Oral Statement of
Mark Pearce, Director, Division
of
Depositor and Consumer Protection,
Federal Deposit Insurance Corporation
on Payday Loans:
Short-Term Solution or Long-Term Problem
to the
Special Committee on Aging,
U.S. Senate
July 24, 2013
Chairman Nelson, Ranking Member Collins, and members of the Committee, thank you
for inviting the Federal Deposit Insurance Corporation to participate in today's hearing. I
am pleased to have the opportunity to share our recently proposed guidance on deposit
advance products, as well as to discuss some of the FDIC's research and experiences
related to small dollar credit needs and older Americans.
This is a timely topic. Recent FDIC survey results showed that in the previous 12
months, almost 6 percent of households obtained credit from an alternative financial
services provider, such as a payday lender or a pawn shop.1 For households headed
by someone 65 or older, the proportion was nearly 2 percent, and for households
headed by a person between 55 and 64, the proportion was nearly 4 percent. When
narrowing the data to households that are unbanked, the numbers rose to close to 17
percent for all households, 6 percent for households headed by someone 65 or older,
and nearly 10 percent for households headed by someone between 55 and 64. These
figures would appear to indicate that consumers have small dollar credit needs, and that
these needs become more pressing for those who do not have a bank account.
As you know, the FDIC is the primary federal regulator of state-chartered banks that are
not members of the Federal Reserve System, which means the banks we supervise are
generally the smaller community banks. The FDIC examines these banks for
operational safety and soundness, and for compliance with consumer protection laws.
Larger banks and bank holding companies are generally supervised for safety and
soundness by the Office of the Comptroller of the Currency and the Federal Reserve,
and for consumer protection compliance by the Consumer Financial Protection Bureau
(CFPB).
The FDIC has recognized the need for responsible small-dollar loan products for a
number of years and issued guidance in 2007 to encourage insured institutions to offer
such products to consumers to meet this need.2 The guidance specifies that these
products should be affordable, have reasonable interest rates with no or low fees, and
be structured with payments that reduce the principal balance. That same year, we
initiated a pilot program which demonstrated that affordable small dollar loans can be
done safely and are feasible for banks.
Mark Pearce, Director, Division
of
Depositor and Consumer Protection,
Federal Deposit Insurance Corporation
on Payday Loans:
Short-Term Solution or Long-Term Problem
to the
Special Committee on Aging,
U.S. Senate
July 24, 2013
Chairman Nelson, Ranking Member Collins, and members of the Committee, thank you
for inviting the Federal Deposit Insurance Corporation to participate in today's hearing. I
am pleased to have the opportunity to share our recently proposed guidance on deposit
advance products, as well as to discuss some of the FDIC's research and experiences
related to small dollar credit needs and older Americans.
This is a timely topic. Recent FDIC survey results showed that in the previous 12
months, almost 6 percent of households obtained credit from an alternative financial
services provider, such as a payday lender or a pawn shop.1 For households headed
by someone 65 or older, the proportion was nearly 2 percent, and for households
headed by a person between 55 and 64, the proportion was nearly 4 percent. When
narrowing the data to households that are unbanked, the numbers rose to close to 17
percent for all households, 6 percent for households headed by someone 65 or older,
and nearly 10 percent for households headed by someone between 55 and 64. These
figures would appear to indicate that consumers have small dollar credit needs, and that
these needs become more pressing for those who do not have a bank account.
As you know, the FDIC is the primary federal regulator of state-chartered banks that are
not members of the Federal Reserve System, which means the banks we supervise are
generally the smaller community banks. The FDIC examines these banks for
operational safety and soundness, and for compliance with consumer protection laws.
Larger banks and bank holding companies are generally supervised for safety and
soundness by the Office of the Comptroller of the Currency and the Federal Reserve,
and for consumer protection compliance by the Consumer Financial Protection Bureau
(CFPB).
The FDIC has recognized the need for responsible small-dollar loan products for a
number of years and issued guidance in 2007 to encourage insured institutions to offer
such products to consumers to meet this need.2 The guidance specifies that these
products should be affordable, have reasonable interest rates with no or low fees, and
be structured with payments that reduce the principal balance. That same year, we
initiated a pilot program which demonstrated that affordable small dollar loans can be
done safely and are feasible for banks.
