a loan product targeting the less well-heeled: a short-term loan that maxes out at $500.
As regulators continue to encourage banks to offer consumers alternatives to high-cost payday loans, the $11 billion-asset Wilmington has teamed up with a local nonprofit to make small-dollar loans that have drastically lower annual percentage rates and longer pay schedules than the typical payday loan.
Robert V.A. Harra Jr., Wilmington Trust’s president and chief operating officer, said the Worker’s Loan Program was established not to be a big money maker but to provide a community service. The bank was approached by officials at West End Neighborhood House who increasingly found themselves working with people stuck in a spiral of debt involving payday loans and were looking for a way out.
“We’ve had a long-term relationship with the West End Neighborhood House,” Mr. Harra said, “and we think this is a good project for us to get involved with, and frankly it’s the right thing to do.”
Other organizations involved in the program are the insurer American International Group Inc., Citigroup Inc.’s Citi Foundation, Speer Trust, and the Federal Home Loan Bank of Pittsburgh.
Neil Cotiaux, a spokesman for the Pittsburgh Home Loan bank, said that it is involved in supplying marketing and administrative funds to the latest project but not in covering bad loans.
Federal Deposit Insurance Corp. Chairman Sheila Bair has been urging banks to offer payday-loan alternatives — and dangling Community Reinvestment Act credit — but to date few banks have done so because they see such loans as barely, if at all, profitable.
Still, the FDIC plans to begin taking applications at the end of this month for a two-year pilot program to encourage banks of all sizes to offer small-dollar loans as an alternative to payday loans. Andrew Stirling, the manager of the Small Dollar Loan pilot program, said the FDIC is talking to 57 banks, ranging from $40 million to more than $100 billion in asset size, from 28 states.
“We’ve had a really strong interest in the industry participating,” he said.
Mr. Cotiaux said that ever more financial institutions are offering financial literacy programs “as one way to combat predatory lending” but few offer payday loan alternatives.
“You’re not seeing nearly as many initiatives like the one just unveiled in Wilmington,” he said. “I wouldn’t call it truly unique because you just don’t know what’s out there across the country, but I would call it cutting-edge.”
Under the program, people can borrow up to $500 at a 13.49% annual percentage rate and take up to four months to repay. Most payday loans have far higher APRs and require payment in full by the next pay period. If the borrower cannot repay the whole amount, the loan is rolled over but the interest due mounts steeply. A November 2006 study published by the Center for Responsible Lending in Durham, N.C., said the average payday loan in Delaware would charge the borrower an APR of 417%.
Wilmington Trust is primarily associated with wealth management services. In the second quarter it closed the purchase of Bingham Legg Advisers LLC, a Boston wealth management firm. Rebecca DePorte, the senior vice president of personal financial services at Wilmington Trust, said it is sometimes mistaken as “the bank for the wealthy.”
“We get a lot of press for our wealth advisory business, but really the majority of this company’s profits comes from its [retail] banking business, and that’s a business for everyone,” Ms. DePorte said. The Worker’s Loan Program is administered through the retail bank.
Mr. Harra said it makes sense for the bank to participate in the program because of the size of Wilmington Trust’s retail bank. It has “a large consumer reach in the state” of Delaware, though initially the loans will be made at just three of Wilmington Trust’s 47 branches in the state. It has the No. 1 deposit market share of any retail bank in Delaware, according to the FDIC.
Paul Calistro, the executive director of West End Neighborhood House, said Wilmington Trust, his organization, and some others in the consortium will bear the credit risk for defaulted loans. Typically, people seeking the loans would get personal credit and budget counseling before receiving a loan, he added.
“We’re going to give them at least, up-front, about a 30-minutes’ counseling,” Mr. Calistro said. “So it’s going to take them about 30 more minutes to do this than a payday loan.”
West End Neighborhood House will evaluate each applicant. The criteria will be a recent bank statement with no overdrafts, the applicant’s two most recent pay stubs, a driver’s license, a current utility bill in the applicant’s name, and a blank check from his or her account.
Based on their budget information and ability to maintain housing and other payments, West End Neighborhood House will determine whether the applicant qualifies for the loan, Mr. Harra said. Once approved, the loans would be made by Wilmington Trust.
This is the third loan program the bank has done with West End Neighborhood House. The other two are called Job Start and Statewide Security Deposit Loan Program, started in 2002 and 1993, respectively. Job Start helps people returning to the work force pay expenses with short-term loans ranging from $300 to $3,000 with an interest rate of 3.75% APR. Terms range from six to 24 months. The program has made about 50 loans for an aggregate of $23,000 to date.
The Statewide Security Deposit Loan Program helps people take out loans to cover their security deposits when renting an apartment. Loans can range up to $800 at 4% APR, and the repayment term can also extend to 24 months. Nearly 1,700 loans have been made in this program for an aggregate of $900,000, the bank said.
Mr. Cotiaux said the Pittsburgh Home Loan bank got involved in the latest program in part because of its free financial literacy program called My Money, My Life, which it started in 2004.
The program aims each year to financially counsel about 200 people 16 to 19 years old in poor neighborhoods of the Pittsburgh area. A strong component of the curriculum, Mr. Cotiaux said, is teaching “what is payday lending, why is it not necessarily good for you, and how do you avoid it?”
The Worker’s Loan Program will no doubt bolster Wilmington Trust’s Community Reinvestment Act rating. “But we’re not doing it for that,” Mr. Harra said. “We already have an ‘outstanding’ rating.”
As of Monday, West End Neighborhood House had accepted 19 applications, and 12 loans had been processed by Wilmington Trust, with $5,050 lent. Still, Mr. Harra said, he knows the loans are not for everybody.
“Payday lending is a choice that an individual makes. If they want to make that choice that’s fine,” he said. “This is just another choice, an option an individual can potentially make.”
