FDIC pushes payday lender rivalry
The Federal Deposit Insurance Corp. last week published guidelines Chairman Sheila Bair hopes will encourage agency-regulated banks to compete for the small consumer loans that are the lifeblood of the payday lending industry. The FDIC also launched a small-loan pilot program.
The payday industry took the developments in stride.
Payday lenders have been a target of Bair’s almost since the day she took over at the FDIC a year ago. Fees on the small loans range upward of 390 percent, yet millions of Americans look to payday lenders as their primary source of fast cash.
In 2006, the industry made 148 million loans to 19 million households. On loan volume of $47 billion, lenders earned fees of $8 billion.
Nice work if you can get it. Banks and credit unions have tried, but overhead costs and fears regulators might look harshly on small, unsecured consumer loans have discouraged many.
Lyndsey Medsker, spokeswoman for the payday lender trade association, says the industry does not think banks can make a profit on its turf. Customers must have a checking account to get a payday loan, she says, but choose to bypass banks to access credit.
If anything, bank entry into payday lending would help bring the industry into the mainstream, Medsker says.
The FDIC guidelines encourage pricing that keeps annual loan rates below 36 percent. Because banks already have a relationship with customers, they should be able to approve loans quickly or pre-arrange lines of credit that would make quick money available without the need for additional review.
The agency would also like to see education and savings components in the bank offerings. Nonprofit partners could help identify qualified borrowers.
The carrot would be kind FDIC treatment of small consumer loans when auditing banks for community reinvestment efforts.
The two-year pilot program will help identify some of the best ways banks can deliver loans up to $1,000 at low cost while complying with the new guidelines.
Spokesman David Barr says the FDIC will look for 20 to 40 banks of all sizes from all over the country to get a broad sampling. The agency had considered offering $30 million in incentives to attract applications, but that proved unnecessary.
Even if the small loans themselves are not profitable, Barr says, the banks can use them to build long-term relationships that include mortgages or other, larger loans.
“There’s no one right answer as to what is the right product,” he says.
The right answer may eventually be found at a place neither banks nor payday lenders want consumers to look.
Wal-Mart Stores Inc. says it will more than quadruple, to 1,000, the number of in-store MoneyCenters by the end of 2008.
The centers cash checks, sell money orders and execute money transfers for customers. The number of transactions is eye-popping given the limited number of stores, 225, that already offer the services. Would you believe more than 2 million a week?
The only Washington store with a MoneyCenter is in Federal Way, but spokesman Alfredo Padilla says the Spokane Valley store will have one by the end of 2007, as will stores in Chehalis and Vancouver. A store near Pocatello will become the first Idaho location.
A Wal-Mart debit card is also planned.
Padilla says Wal-Mart has announced no plans to enter the payday loan business, but executives have said the company will add services in cooperation with GE Money or other partners. Wal-Mart has abandoned efforts to open its own bank.
If the world’s largest retailer can find a way into the small-loan business, look out. Given the overlap between its customer base and the typical payday loan client, the company could quickly dominate the industry.