At the same time, in its role as supervisor, the FDIC has provided guidance to delineate
risks and troublesome practices that may be associated with other kinds of small dollar
credit offerings, such as payday loans. In 2003 and 2005, the FDIC provided guidance
to banks that offered or were considering offering payday loans (either directly or
through partnerships with third parties), stating our supervisory expectations that
institutions should monitor customers' use of payday loans, prevent customers from
relying excessively on the product, and take other steps to appropriately manage risks.3
While the FDIC continues to encourage banks to respond to the small dollar credit
needs of its customers, we have observed that some of the products and practices that
were beginning to appear in some segments of the industry closely resembled ones that
had previously caused concern. Although the products and practices appeared to be
concentrated in a limited number of institutions, we felt it was important to provide
guidance to ensure that FDIC-supervised banks considering offering these products are
aware of the potential of harm to consumers, as well as the potential for safety and
soundness concerns.
As a result, earlier this year, the FDIC proposed guidance on deposit advance products,
a credit instrument that can be quite similar to payday loans as evidenced by high fees,
very short lump-sum repayment terms, and inadequate attention to a consumer's ability
to repay the loan. A copy of the proposed guidance is attached to my testimony.4 The
OCC issued nearly identical guidance at the same time. The proposed guidance
outlines supervisory expectations, including detailed underwriting expectations, to make
banks aware of what examiners would assess in conducting a review. Before issuing
the guidance in final form, we wanted to solicit public comments, and we received over
100, including from members of this Committee. We currently are carefully reviewing
the comments as we work to finalize the guidance.
As I mentioned earlier, it is possible for banks to make affordable small dollar loans that
do not include the features that pose unnecessary risks for banks and their customers.
From 2007 to 2009, the FDIC conducted a pilot project with 28 financial institutions with
assets ranging from $28 million to nearly $10 billion to demonstrate the feasibility of
small dollar lending for banks. The loans made as part of this pilot program were for
$2,500 or less and met certain core standards. For example, the loan terms had to be
90-days or longer, and prudent, streamlined underwriting was required to establish that
consumers could reasonably be expected make their loan payments and have sufficient
funds remaining to meet basic living expenses and other obligations. Annual percentage
rates on these loans were 36 percent or less, with low or no fees, and a loan decision
was typically provided within 24 hours.
Ultimately, as a result of the pilot, these banks made 34,400 small dollar loans for a total
of approximately $40 million. The performance of the loans was shown to be in line with
the performance of other unsecured consumer credit products and the pilot concluded
that it was feasible for banks to offer such loans in a safe and sound manner. I have
included a copy of a report on the pilot with my testimony.5
risks and troublesome practices that may be associated with other kinds of small dollar
credit offerings, such as payday loans. In 2003 and 2005, the FDIC provided guidance
to banks that offered or were considering offering payday loans (either directly or
through partnerships with third parties), stating our supervisory expectations that
institutions should monitor customers' use of payday loans, prevent customers from
relying excessively on the product, and take other steps to appropriately manage risks.3
While the FDIC continues to encourage banks to respond to the small dollar credit
needs of its customers, we have observed that some of the products and practices that
were beginning to appear in some segments of the industry closely resembled ones that
had previously caused concern. Although the products and practices appeared to be
concentrated in a limited number of institutions, we felt it was important to provide
guidance to ensure that FDIC-supervised banks considering offering these products are
aware of the potential of harm to consumers, as well as the potential for safety and
soundness concerns.
As a result, earlier this year, the FDIC proposed guidance on deposit advance products,
a credit instrument that can be quite similar to payday loans as evidenced by high fees,
very short lump-sum repayment terms, and inadequate attention to a consumer's ability
to repay the loan. A copy of the proposed guidance is attached to my testimony.4 The
OCC issued nearly identical guidance at the same time. The proposed guidance
outlines supervisory expectations, including detailed underwriting expectations, to make
banks aware of what examiners would assess in conducting a review. Before issuing
the guidance in final form, we wanted to solicit public comments, and we received over
100, including from members of this Committee. We currently are carefully reviewing
the comments as we work to finalize the guidance.
As I mentioned earlier, it is possible for banks to make affordable small dollar loans that
do not include the features that pose unnecessary risks for banks and their customers.
From 2007 to 2009, the FDIC conducted a pilot project with 28 financial institutions with
assets ranging from $28 million to nearly $10 billion to demonstrate the feasibility of
small dollar lending for banks. The loans made as part of this pilot program were for
$2,500 or less and met certain core standards. For example, the loan terms had to be
90-days or longer, and prudent, streamlined underwriting was required to establish that
consumers could reasonably be expected make their loan payments and have sufficient
funds remaining to meet basic living expenses and other obligations. Annual percentage
rates on these loans were 36 percent or less, with low or no fees, and a loan decision
was typically provided within 24 hours.
Ultimately, as a result of the pilot, these banks made 34,400 small dollar loans for a total
of approximately $40 million. The performance of the loans was shown to be in line with
the performance of other unsecured consumer credit products and the pilot concluded
that it was feasible for banks to offer such loans in a safe and sound manner. I have
included a copy of a report on the pilot with my testimony.5