The story on the small-dollar loan program
As we came up to Halloween this 2009, nine more banks failed and were taken over by the Federal Deposit Insurance Corp (FDIC). That means one-hundred-fifteen banks have failed across the US since the start of this recession. The reality is the FDIC does not have enough money to keep on bailing out these failing banks. There will have to be another round of emergency levies to pay for all the other failures expected over the next twelve months. Not waiting for failure, the CIT Group Inc. is the latest commercial lender to file for Chapter 11 bankruptcy. It’s a mere $10 billion in debt which means the government probably will not recover the $2.3 billion bailout money it handed over to CIT when the recession first hit.
Why should all this gloom and doom matter? These are national events and have little effect on the needs of the everyday consumer on Main Street. Except the national economy does have a direct effect on low-income families. Let’s ignore the problems of job insecurity and unemployment, and focus on how people live. At some point, almost everyone, no matter how prudent they are, find themselves short of cash. They look around for credit. Even a small amount will see them through this difficulty. But when they go to the banks, they find there’s a widening gap between the services as advertized and those actually offered by the banking community. The people who need easy access to credit are usually denied help. It’s easy to say the words “credit crunch” as if that explains everything. Yes, the banks have stopped lending to each other. Yes, the government has been stress-testing the banks and asking them to hold a larger capital reserve. But the reality is that the banks on Main Street do not want to make small-dollar loans to people with weak credit scores. This forces people into the payday loan market.
Now back to the FDIC. It has been very worried by the denial of service to the “underbanked community” — that’s you and me — so it’s looking to expand the pilot program it began early in 2008. The idea was simple. The FDIC invited 31 banks receiving federal assistance to start offering small-dollar loans. So far, a total of only $28 million has been lent out in amounts less than $2,500 but the results are very encouraging. The delinquency rates are not markedly higher than for “conventional” loans. Although banks have had to show more flexibility in dealing with people in financial difficulty, this is proving a good first step to building alternatives to the overdraft and payday loan markets where interest rates are significantly higher. The FDIC is now looking to expand from the pilot and to encourage more banks to start offering these loans. So, before you rush into the arms of a payday loan company, check out your state for a bank that’s been taken over by the FDIC. You may find there’s a small-dollar loan with your name on it from a bank with a federal guarantee behind it. This is good for you because the interest rates will be lower and it will more quickly help you repair your credit score.