Fall River-based BankFive is among the banks participating in the Federal Deposit Insurance Corp.’s two-year “Small Dollar” pilot program.
The concept of “microlending” won Indian banker Muhammad Yunus and his institution, Grameen Bank, a Nobel Peace Prize in 2006 for the economic development help he provided to poorer communities.
Two years later, the Federal Deposit Insurance Corp. is piloting a similar effort at 31 banks in the United States, including two in the Bay State.
Under the FDIC’s two-year “Small Dollar” pilot program, which was launched in February, Fall River-based BankFive and Wakefield-based The Savings Bank are among the banks that have rolled out consumer lending programs for people who want to borrow less than $1,000 – and might otherwise go to a check casher or payday lender for the funds.
The idea, FDIC spokesman Andrew Stirling explained, is that banks will gain more customers – and the customers won’t be paying the exorbitant fees charged by alternative lenders.
“There is a market need for these smaller loans,” Stirling said. Banks will be allowed to pick up Community Reinvestment Act credits for offering them, because they are serving a community need.
The FDIC predicts those that make the smaller loans will engineer plenty of goodwill in their communities for meeting that need – and, presumably, for helping borrowers avoid more expensive borrowing options.
Stirling said payday lenders charge about $17 for every $100 borrowed and typically offer loan terms of just two weeks – bringing the annual percentage rate charged on such a loan to 391 percent, a far cry from the maximum 36 percent the FDIC is allowing in the pilot programs.
BankFive currently is charging just 6 percent on its small-dollar loans, which run to a maximum term of 36 months, according to Vice President for Consumer Lending Stephanie Primo-Simons. The bank decided to offer its loans at prime rate, she said, and to keep the rate non-adjustable.
“We are trying to help [new customers] establish credit,” she noted, adding that the bank decided a lower interest rate would help customers do so by allowing them to pay loans back faster.
Personal loans – which are unsecured, so usually lent at a higher rate – normally cost a customer anywhere from 10.5 to 13 percent in interest these days, Primo-Simons said. Personal loans typically are offered in amounts ranging from $1,000 to $5,000.
‘A Safe Environment’
Both BankFive and The Savings Bank include a savings component in their small-dollar loan programs, although they’re structured somewhat differently. BankFive loan customers will get billed $10 extra on each loan payment, which will then be deposited into a savings account. Customers at The Savings Bank will be required to deposit 5 percent of each loan payment into a savings account at the bank.
“We are going to try to coach them to become a saver,” explained Senior Vice President for Retail Lending Kathleen Beaulieu. Also, with that method, the customer becomes a bank customer as both a borrower and depositor, she added.
“We would like them to be comfortable coming into our bank and to consider banks a safe environment,” Beaulieu said.
When customers are in the bank, staffers will have the opportunity to try to sell other products or services, she added.
Stirling said the FDIC is interested in seeing how the Massachusetts banks’ savings component works.
“We didn’t want to be prescriptive in what we asked the banks to do,” he said – although having a savings component is listed on the federal regulator’s Web site as a “key feature of a preferred small-dollar lending program.”
But Stirling said the FDIC recognizes that to be sustainable, the bank’s programs have to be profitable. Bringing in and keeping new customers is one way to do that.
The Savings Bank, which is charging 18 percent interest for its small-dollar loans and has a maximum 36-month term, also has decided to waive wire transfer fees for loan customers wanting to send money overseas. Bank officials hope that benefit will be a draw in some of its branches in areas with high immigrant populations.
“Again, what we’re trying to do is create that safe banking environment,” Beaulieu said.
In addition to immigrants – including people seeking funds to cover the application fee to become a U.S. citizen – The Savings Bank is especially interested in reaching out to military personnel whose families might be relying on payday lenders, as well as students and others with limited credit histories.
To date, The Savings Bank has made just one loan with its program and BankFive is still preparing marketing materials for its newer program.
The Savings Bank marketing has been selective, noted bank spokeswoman Rachel Kallery.
“We’ve mostly been reaching out through community leaders,” she said, so they can in turn explain the program to people who might be interested, as well as good potential customers.
“Ultimately, our goal is to see these people succeed in developing a savings program” and become long-term customers of the bank, Kallery added.
Stirling said the FDIC will judge small-dollar lending to be a success if banks can find customers and make the loans profitably. He said if it is successful, “we’ll make banks aware of the benefits” and it will become a permanent voluntary program.
