New FDIC Report Shows Rate-Limited Short-Term Loans Are Unprofitable and
Unsustainable
Pilot Program Proves Banks Unable to Service the Short-term 'Payday' Loan
Market
WASHINGTON, July 6 /PRNewswire-USNewswire/ -- The FDIC's latest report on its
Small-Dollar Loan Pilot Program sheds new light supporting the short-term
payday loan industry financial model for those needing short-term financing.
Most of the banks that participated in the FDIC pilot program admit that their
goal is not to earn profits, but is instead to "generate goodwill" within
their respective communities and to qualify for government Community
Reinvestment Act credit. Further, the 446 participating bank branches made a
mere 8,346 loans over the course of a year, an average of one loan per branch
every 20 days. In contrast, the short-term payday loan industry makes more
than 100 million loans per year.
An artificial rate cap makes short-term lending unprofitable, as the FDIC
report explains: "[g]iven the small size of SDLs (small-dollar loans)... the
interest income and fees generated are often not sufficient to achieve
short-term profitability." Instead, banks participating in the FDIC program
use their low-priced loans to sell customers on other financial services,
including checking accounts with extremely expensive overdraft protection
fees.
The Small-Dollar loans in the FDIC's program are not comparable to short-term
payday loans, as many participating banks have stringent qualification
criteria for borrowers. For example, the FDIC cites Citizens Trust Bank as a
case study in its report, but the bank requires borrowers to have been at
their current address for at least a year, and to meet a fixed credit score
requirement and show six months of income. Other banks require a linked
savings account and credit report. In contrast, most short-term payday loans
simply require a bank checking account and a paystub to qualify for a
low-dollar loan.
"Adults are best served when they can choose among many competing lending
options," said Samantha O'Neil, Communications Director at the Center for
Consumer Freedom. "When Oregon set an APR rate cap, payday lenders left the
state in droves and former payday borrowers increased their dependency on more
expensive options, including checking account overdrafts." Other reports from
the Federal Reserve Board in New York and university economists have echoed
that concern.
SOURCE Center for Consumer Freedom
Samantha O'Neil of the Center for Consumer Freedom, +1-202-463-7112,
oneil@consumerfreedom.com
