Economic Inclusion

I heard of the term economic inclusion at the Federal Deposit Insurance Corporation website of the same name. There are several newer initiatives listed, but scroll down to the Small-Dollar Loan Pilot Program which ran from 2008-2010. The small loan template developed from the program is presented in tabular form here. and is an alternative to the high credit costs of payday loans, auto title loans, pawn shop loans and overdraft protection. Kudos to the banks who joined the program, listed here in Table 1 of a more detailed 2009 report after the first year. Like all banks, they are not in business to lose money, but senior management's support and the FDIC's incentives encouraged them to accept less profit from the Small Dollar Loan program in hopes of including the loan recipients among their long-term customers. The program did not attract many banks because most wanted the income from the fees and interest associated with overdraft protection and their own high-cost loan programs. As of 2012, a typical payday loan from a bank costs $10 for each $100 borrowed, for an annual percentage rate of 365% based on the average ten day term for the loans. It is easy to see why these banks didn't want to participate in the FDIC program, which had a maximum 36% APR with any fees included in the interest calculation.*

The Birmingham, Alabama city council became so concerned about the density of high-cost lending operations in their city that they voted a six month moratorium on new openings on December 6, 2011.** Added to that was the fact that Senator Richard Shelby (R-AL) led the US Senate Republicans in blocking the appointment of Richard Cordray to head the Consumer Financial Protection Bureau, and it becomes clear why Mr. Cordray chose Birmingham for his first CFPB hearing after his January 4th recess appointment by President Obama. The subject of the hearing was payday lending by banks and alternative financial institutions. The hearing was well-covered by Tony Pugh on stltoday and Carter Dougherty at Bloomberg.


*I have heard that some credit unions are currently following the 36% APR guideline, so I inquired of my own CU. They offer a payday loan of $500 at a total cost of about $7 depending on the exact length of the loan. They also offer financial education and debt management by Cornerstone Financial Education.

 **See my post about the density of alternative financial institutions in my neighborhood, 5.7 Lenders per Mile.