The proposal, HR 6334, requires regulators to consider public comments in their ongoing community reinvestment evaluations. The codification of the public’s response and the repercussions of those responses increase the likelihood that the public’s needs are being met by financial institutions.
Even before these proposed changes to the Community Reinvestment Act, the FDIC has started to actively listen to the concerns and suggestions of community stakeholders. In 2008, the FDIC launched a two-year pilot program in which participating banks would offer secure and affordable small-dollar loans—a key credit need of many low-wealth people. With a more rigorous public comment process in place, communities would have a more impactful way to express their credit needs and demand products, such as affordable small-dollar loans, designed with those needs in mind.
Studies show that using a high-cost form of short-term credit, such as a payday loan, increases the likelihood that the borrower will fall behind on a credit card payment, be subject to eviction, lose a bank account, face a utility cutoff, delay medical care, or file for bankruptcy. Offering affordable small-dollar loan products helps hard-working families access sustainable short-term credit.
Borrowers taking advantage of the FDIC’s pilot program decreased their reliance on high-cost consumer credit and often took advantage of savings components built-in to many small dollar loan products. By not paying high-cost payday loan fees, low-wealth borrowers were able to save more money. The average loan amount for pilot banks’ small dollar loans was approximately $700, while the average term was 10 to 12 months and the average interest rate ranged between 13 percent and 16 percent, with the most common interest rate charged at 18 percent.
Lake Forest Bank and Trust of Lake County, Illinois, also participated in the pilot program and reported that their affordable small dollar loan product has been profitable. The program made 100 loans and any losses the bank experienced on the affordable small dollar loan product were no higher than those on other consumer loans. Lake Forest Bank reported that 32 percent of the affordable small dollar loan borrowers were new customers to their bank, demonstrating that a small-dollar loan program can incorporate un- and underbanked consumers into the mainstream banking system and help banks develop relationships with new markets.
The affordable small dollar loan program shows what can happen when banks, regulators, and the public work together to creatively address the needs of all communities: innovative products that can both be profitable for financial institutions and build community assets and long-term financial skills.
Establishing a more meaningful public comment process through the American Community Investment Reform Act would certainly result in even more win-win situations for low-wealth communities across the country.