Small dollar loans, good or bad? The FDIC issued on November 16 a Financial Institution Letter (FIL-52-2015), that is a re-emphasis of its 2005 FIL (FIL-14-2005). Both take up the subject of small dollar lending. The purpose of the 2015 FIL is “to ensure that bankers and others are aware that it does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders.” Emphasis is in the FDIC communication, intended to stress that banks can be in this business. Generally, small dollar credits are in amounts of less than $5,000 to be repaid within a year or less.
The reason for the 2015 FIL may be that since the 2005 FIL few banks have retained formal programs (aside from credit cards) that provide small dollar credits to their customers, particularly programs through customers’ deposit/checking accounts (although most banks will provide the occasional small dollar loan to accommodate a customer’s unexpected needs). From the 2005 FIL banks got the message that regulators frowned on these small dollar credit programs.
Perhaps the FDIC either did not intend that result then and/or does not intend that result now. In either case, this new emphasis by the FDIC will be welcome, to banks and to their customers. The 2015 FDIC communication goes on to say, “Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws.”
In recent years it seemed to bankers that regulators have been preoccupied with having banks curtail services. Perhaps this latest FIL is a sign that government authorities are once again recognizing why we have banks, the importance of the financial services that people rely upon, and why each generation Federal and State governments take action to facilitate the ability of banks to serve their customers. After all, every single bank that operates in the United States was given a government charter, for reasons of public policy.
Data gathered by the American Bankers Association (the first ABA) suggest that, aside from credit cards, more than 50 million people each year are in the market for short-term/small dollar credit. People of all income categories, population groups, and geographies rely upon small dollar loans for a variety of purposes, from emergencies to necessities to mere wants. The Bureau of Consumer Financial Protection has proposed rules on small dollar loans that would reduce access to and availability of small dollar loans. Hard to see how that helps consumers. Interesting to consider how that squares with the FDIC’s new foray into encouraging customer service.