Small-Dollar Loan Pilot Program Final Results, Safe Transactional and Savings Account Proposed Templates, and Policy

and Project Updates

June 24, 2010

Opening Remarks

Sheila C. BairChairman, FDIC

Discussion of the Strategic Planning Subcommittee’s Meeting Regarding the Small- Dollar Loan Pilot Final Results and Case Studies

Moderator: Bruce D. Murphy, Executive Vice President and President, Community Development Banking, KeyBank, N.A.

Rae-Ann Miller, Special Advisor to the Director, Division of Insurance and ResearchAlden McDonald, President & CEO, Liberty Bank, New Orleans, LALilia Escajeda, Public Relations Consultant , Amarillo National Bank, Amarillo, TX Casandra Slade, Senior Vice President, Community Development Officer, Lake Forest Bank, Lake Forest, IL

Affordable, Responsible, and Feasible Small Dollar Loans: The

FDIC Small Dollar Loan Pilot

Advisory Committee on Economic Inclusion

June 24, 2010

The Small-Dollar Loan Pilot Program

• In February 2008, 31 banks were selected to participate in the Small-Dollar Loan (SDL) Pilot Program.

• The two-year case study explored how banks can profitably offer small-dollar as an alternative to high cost credit products.

• Data were collected quarterly from 1Q08 through 4Q09.

FDIC Small-Dollar Loan Guidelines, June 2007

• Loan amounts up to $1,000• Payment periods that extend beyond a single

paycheck• APRs below 36 percent• Low or no origination fees• No prepayment penalties• Streamlined underwriting• Prompt loan application processing• Automatic savings component• Access to financial education

4Q09 Summary of Results for Small Dollar Loans

Number of Banks

Reporting Total Average Minimum Maximum

Loans Up to $1000Number of Notes 22 3,010 111 1 1,675

Note Volume 22 $2,168,295 $98,559 $500 $1,140,660Loan Amount 22 N/A $724 $445 $1,000Term (months) 22 N/A 12 2 24Interest Rate 22 N/A 13.09% 4.00% 31.90%

Non-zero Fees 9 N/A $31 $8 $70

Source: FDIC

4Q09 Summary of Results for Nearly-Small Dollar Loans

Number of Banks

Reporting Total Average Minimum Maximum

Loans $1000 - $2500Number of Notes 12 2,301 192 1 1,151

Note Volume 12 $3,972,694 $331,058 $1,200 $1,942,837Loan Amount 12 N/A $1,727 $1,200 $2,070Term (months) 12 N/A 15 10 24Interest Rate 12 N/A 13.99% 4.00% 33.53%

Non-zero Fees 6 N/A $43 $15 $70

Source: FDIC

Lessons Learned

• Defaults Comparable to General Population

• Dominant Program Goal: Relationship-Building Tool

• Programmatic Elements Linked to Success– Long-Term Board & Management Support– Engaged Champion– Location in LMI and Rural Communities

Lessons Learned

• Product Elements Linked to Success– Loan Terms Longer Than a Few Pay Periods– Strong, but Streamlined Underwriting

• Linked Savings and Financial Education– Better Loan Performance May Be Correlated– Mixed Views on Mandates

A Replicable Model for Small-Dollar Loans

A Safe, Affordable, and Feasible Template For Small-Dollar Loans

Product Element Parameters Amount $2,500 or less

Term 90 days or more

Annual Percentage Rate (APR) 36 percent or less

Fees Low or none; origination and other upfront fees plus interest charged

equate to APR of 36 percent or less Underwriting Streamlined with proof of identity,

address, and income, and a credit report to determine loan amount and

repayment ability; loan decision within 24 hours

Optional Features Mandatory savings and financial education

Next Steps

• Objective: Small Dollar Loans Become a Staple Product for Mainstream Financial Institutions.

– Highlight the Facts About Existing Models, Pilot Case Studies

• Liberty Bank• Amarillo National Bank• Lake Forest Bank & Trust

Encourage Partnerships

• “Bank-On” Campaigns

• FDIC Alliance for Economic Inclusion– 35 Small-Dollar Lending Banks

• “Pooled Funds” Model – Baltimore’s Borrow and Save

Study Creation of Guarantees

• Linked, Low-Cost Deposits– Illinois Micro Loan Program

• Loan Loss Reserves– Virginia State Employees Loan Program– Wilmington Trust/WENH– CDFI Proposed Legislation

Embrace New Technologies

• Employer-Based Lending Programs– Virginia State Employees Loan Program– Federal Employee Education and Assistance

Fund– Lake Forest Bank & Trust– United Way Working Bridges

• Employer-Based Platform Providers– Employee Loan Solutions

VSELP Loan StatisticsJuly 13, 2009 to June 18, 2010

• Total Loans Funded $2,594,900

• Total Loans Outstanding $1,619,500

• Average Loan Amount $500

• Charge Off Rate 0.37%

• Number of Loans 5,256

• Number of Borrowers 3,454

1 Loan 1,758

2 Loans 1,590

3 Loans 318

United Way of Chittenden County

Employees are accessing $$ they need

– Over 358 loans*

– Emergency funds & financial planning

Employees are building credit and savings

– 96% of loans repaid; loss ratio approximately 9%

– 35% continue saving after repayment; average account $384

– Loan participants going on to access conventional financial services

Study this summer will gather additional data* North Country Federal Credit Union two-year data

