Though much of the nation's financial press focuses on the economic fallout from troubled subprime mortgages, very positive developments have occurred in the loan market for lower-income workers and consumers — small-dollar consumer loans.
Several efforts are underway to bring a very large group of Americans into mainstream banking rather than forcing them to rely on predatory lenders.
The Federal Deposit Insurance Corp. has begun a pilot program designed to bring lower-income and, therefore, higher-risk consumers into the banking mainstream by encouraging banks to offer loans of up to $1,000 at reasonable interest rates.
In October, Defense Department regulations took effect to protect service members and their families from predatory lending, including a 36% annual-percentage-rate cap on certain types of loans. These regulations, like the FDIC program, are meant to help bring underserved military personnel into the banking mainstream and away from payday and similar predatory lenders. The Defense Department guidelines specifically refer to the FDIC small-dollar loan program as a viable alternative for service members.
Under the FDIC program, banks and other lenders are encouraged to make small loans with reasonable interest rates, no or low origination fees, no prepayment penalties, payment periods that extend beyond a single pay cycle, a savings component, and financial education.
Several banks and credit unions were already offering such products. My organization within MidCountry Bank in Kansas City, Mo., offers what we call the NewPath Loan in military markets. This initiative mirrors the criteria in the FDIC program and can reduce the underserved military market's reliance on high-cost, nonbank lenders. NewPath offers both education and a $50 contribution to an emergency savings account when the loan is paid.
FDIC Chairman Sheila Bair has said she views the small-dollar loan program as an important step toward helping short-term borrowers achieve financial stability. "We have high hopes that this effort will provide the foundation for broader programs that can be offered in the future," she has said.
The FDIC program should be expanded and offered by all banks and financial institutions as a much-needed alternative to predatory lenders in military and lower-income communities.
Here's an opportunity for local banks to demonstrate how they can help build their communities.
