FDIC Quarterly 28 2010, Volume 4, No. 2

cycle for payday loans, or the immediate repayment 

often required for fee-based overdrafts.

FDIC Chairman Sheila C. Bair has expressed a desire to 

determine how safe and affordable small-dollar lending 

can be expanded and become more of a staple product 

for all banks.2 Pilot banks have demonstrated that the 

Safe, Affordable, and Feasible Small-Dollar Loan 

Template is relatively simple to implement and requires 

no particular technology or other major infrastructure 

investment. Moreover, adoption of the template could 

help banks better adhere to existing regulatory guidance 

regarding offering alternatives to fee-based overdraft 

protection programs.3 Specifically, this guidance 

suggests that banks should “monitor excessive consumer 

usage (of overdrafts), which may indicate a need for 

2

 See opening comments from FDIC Chairman Sheila C. Bair at the 

December 2, 2009, FDIC Advisory Committee on Economic Inclusion 

Meeting, at http://www.vodium.com/MediapodLibrary/index.asp?

library=pn100472_fdic_advisorycommittee&SessionArgs=0A1

U0100000100000101. 3

 “Overdraft Protection Programs, Joint Agency Guidance,” Financial 

Institution Letter, February 18, 2005, http://www.fdic.gov/news/news/

financial/2005/fil1105.html. 

Introduction

The Federal Deposit Insurance Corporation’s (FDIC) 

two-year Small-Dollar Loan Pilot Program concluded in 

the fourth quarter of 2009. The pilot was a case study 

designed to illustrate how banks can profitably offer 

affordable small-dollar loans as an alternative to highcost credit products such as payday loans and fee-based 

overdraft programs.1 This article summarizes the results 

of the pilot, outlines the lessons learned and the potential strategies for expanding the supply of affordable 

small-dollar loans, and highlights pilot bank successes 

through case studies.

Since the pilot began, participating banks made more 

than 34,400 small-dollar loans with a principal balance 

of $40.2 million. Overall, small-dollar loan default rates 

were in line with default rates for similar types of unsecured loans. A key lesson learned was that most pilot 

bankers use small-dollar loan products as a cornerstone 

for building or retaining long-term banking relationships. In addition, long-term support from a bank’s 

board and senior management was cited as the most 

important element for programmatic success. Almost all 

of the pilot bankers indicated that small-dollar lending 

is a useful business strategy and that they will continue 

their small-dollar loan programs beyond the pilot.

A Safe, Affordable, and Feasible Template for 

Small-Dollar Loans

The pilot resulted in a template of essential product 

design and delivery elements for safe, affordable, and 

feasible small-dollar loans that can be replicated by 

other banks (see Figure 1). While each component of 

the template is important, participating bankers 

reported that a longer loan term is key to program 

success because it provides more time for consumers to 

recover from a financial emergency than the single pay 

1

 See previous articles on the Small-Dollar Loan Pilot Program, 

“An Introduction to the FDIC’s Small-Dollar Loan Pilot Program,” 

FDIC Quarterly 2, no. 3 (2008), http://www.fdic.gov/bank/analytical/

quarterly/2008_vol2_3/2008_Quarterly_Vol2No3.html; and “The FDIC’s 

Small-Dollar Loan Pilot Program: A Case Study after One Year,” 

FDIC Quarterly 3, no. 2 (2009), http://www.fdic.gov/bank/analytical/

quarterly/2009_vol3_2/smalldollar.html. 

Feature Article:

A Template for Success: 

The FDIC’s Small-Dollar Loan Pilot Program

Figure 1

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

Source: FDIC.
FDIC Quarterly 29 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

most programs would be consistent with the Affordable 

Small-Dollar Loan Guidelines (SDL Guidelines), but it 

offered banks some flexibility to encourage innovation.5

The pilot was a case study and does not represent a 

statistical sample of the banking universe. Pilot bankers 

provided some basic information about their programs 

each quarter.6 Some data, such as number and volume 

of loans originated, were relatively straightforward to 

obtain and aggregate. To obtain more subjective or 

5

 FDIC, “Affordable Small-Dollar Loan Guidelines,” news release, June 

19, 2007, http://www.fdic.gov/news/news/press/2007/pr07052a.html. 

The primary product features described in the guidelines included loan 

amounts up to $1,000, payment periods beyond a single paycheck 

cycle, annual percentage rates below 36 percent, low or no origination 

fees, streamlined underwriting, prompt loan application processing, 

an automatic savings component, and access to financial education. 6

 The information collection request complied with the Paperwork 

Reduction Act; it did not include account-level information, in accordance with the Right to Financial Privacy Act. See the Federal Register

citation at http://www.fdic.gov/regulations/laws/federal/2007/07notice

June7.html for a description of the information collection process.

alternative credit arrangements or other services, and 

inform consumers of these available options” that could 

include small-dollar credit products.

Background

The Small-Dollar Loan Pilot Program pilot began with 

31 banks, and several banks entered and exited as the 

pilot progressed. The pilot concluded with 28 participating banks ranging in size from $28 million to nearly 

$10 billion (see Table 1). The banks have more than 

450 offices across 27 states. Before being accepted into 

the pilot program, banks had to submit an application, 

describe their programs, and meet certain supervisory 

criteria.4 About one-third of the banks in the pilot had 

existing small-dollar loan programs at the time of their 

applications, while the rest instituted new programs in 

conjunction with the pilot. The FDIC anticipated that 

4

 “An Introduction to the FDIC’s Small-Dollar Loan Pilot Program” 

described pilot program application parameters. See footnote 1.