Results: Results: EmployeeEmployee Loan/Savings Program Loan/Savings Program

Regulatory Issues

• Community Reinvestment Act– Current Policy/Examination Procedures– More Specific Consideration– CRA to Offset ROI– CRA Public Hearings

• Other Incentives– EFTA Carve-Out– Loss Sharing/Guarantees– Overdrafts

Break

Transactional and Savings Account Proposed Templates

Moderator: Ellen Lazar, Senior Advisor to the Chairman for Consumer Policy

Barbara A. Ryan, Deputy to the Vice ChairmanRoberta K. McInerney, Deputy General CounselRae-Ann Miller, Special Advisor to the Director, Division of Insurance

and ResearchSherrie Rhine, Senior Economist, Division of Insurance and Research

Transactional and Savings Account Proposed Templates

Transactional Work GroupSavings Work Group

Committee on Economic InclusionJune 24, 2010

Background The 2009 FDIC survey finds that:

At least one-quarter of households either lack a bank account or use non-bank providers for financial services

LMI consumers are more likely to be underserved than the general population

At the April 1, 2010 ComE-IN meeting, the committee:

Discussed the potential benefits of safe, low-cost transactional and basic savings account products for LMI consumers

Heard about successful examples of low-cost product offerings by financial institutions

Received sample templates for safe, low-cost transactional and basic savings accounts related to strategic planning initiatives underway by the respective work groups

Guiding Principles

The principles used to develop the sample templates were shaped by:

Having low and transparent fees Being FDIC-insured and subject to consumer protection

laws, regulations, and guidelines Being simple to use Having easily understandable terms and conditions Creating sustainable product offerings for financial

institutions

Request for Public Comment At the April 1, 2010 ComE-IN meeting, the committee

recommended that the FDIC solicit public comment on the transactional and basic savings templates.

On May 6, 2010, the FDIC published a news release requesting the public to comment on the templates.

By the close of the 30-day comment period, 46 comments had been received. Financial Institutions and Financial Organizations (15) State Banking and Community Affairs Departments and

Councils (6) Financial Services Industry/Trade Associations (6) Consumer Groups and Nonprofit Organizations (14) Private Citizens (5)

Transactional Account Comments

Broad support for the idea of a low-cost account for LMI customers.

Banks believe they already offer such accounts.

Consumer groups believe it is critical to structure the accounts carefully.

Transactional Account CommentThemes and Issues Role of technology

Targeted population

Overdraft

Ancillary services

Minimum balances and fees

Incentives, CRA, and marketing

Concerns: Mandate versus guidance Eligibility requirements

Transactional Account: Areas of Broad Support Electronic delivery (debit-based card, paperless)

Direct deposit

No overdraft (tied to electronic account)

Available to all

Clear guidance on eligibility

Simple, clear, predictable, and affordable fee structure

Ancillary services are a critical component: money orders, check cashing, money transfers, and free online banking

Common Themes Raised in the Basic Savings Account Comments Role of technology, targeted population, eligibility

requirement, mandate versus guidance and impact on product innovation, direct deposit and other automated saving, and incentives and potential role of CRA were raised.

Opening and minimum balances: banks and bank trades suggested higher amounts, states, community and consumer groups suggested lower amounts.

Several commenters suggested providing incentives to save: discounts on other services for maintaining balances, limits on numbers of withdrawals, limits on methods of withdrawing.

Basic Savings Account: Areas of Broad Support

Automated savings

Direct deposit

Interest earning

Proposed FDIC Model Safe Accounts

The public comments helped inform the creation of the proposed FDIC Model Safe Accounts to the committee.

Common features of the transactional and basic savings accounts include: Electronic card-based deposit accounts Low opening and minimum balances Low, transparent and predictable fees Direct deposit Paperless, electronic statements Available to all consumers No overdraft – Transactional Accounts Interest earning – Basic Savings Accounts

Transactional Account Basic Savings Account

Debit-based electronic account √ √

No fee-based overdraft coverage √ √

Opening balance $10 - $25 $5

Monthly minimum balance $1 $5

Monthly maintenance fee No more than $3 None, if minimum balance is met

Money orders/e-checks 2 free, additional money orders/e-checks at low fee

--

“On Us” third-party check cashing Free Free

Third-party check cashing Low fee Low fee

Direct deposit Free Free

Automatic saving -- Free

Mobile/On-line banking and bill-pay Free --

Electronic Statements Free Free

Domestic and international wire transfers

Competitive market rate --

Proposed Elements of the FDIC Model Safe Accounts

Thank you

Lunch

Transactional and Savings Account Proposed Templates (Continued) and Status Report On Strategic Plan Projects

Moderator: Ellen Lazar

Luke Brown, Associate Director, Compliance Policy Branch, Division of Supervision and Consumer Protection, FDIC

Roberta K. McInerneyRae-Ann MillerLuke Reynolds, Chief, Outreach and Program Development Section,

Division of Supervision and Consumer Protection, FDICBarbara A. Ryan

Issues Update

Moderator: Ellen Lazar

Luke BrownRoberta K. McInerneyRae-Ann MillerLuke ReynoldsBarbara A. RyanJanet R. Gordon, Senior Policy Analyst, Division of Supervision and

Consumer Protection, FDIC 

Conclusion

Sheila C. BairEllen Lazar