Payday lenders, already in the sights of the U.S. Department of Defense, have now been targeted by the Federal Deposit Insurance Corp.
Led by Chairman Sheila Bair, the agency charged with assuring bank security and deposit safety is considering a new program intended to help banks take on high-fee, high-interest lenders capturing low- and middle-income individuals who can least afford such credit but have nowhere else to turn.
Many of those borrowers are young military personnel who have little experience with credit and no relationship with a local financial institution. Last year, a Defense Department study warned that credit woes were hurting morale.
Congress responded by attaching an amendment to the Defense Authorization Bill that caps the interest rate on loans to armed forces personnel at 36 percent, compared with payday industry rates upwards of 390 percent. The law takes effect in October.
Passage of the amendment rallied consumer advocates who say interest rate caps or other restrictions should be imposed on all short-term, small loans. Bair, who took office in June, formed an Advisory Committee on Economic Inclusion to determine how the FDIC might help.
She said poor credit has driven too many with credit needs away from traditional financial institutions.
“It troubles me greatly that we have something of a two-tiered financial system in the United States,” Bair said during a Thursday teleconference sponsored by the FDIC and American Bankers Association.
Many of those borrowers, she noted, have checking accounts, but look to payday lenders for credit.
“It frustrates me they are not turning to their banks,” she said.
To help reintroduce the banks to their customers, the Inclusion Committee developed guidelines for a pilot program that would offer incentives to participating banks.
The FDIC could make $30 million of its overnight deposits available at below-market interest rates. Larger deposits would be collateralized.
Small loan activity could be rewarded with consideration under the Community Reinvestment Act.
Examiners could be more forgiving when reviewing the underwriting of some loans.
In return for FDIC help, the banks might offer loans as small as $300 with low rates, small fees, and amortization over as many as 18 months. Many payday borrowers greatly increase loan costs by repeatedly rolling over loans when they cannot repay at the end of 30 days.
Also, a 5 percent savings component would be added to the loan principal. When loans are repaid, borrowers will have small savings accounts and stronger relationships with their bank.
She mentioned – cautiously, because the topic is a sore one for bankers – programs launched by credit unions in North Carolina and Pennsylvania that already do many of the things the FDIC is suggesting.
The state of Pennsylvania backs the program there with a $20 million deposit with the credit union system. The funds must earn a market rate of interest. Returns in excess of that amount can be used to reimburse credit unions up to 50 percent of the loss on a defaulted loan.
Banks, Bair said, already have the infrastructure and people to serve checking account customers who might become borrowers if the right products are made available.
“We think this can be done profitably in a way that will enhance your reputation and build relationships with your customers,” Bair said.
Sly bankers who serve military personnel are already exploiting one payday lender tool. They identify potential small-loan borrowers by tracking the post-dated checks that frequently secure payday loans. Then they approach the customer.
Gary Wagers, manager of consumer lending for Banner Bank, was among those taking in the FDIC proposal, which could be implemented by summer.
The Walla Walla-based bank offers lines of credit down to $1,000 for credit-worthy customers, but nothing for those with no or poor credit histories.
Though payday lenders infest Walla Walla, Wagers says he realized listening to Bair and other presenters how little he and other Banner officials understood that industry.
Banner wants to serve that market.
“What are we going to do? I don’t know,” Wagers says.
He says Banner does not want to take losses on small loans, but does not want to set loan criteria so strict it will have no takers. Some lenders say early customer response to loan products with terms better than those payday lenders offer has been disappointing.
The FDIC must perform a balancing act, as well. As the agency encourages banks to serve consumers inherently more risky, it cannot stray too far from its fundamental mission: protecting bank depositors.
Bair seems convinced the FDIC is up to the task.