Statement of
Robert W. Mooney, Deputy Director,
Consumer Protection and Community Affairs,
Division of Depositor and Consumer Protection,
Federal Deposit Insurance Corporation
On
An Examination of the Availability
Of Credit for Consumers
before the
Subcommittee on Financial Institutions
and
Consumer Credit, Committee on Financial Services,
U.S. House Of Representatives
2128 Rayburn House Office Building
September 22, 2011
Chairman Capito, Ranking Member Maloney, and members of the Subcommittee, thank
you for inviting me to testify on options available to consumers in need of small-dollar,
short-term credit. Expanding the availability of mainstream financial services in general,
and affordable small-dollar loans in particular, is a significant priority at the Federal
Deposit Insurance Corporation.
The FDIC believes that banks already have the tools and infrastructure to create small-
dollar credit products that are both affordable for consumers and beneficial for banks.
Also, enhancing opportunities to save and bolstering financial literacy can help
consumers better manage economic disruptions, and perhaps avoid using short-term
credit altogether. Small dollar loan products are a useful business strategy for banks to
establish new customers and foster long-term banking relationships. To that end, the
FDIC implemented a number of initiatives to help banks stimulate an increase in
offerings of reasonably-priced, safe alternatives to high-cost short-term credit and to
improve consumers' overall financial resilience. Our testimony addresses these
initiatives in more detail, including the results of the FDIC's Small Dollar Loan Pilot
Program.
Demand for Short-Term Credit is High
In the wake of the longest economic recession since the 1930's and against the
backdrop of persistently high unemployment, record foreclosures, a moribund housing
market, and stock market volatility, many U.S. households are struggling to make ends
meet, and do not have the capacity to deal with further financial shocks. A paper
published earlier this year showed that one-half of U.S. households are "financially
fragile" in that they would "probably" or "certainly" be unable to cope with a short-term
financial emergency.1
Not surprisingly, in this economic environment, there is a large demand for small-dollar
credit to cover emergencies, but all too often, consumers turn to high-cost products to
Robert W. Mooney, Deputy Director,
Consumer Protection and Community Affairs,
Division of Depositor and Consumer Protection,
Federal Deposit Insurance Corporation
On
An Examination of the Availability
Of Credit for Consumers
before the
Subcommittee on Financial Institutions
and
Consumer Credit, Committee on Financial Services,
U.S. House Of Representatives
2128 Rayburn House Office Building
September 22, 2011
Chairman Capito, Ranking Member Maloney, and members of the Subcommittee, thank
you for inviting me to testify on options available to consumers in need of small-dollar,
short-term credit. Expanding the availability of mainstream financial services in general,
and affordable small-dollar loans in particular, is a significant priority at the Federal
Deposit Insurance Corporation.
The FDIC believes that banks already have the tools and infrastructure to create small-
dollar credit products that are both affordable for consumers and beneficial for banks.
Also, enhancing opportunities to save and bolstering financial literacy can help
consumers better manage economic disruptions, and perhaps avoid using short-term
credit altogether. Small dollar loan products are a useful business strategy for banks to
establish new customers and foster long-term banking relationships. To that end, the
FDIC implemented a number of initiatives to help banks stimulate an increase in
offerings of reasonably-priced, safe alternatives to high-cost short-term credit and to
improve consumers' overall financial resilience. Our testimony addresses these
initiatives in more detail, including the results of the FDIC's Small Dollar Loan Pilot
Program.
Demand for Short-Term Credit is High
In the wake of the longest economic recession since the 1930's and against the
backdrop of persistently high unemployment, record foreclosures, a moribund housing
market, and stock market volatility, many U.S. households are struggling to make ends
meet, and do not have the capacity to deal with further financial shocks. A paper
published earlier this year showed that one-half of U.S. households are "financially
fragile" in that they would "probably" or "certainly" be unable to cope with a short-term
financial emergency.1
Not surprisingly, in this economic environment, there is a large demand for small-dollar
credit to cover emergencies, but all too often, consumers turn to high-cost products to
meet their needs. For example, estimates peg payday loan volume to be in excess of
$38 billion annually2 and annual revenue from overdraft fees at about $38 billion.3
Annual percentage rates (APRs) for these products can top several hundred -- or even
thousand -- percent, putting more stress on already weakened consumer balance
sheets.
