Facilitated Discussion of Advisory Committee on Economic Inclusion’s Strategic Plan  

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

Ellen Lazar, Senior Advisor to the Chairman for Consumer Policy, FDIC

Roberta K. McInerney, Deputy General Counsel, FDIC

Rae-Ann Miller, Special Advisor to the Director, Division of Insurance and Research, FDIC

Luke Reynolds, Chief, Outreach & Program Development Section, Division of Supervision, FDIC 

Barbara Ryan, Deputy to the Vice Chairman, FDIC 

Advisory Committee on Economic Inclusion Strategic Plan Work Group Objectives

FDIC

        - TODAY’S GOAL:  To discuss and evaluate work group objectives, proposed projects and next steps in building a strategic plan for the Committee’s Work
        - BROAD OBJECTIVE:  To decrease the number of unbanked and underbanked people in the United States and increase individuals’ participation in the mainstream financial system

OBJECTIVETransactional Accounts Work Group

	Identify safe and innovative transaction accounts designed for LMI consumers and develop methods of stimulating bank offerings of such products

Michael Barr, Chair; Ted Beck; Larry Fish; Manuel Orozco; Deborah Wright; Barbara Ryan, Staff

  Potential Policies and Projects
        - Summarize the LMI Transaction Product Landscape
        - To the extent feasible, develop a prototype “suite” of LMI transactional products, including delivery platform options, account features and sustainable delivery strategies
        - Convene a Transactional Services Forum that will:  discuss innovation in LMI transactional products; gain external feedback about the suite of products and best practices; and develop an action plan to stimulate bank offerings of transactional accounts for LMI households
        - Identify initiatives that the FDIC can take on its own or jointly, in collaboration with other agencies and partners, to encourage banks to offer the suite of transactional products and adopt best practices

OBJECTIVESavings Work Group

    Provide consumers, particularly LMI and underserved, with convenient and safe ways to save that are also attractive to and feasible for mainstream financial institutions to offer.

Peter Tufano, Chair; Kelvin Boston; Robert Steel; John Ryan; Floyd Flake; Rae-Ann Miller, Staff

Potential Policies and Projects
        - Launch a research project to determine a “base level” of savings, particularly for LMI Households (Late 2010)
        - Create national savings goals and promote goals (Mid 2011)
        - Define and promote templates for desirable savings products and conduct a symposium to highlight results (Fall 2010)
        - Develop benchmarks for the range of costs to banks offering savings products (Late 2010)
        - Consider guidance to make CRA more meaningful to banks that offer appropriate savings products for LMI consumers

OBJECTIVEFinancial Literacy Work Group

	Examine current financial education delivery and research efforts, and consider recommendations to improve the dissemination of existing financial education resources and strategies

Larry Fish, Chair; Ted Beck; Ester Fuchs; Manuel Orozco; Michael Shepherd; Diana Taylor; Luke Reynolds, Staff

Potential Policies and Projects
        - Determine whether it is possible to calculate the return on investment (ROI) for financial education activities, and, if so, recommend a strategy to do so
        - Examine education efforts over the past 25 years and determine what has worked well and what has not
        - Explore whether financial education best practices observed by regulators can be more broadly disseminated to practitioners
        - Consider the development of a certification program for third-party organizations (or educators) that provide general financial education
        - Explore whether increased weight should be given to financial education activities during the CRA examination process

OBJECTIVEIncentives Work Group

	Encourage banks to lend and invest in LMI communities, and to offer responsible loan and deposit products to low-income individuals and families by offering CRA incentives and visible demonstrations of support from the FDIC Chairman, to the extent permissible.

Ron Grzywinski, Chair; Martin Eakes, Ester Fuchs, Wade Henderson; Luke Brown, Staff

Potential Policies And Projects
        - More robust CRA incentives through strengthening CRA; making changes to CRA Tests; revisiting CRA Assessment Areas
        - Support for CDFIs – including CRA credit and bank adoption of CDFIs
        - FDIC Chairman’s support through a high profile Chairman’s Award Program (or other award)

OBJECTIVEAffordable Credit Work Group

	Stimulate the availability of affordable, responsible credit to LMI consumers in a way that is feasible and profitable for financial institutions

Bruce Murphy, Chair; Robert Steel; Diana Taylor; John Ryan; Alden McDonald; Rae-Ann Miller, Staff

Advisory Committee on Economic Inclusion

Taking it to the Next Level:  

How Can the Lessons Learned from the FDIC’s Small Dollar Loan Pilot and Other Models be Used to Encourage Small Dollar Lending Throughout the Financial Mainstream?

December 2, 2009

October 22nd Strategic Planning Subcommittee Meeting
        - Objective:  Small Dollar Loans Become a Staple Product for Mainstream Financial Institutions.
        - Participants:  Financial Institutions, State and Federal Agencies, Nonprofits, and Small-Dollar Loan Companies.

