In February 2008, the FDIC began a two-year pilot project to review affordable and responsible small-dollar loan programs in financial institutions.

The pilot is a case study intended to identify effective and replicable business practices to help banks incorporate affordable small-dollar loans into their other mainstream banking services. Best practices resulting from the pilot will be identified and become a resource for other institutions. Thirty-one (31) volunteer banks are participating. These banks have total assets ranging from $27 million to $10 billion and they are in diverse geographic locations.

Program Requirements

Key features described in the Guidelines on Affordable Small-Dollar Loans include:

• Loan amounts of up to $1,000;
• Amortization periods longer than a single pay cycle and up to 36 months for closed-end credit, or minimum payments that reduce principal (i.e., do not result in negative amortization) for open-end credit;
• Annual percentage rates (APR) below 36 percent;
• No prepayment penalties;
• Origination and/or maintenance fees limited to the amount necessary to cover actual costs; and
• An automatic savings component.

While many participating banks follow these features, there is room for some exceptions. For example, depending on their business plan and consumer demand, a number of banks in the pilot originate loans larger than $1,000, and for the purposes of the pilot, report on loans up to $2,500. Additionally, while several participating banks require automatic savings linked to small-dollar loans, others encourage savings.

Application Process and Selection Criteria
During the case study, the FDIC will receive applications from other institutions interested in joining the small-dollar loan pilot and that meet certain minimum eligibility requirements, including:

• A composite "1" or "2" rating on its most recent Safety and Soundness examination, and a Management rating of "1" or "2";
• Satisfactory policies and procedures in all areas, including lending, audits, aggregate risk, internal controls, liquidity, interest rate risk, compliance and Bank Secrecy Act/Anti-Money Laundering (BSA/AML);
• A composite "1" or "2" rating on its most recent Compliance examination; and
• At least a "Satisfactory" rating on its most recent Community Reinvestment Act (CRA) evaluation.

In addition, the institution must not currently be subject to a formal or informal enforcement action or be the subject of an investigation or inquiry.

Volunteers interested in participating in the study will be asked to provide the following (or similar) information:

• Whether it already offers small-dollar loans and, if so, the terms of such loans;
• Whether it proposes to initiate a small-dollar loan program;
• The proposed structure of the program;
• The current or proposed size of the program;
• How it proposes to market the program;
• How it envisions the small-dollar loan application process;
• What it proposes as underwriting criteria; and
• Proposed interest rates and fees.

Small Dollar Loan Reporting
In May 2008, the FDIC began collecting information, as described in the link above, about each institution's experience with its small-dollar lending program. Preliminary results from the first quarter data collection are available in FDIC Quarterly - PDF 681k (PDF Help). Additionally, third quarter results are featured in an article available in the FDIC Quarterly (http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/AltFinServicesprimer.html)

The study conforms to privacy rules and will not request any information that could be used to identify individual bank customers, such as name, address or account number. All raw data from participating insured institutions will remain confidential. The FDIC plans to publish only general findings of the study.

Benefits of Participating in the Study

Participation in this program will be strictly voluntary; however, it is anticipated that participating institutions will realize some benefits. For example, a state nonmember bank that establishes a loan program that provides small, unsecured consumer loans consistent with the Guidelines on Affordable Small-Dollar Loans would warrant favorable consideration by the FDIC under CRA as an activity responsive to the credit needs of the institution's community. Other institutions will also likely be subject to similar favorable consideration after review by their primary federal regulator.

Also, programs that transition low- or moderate-income borrowers from higher cost loans to lower cost loans would be considered particularly responsive to community needs. Therefore, state nonmember banks offering lower-cost alternatives to such borrowers would also be viewed by the FDIC as particularly responsive in the CRA examination, as would be likely for other institutions upon review by their primary federal regulator. Where small-dollar loan products are combined with a low-cost savings account, institutions may also qualify for favorable consideration for providing community development services.

Institutions can potentially use the small-dollar loan pilot to tap into new markets by expanding relationships with individuals who currently may not be fully utilizing the mainstream financial system. An intangible benefit is community goodwill that would likely be created as a result of offering consumers credit products with significant savings over payday loan fees.

We believe that affordable small-dollar lending is a win/win for institutions and consumers. We appreciate your interest and welcome any questions you may have to be sent to: SmallDollarPilot@FDIC.gov.

U.S. OMB control number 3064-0157, expiring October 31, 2010. A federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.