The FDIC Announces a Possible Replacement for Payday Loans
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UPDATED: Nov 18, 2011
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Martin J. Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), gave a recent speech that covered some of the FDIC’s steps taken to curb the harmful effects payday loans have had on lower-income and minority families.
After determining “7 percent of U.S. households [who] do not have bank accounts, and another nearly 18 percent who may have an account still utilize non-bank financial services such as check cashers and payday lenders,” as stated by Gruenberg, the FDIC is shifting focus to “expanding access to insured financial institutions to all Americans.”
The measures the FDIC has begun to take include the testing of a project recommended in the past: the Small-Dollar Loan Pilot Program.
This program’s aim is to provide banks with a business model that would allow them to offer the same services payday lenders offer, but to allow those services to be profitable to both borrowers and banks alike.
The loans offered by this program are for $2,500 or less, have a term of 90 days or less, and carry an annual percentage rate (APR) of 36 percent or less. They have low origination fees, if any, and banks’ decisions to offer the loans are to be made within 24 hours of receiving an application.
Gruenberg reported that after testing the program on 28 volunteer banks, the Small-Dollar Program “demonstrated that banks can offer safe, affordable small-dollar loans as an alternative to high-priced sources of emergency credit.”
He said the FDIC is “hopeful that the results of the testing will encourage more banks to offer such products.”