Discussion Focused on Two Broad Areas to Achieve Scale
        - Encourage More Financial Institutions to Engage in the Predominant Existing Business Model That Focuses on Relationship-Building.
        - Encourage Innovation in Business Models by Using Technology and Alternative Delivery Methods to Drive Down Costs. 

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 investigates how banks can profitably offer small-dollar as an alternative to high cost financial products.
        - Data will be collected quarterly from 1Q08 through 4Q09. 

FDIC Small-Dollar Loan Guidelines
        - 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

CreditPlus Product Summary
        - Small short-term loan 
        - Financial alternative to payday lenders 
        - 3 hour financial literacy training required 
        - Loan amounts:  $500 or $1000
        - Based on Credit Score 
        - Interest rate:  5% fixed 
        - Loan terms:  12 or 24 months
        - 1⁄2 of Proceeds go to pay down debt, 1⁄2 into a savings account.

        - $3,000,000 available pool
        - Total loans originated since inception – 2,103 or $2,074,000
        - Total originated in the 3rd Quarter of 2009 – 805 or $676,000
        - Current past due (30+ days) – 5.37%
        - Total trained under CreditPlus Program – 4,079 (49% never requested a loan)

About Our Small Loan Program

Our bank’s small loan program:
        - Simple consumer loan application form
        - Comfortable branch environment
        - A very nonjudgmental process
        - Fast approval – they can get their money in one trip to the bank
        - No fees or other charges
        - 18% maximum interest rate – the rate is never an issue with the customer
        - Terms up to 2 years
        - We ask customer to complete a survey for the 

	while we are processing their loan application

Credit Union Better Choice	
        - Pennsylvania Treasury Department deposited   $20 million in Mid-Atlantic Corporate FCU.
        - State gets market rate of return (no state funds used).
        - Money earned beyond market rate funds loan loss pool.
        - Credit unions eligible to apply for up to 50% of losses, after writing off loan using NCUA criteria.
        - Pay-outs twice yearly – reimbursement from available funds.

Credit Union Better Choice
        - Program Results as of June 30, 2009
        - Number of credit unions reporting		       79
        - Total # of Loans	                        	  20,067
        - Total $ Value of Loans	               $9.37 million
        - Savings to Consumer	                 $6.7 million
        - Amount in Savings (10%)		        $ 937,281

DFM Group, Inc.

US Patent 7,386,507B2

By definition, 100% of existing $40B in Payday Loans are from employees.  Thus,

the ELBP creates a structural “ecosystem” for lenders, employers, and employees to 

interact.   Making & administering loans is not brand new here (401K loans)

ELBP Innovation #1 – The Employee Benefit Structure

Summary
        -  Employers offer loan program as entity-wide benefit

  (i.e. like medical, dental, 401K, sup. insurance, etc.)
        -  Banks & CUs provide the benefit service in contract

  with the employer (i.e. similar to 401K services today)
        -  Employees request the loan program & repay the 

  loan via payroll deductions (i.e. similar to 401K loans

  and other benefit withholdings today)

Bank/CU

Employee

Employer 

DFM Group, Inc.

US Patent 7,386,507B2

Stripping Cost -  The Economics of Secured, Automated Lending

The technology & programmatic “Walled Garden” of the ELBP allows for the majority

of today’s consumer loan making costs to be eliminated.   Consumers enjoy lower

priced loans because lenders leverage existing Employer IT infrastructure to affordably

re-enter small loan making

Summary

Promotion

Origination

Administration

Repayment

Typical Costs
        -  Bank web site – front end
        -  Advertising
        -  Other marketing promotion
        -  Authentication
        -  Underwriting
        -  Collateralization
        -  Signatures

Typical Costs

$ 90 - $115 ea

Typical Costs
        -  Funding
        -  Tracking
        -  Statements, mailings
        -  EFT processing
        -  Check handling
        -  Follow-up, collections
        -  Charge off bad debt

Typical Costs

Cost Shift – New Model
        -  Employer portal (HR)
        -  Employer promotion (HR)

Cost Shift – New Model
        -  Payroll sys. authentication
        -  Auto underwriting 
        - Auto collateral 
        - Auto signature (“I Agree”)

Cost Shift – New Model
        -  Auto Funding...DD acct
        -  Auto reporting...status
        -  Online status...”My Loan”

Cost Shift – New Model
        -  Auto deduction - payroll
        -  No checks
        -  Nearly zero charge off

Front End

Front End

Back End

Back End

A Partnership

Virginia

State Employee

Assistance Fund 

Virginia

Credit Union

+

=
        - No state funds/tax dollars are used to make these loans.
        - No CVC designated gifts to charities are used to make these loans.

