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Predatory Lending Has Its Days Numbered November 14, 2009
A broad group of banks offers better options for low income people An innovative scheme developed by the Federal Deposit Insurance Corporation (FDIC) is gradually opening up an alternative for low-income workers, who due to lack of options end up paying more when they get a loan for a personal emergency. The Pilot Program for Small Loans (SDL), involving 31 banks in 26 states, is a two-year plan created in February 2008 with the aim of providing options to low income people excluded from the banking system. According to a report on the first year of the program, which offers loans up to $2,500, 16 thousand loans have been originated resulting from it, with a capital aggregate balance of $18.5 million. "The purpose of our program was to illustrate that a bank can make a profit while offering small loans as an alternative to more expensive credit products," said Lou Reynolds, head of extension and software development of the FDIC. The person who wants to borrow an SDL must document their identity, home address and income, and prove that they have sufficient financial ability to pay. SDL's plan does not dictate the specific model that each bank should adopt, but stipulates that participating banks must serve people with limited credit histories, to adopt reasonable rates, not impose fees or only if they are reduced, and aim to reduce the principal balance of the loan. Often, people without credit history or low credit scores go to payday loan companies or overdraw their checking accounts when presented with a sudden need for cash. The government estimates that between 80 and 100 million people in this country do not participate in mainstream banking. According to the Center for Responsible Lending (CRL), a loan from a payday agency carried an annual interest of 400% and ends up sinking creditors in a vicious cycle of debt. The typical client, said the center, ends up paying $500 in interest on a loan of $300. According to SDL criteria from the FDIC plan, a reasonable annual interest rate (APR) should not exceed 36%. The National Association of Financial Services (CFSA), representing payday agencies in the country, undermines the importance of the SDL program. It argues for example that only 31 banks are participating in the federal initiative and are present in only 446 locations in 26 states, compared with the 24 thousand existing payday agencies. In California, a single bank, Bancomer USA, is listed in the SDL participants plan. Yesterday, however, a bank executive told this newspaper that SDL loans are to be discontinued because the institution is going to merge with another. The CFSA also claims that long-term SDL loans are more expensive than those obtained through a payday lender. Progreso Financiero, a bank founded in the San Francisco area by Jaime Gutierrez, a graduate of Business Administration from Harvard University, does not participate in the FDIC program, but their goals are consistent with the idea that it is possible to provide a loan with reasonable conditions, while providing dividends. Gutierrez, CEO of Progreso Financiero, said that since its start, the institution has already approved 30 thousand loans. "My mission is to help 23 million Latinos across the country who are outside the banking system," he said. On the other hand, he pointed out that having a bank account does not ensure obtaining a loan from a bank. Progreso Financiero works with a network of small booths located inside supermarkets such as Mi Pueblo and Liborio Markets in San Francisco and Los Angeles respectively. "The way we explain it is 'if you need a thousand dollars, you pay $1,200 in 20 payments of $60 every two weeks.' It's very simple." Also, he said, the system awards points to solvent creditors, allowing them to build a credit history. Loans range between $250 and $2,500, and the average loan is $900 with an average nine-month term. In the next four years the company intends to make a million more loans. |