The effects of high-cost credit can be particularly significant for lower-income
consumers. According to the most recent Federal Reserve Board Survey of Consumer
Finances, one in five consumers in the lowest income quintile ($20,600 or less) had
zero or negative net worth.4 Moreover, the FDIC's Survey of Unbanked and
Underbanked Households in 2009 found that nearly 20 percent of households with
incomes of $30,000 or below had used non-bank companies for credit needs rather
than banks.5
FDIC Efforts to Encourage Banks to Offer Affordable Small-Dollar Loans
A generation or so ago, it was common for banks to make small, unsecured loans to
individuals. However, over time, a series of product and technological innovations and
changes in the competitive landscape in banking, among other factors, contributed to a
decline in the number of banks offering small loans and an increase in alternative credit
providers, such as payday loan stores, auto title lenders, and pawn shops that often
offer costly credit products. Not long after, many banks began to offer automated fee-
based overdraft products on a wider scale that also can be a costly way for consumers
to deal with financial emergencies. The FDIC Study of Bank Overdraft Programs in
2008 illustrates the steep costs of automated fee-based overdraft programs; it showed
that the median overdraft was $36, but the median fee to cover overdrafts was $27.6
The FDIC began reviewing whether banks could feasibly offer alternatives to high-cost
short-term credit in the context of military personnel, whose financial problems can
collectively affect the readiness of our armed forces. More specifically, in December
2006, the FDIC held a conference, titled "Affordable, Responsible Loans for the Military:
Programs and Prototypes" where attendees, including banks, representatives from the
Department of Defense and other agencies, community groups, and others developed a
template for an affordable, small-dollar loan program.
Subsequently, in a broader effort to encourage more banks to offer small-dollar credit
products that are affordable, yet safe and sound and consistent with all applicable
federal and state laws, the FDIC issued the Affordable Small-Dollar Loan Guidelines
(the Guidelines) in June 2007. The Guidelines explore several aspects of loan product
development, including affordable prices, reasonable loan terms, streamlined
underwriting, and the benefits of linking a savings component and financial education to
short-term loan products. Importantly, the FDIC recognizes that the Community
Reinvestment Act (CRA) could also provide a valuable incentive to offer affordable
small-dollar loans. The Guidelines clarify that FDIC institutions providing such products
consistent with the Guidelines will receive favorable consideration in the CRA
examination.
$38 billion annually2 and annual revenue from overdraft fees at about $38 billion.3
Annual percentage rates (APRs) for these products can top several hundred -- or even
thousand -- percent, putting more stress on already weakened consumer balance
sheets.
The effects of high-cost credit can be particularly significant for lower-income
consumers. According to the most recent Federal Reserve Board Survey of Consumer
Finances, one in five consumers in the lowest income quintile ($20,600 or less) had
zero or negative net worth.4 Moreover, the FDIC's Survey of Unbanked and
Underbanked Households in 2009 found that nearly 20 percent of households with
incomes of $30,000 or below had used non-bank companies for credit needs rather
than banks.5
FDIC Efforts to Encourage Banks to Offer Affordable Small-Dollar Loans
A generation or so ago, it was common for banks to make small, unsecured loans to
individuals. However, over time, a series of product and technological innovations and
changes in the competitive landscape in banking, among other factors, contributed to a
decline in the number of banks offering small loans and an increase in alternative credit
providers, such as payday loan stores, auto title lenders, and pawn shops that often
offer costly credit products. Not long after, many banks began to offer automated fee-
based overdraft products on a wider scale that also can be a costly way for consumers
to deal with financial emergencies. The FDIC Study of Bank Overdraft Programs in
2008 illustrates the steep costs of automated fee-based overdraft programs; it showed
that the median overdraft was $36, but the median fee to cover overdrafts was $27.6
The FDIC began reviewing whether banks could feasibly offer alternatives to high-cost
short-term credit in the context of military personnel, whose financial problems can
collectively affect the readiness of our armed forces. More specifically, in December
2006, the FDIC held a conference, titled "Affordable, Responsible Loans for the Military:
Programs and Prototypes" where attendees, including banks, representatives from the
Department of Defense and other agencies, community groups, and others developed a
template for an affordable, small-dollar loan program.
Subsequently, in a broader effort to encourage more banks to offer small-dollar credit
products that are affordable, yet safe and sound and consistent with all applicable
federal and state laws, the FDIC issued the Affordable Small-Dollar Loan Guidelines
(the Guidelines) in June 2007. The Guidelines explore several aspects of loan product
development, including affordable prices, reasonable loan terms, streamlined
underwriting, and the benefits of linking a savings component and financial education to
short-term loan products. Importantly, the FDIC recognizes that the Community
Reinvestment Act (CRA) could also provide a valuable incentive to offer affordable
small-dollar loans. The Guidelines clarify that FDIC institutions providing such products
consistent with the Guidelines will receive favorable consideration in the CRA
examination.