Loan Guidelines
        - Pilot program
        - Loan 
        - Borrow from $100 to $500 in $100 increments
        - Up to 6 months to repay
        - No more than 2 loans per calendar year
        - APR of 24.99% with no fees
        - Eligibility
        - Must be a non-probationary, salaried state employee
        - Must be a VACU Member with no adverse VACU history
        - Must successfully complete the online financial education module
        - Repayment
        - Employee authorizes direct deposit from payroll into VACU account 
        - Employee sets up automatic debit from VACU account to repay loan

 Borrower Demographics

“Other” includes un-banded positions (including faculty) and those with no pay band listed.

Borrower vs. Statewide Salaried Comparison

84% of borrowers are Black26% of State workers are Black75% of borrowers are Female52% of State workers are Female46% of borrowers are in Pay Band 3*26% of State workers are in Pay Band 3*

*The largest group of state workers by Pay band is pay band 3.

Pilot Benefits Realized
        - 410 loans provided @ 18%, 
        - great for borrowers, demand is high
        -  high satisfaction among employers
        - Internet interface works well
        - Employers trusted as point of access
        - Auto savings attracts repeat borrowers

10% take up rate overall

*

*

Cardmember Demographics
        - ~50% between the ages of 25-50
        - Majority at current employer over 5 years
        - 63% earn between $20k - $40k

Cardmember Demographics Summary

*

Key Credit Metrics

Forecasted

FICO Score Stratification

FICO Scores

# of Accounts

Annualized Charge-offs

Net Chargeoffs as a Percentage of Transaction Volume1

Notes: 1Reflects managed US card operations.
        - Recent stabilization in delinquency rate
        - Lower relative losses as a percentage of volume than top issuers
        - Average portfolio FICO of 568

Credit Metrics Summary

Marketplace Changes

Proprietary & Confidential – Prosper Marketplace, Inc. © 2009

*
        -   New marketplace controls
        -    640 credit score minimum – or have previous on-time loan
        -    Auction floor minimums – AA: 3%, HR: 17%
        -   New rating system based on expected annual loss
        -   Built from proprietary model of 29,000 Prosper loans
        -    Default estimates for each loan divided into 100 credit slices
| Original Credit Grade System |
|------------------------------|
| Credit Grade                 | Credit Score |
| AA                           | 760+ |
| A                            | 720 – 759 |
| B                            | 680 – 719 |
| C                            | 640 – 679 |
| D                            | 600 – 639 |
| E                            | 560 – 599 |
| HR                           | 520 – 559 |
| New Prosper Rating System |
|---------------------------|
| Prosper Rating            | Est. Avg. Annual Loss Rate |
| AA                        | 0.00 - 1.99% |
| A                         | 2.00 – 3.99% |
| B                         | 4.00 – 5.99% |
| C                         | 6.00 – 8.99% |
| D                         | 9.00 –11.99% |
| E                         | 12.00 – 14.99% |
| HR                        | >15% |

Progreso “Store in a Store” Locations

*

Petra Rosales

Owner, Porcelain Dolls By Petra and Jorge

ACCION 

Texas.Louisiana
        -   ACCION Texas-Louisiana has (*):
        -  1,975 active clients
        -  $89,561,733 disbursed (since ’94)
        -  10,268 loans (since ‘94)
        - $24,540,357 active portfolio
        - $10,106 average loan balance
        - 54 employees 

(*) As of September 30, 2009

*

SUMMARY OF SMALL DOLLAR LOAN DISCUSSION
        - Objective:  Small Dollar Loans Become a Staple Product for Mainstream Financial Institutions.

SUMMARY OF SMALL DOLLAR LOAN DISCUSSION
        - Potential Strategies to Scale Availability of Small Dollar Credit
        - Amplify the Facts About Existing Models
        - Embrace New Technologies and Delivery Channels
        - Encourage Partnerships
        - Create Guarantees
        - Streamline Regulatory Issues 

Potential Policies and Projects
        - Take the Small-Dollar Loan Pilot to the “Next Level: by Initiating Projects Designed to Increase the Scale of Small-Dollar” Loans

Establish a standard for acceptable small-dollar loan programs and a promotional campaign (Late 2010)

Consider creating pools of philanthropic funds or government operating funds to serve as “Guarantees” for acceptable small-dollar loan programs (Early 2011)

Conduct a close-out event for the Small-Dollar Loan Pilot (Summer 2010)

Work with other stakeholders to broaden the availability of Small-Dollar Loans across the financial mainstream (Early 2010)
        - Consider conducting a pilot using federal workforces to test innovative small-dollar loan business models (mid 2011)

Potential Policies and Projects (cont’d)
        - Perform research on issues related to affordable credit, particularly for LMI consumers – close-out article for the small-dollar loan pilot; small-dollar loan guarantees; small business lending; mortgage lending (could also conduct a symposium)
        - Consider guidance to ensure that Affordable and Responsible Small-Dollar Loan Programs receive positive CRA consideration

NEXT STEPS
        - Roll-up of Plan – How we will continue to work together