Table 1

Small-Dollar Loan Pilot Program Participants

Bank Location Total Assets ($000s) Number of Branches

Amarillo National Bank Amarillo, TX 2,792,382 16

Armed Forces Bank Fort Leavenworth, KS 862,852 52

Bank of Commerce Stilwell, OK 93,672 3

BankFive Fall River, MA 708,545 13

BankPlus Belzoni, MS 2,144,987 61

BBVA Bancomer USA* Diamond Bar, CA 139,327 25

Benton State Bank Benton, WI 45,780 3

Citizens Trust Bank Atlanta, GA 387,130 11

Citizens Union Bank Shelbyville, KY 715,927 18

Community Bank of Marshall Marshall, MO 98,478 6

Community Bank - Wheaton/Glen Ellyn Glen Ellyn, IL 340,628 4

The First National Bank of Fairfax Fairfax, MN 27,539 1

Kentucky Bank Paris, KY 676,239 15

Lake Forest Bank & Trust Lake Forest, IL 1,816,422 8

Liberty Bank and Trust Company New Orleans, LA 423,624 24

Liberty National Bank Paris, TX 245,262 3

Mitchell Bank Milwaukee, WI 73,623 5

National Bank of Kansas City Overland Park, KS 708,191 6

Oklahoma State Bank Guthrie, OK 43,228 4

Pinnacle Bank Lincoln, NE 2,538,702 57

Red River Bank Alexandria, LA 795,889 16

State Bank of Alcester Alcester, SD 94,263 1

State Bank of Countryside Countryside, IL 913,111 6

The Heritage Bank Hinesville, GA 982,012 32

The Savings Bank Wakefield, MA 417,081 9

Washington Savings Bank Lowell, MA 164,724 3

Webster Five Cents Savings Bank Webster, MA 559,762 8

Wilmington Trust Wilmington, DE 9,609,666 44

Source: FDIC.

Note: Data as of fourth quarter 2009.

*BBVA Bancomer USA merged into Compass Bank (Birmingham, AL) in September 2009. Data shown are the latest available for BBVA, as of June 30, 2009.
FDIC Quarterly 30 2010, Volume 4, No. 2

Loan Characteristics

While the application process did not preclude openended credit, all banks in the pilot offered only closedend installment loans. Basic loan characteristics, such as 

interest rates, fees, and repayment terms, did not vary 

between large and smaller originators. Therefore, there is 

no distinction made for origination volume in the fourthquarter loan characteristics data shown in Table 4.

Loan terms remained fairly consistent from quarter to 

quarter. For example, the average loan amount for SDLs 

was approximately $700, and the average term was 10 to 

12 months. The average loan amount for NSDLs was 

approximately $1,700, and the average term was 14 to 

16 months. Average interest rates for both types of loans 

ranged between 13 and 16 percent, and the most 

common interest rate charged was 18 percent. About 

half of the banks charged an origination fee (the average 

fee was $31 for SDLs and $46 for NSDLs), and when 

this fee was added to the interest rate, all banks were 

within the targeted 36 percent annual percentage rate.

Loan Performance

The delinquency ratio for SDLs climbed to 11 percent 

in fourth quarter 2009 from a relatively stable rate of 

about 9 percent for much of 2009.7 The fourth quarter 

increase in SDL delinquencies is attributed largely to 

adverse economic conditions in bank communities. The 

delinquency ratio for NSDLs has also been high, though 

somewhat volatile, again due to adverse local economic 

conditions. As of fourth quarter 2009, the NSDL delinquency ratio was 9.4 percent compared with 10.9 

percent in the third quarter, 6.4 percent in the second 

quarter, and 6.6 percent in first quarter 2009. Delin7

 Delinquency refers to loans 30 days or more past due.

otherwise difficult-to-quantify information, the FDIC 

held periodic one-on-one discussions and group conference calls with bank management.

The pilot tracked two types of loans: small-dollar loans 

(SDLs) of $1,000 or less and nearly small-dollar loans 

(NSDLs) between $1,000 and $2,500. Data collection 

was initially concentrated in the SDL category, in 

accordance with the SDL Guidelines. Data collection 

was expanded for the NSDL category after the first year 

of the pilot, when some bankers relayed to the FDIC the 

importance of these loans to their business plans. In 

particular, they indicated that some of their customers 

needed and could qualify for larger loans and that these 

loans cost the same to originate and service as SDLs, but 

resulted in higher revenues. Some bankers conducted 

only SDL or NSDL programs, and some conducted both 

types. In this article, the terms “small-dollar lending” 

and “small-dollar loans” refer to banks’ overall programs, 

regardless of which category of loan they originated.

Pilot Results

During the two-year pilot, participating banks made 

more than 18,100 SDLs with a principal balance of 

$12.4 million and almost 16,300 NSDLs with a principal balance of nearly $27.8 million (see Table 2). As 

of the end of the pilot in fourth quarter 2009, 7,307 

SDLs totaling $3.3 million and 7,224 NSDLs totaling 

$9.2 million were outstanding. Quarterly origination 

volumes were affected by seasoning of newer programs, 

periodic changes some banks made to their programs, 

banks exiting and entering the pilot, seasonality of 

demand, and local economic conditions.

Loan Volume

Table 3 shows loan volume data for fourth quarter 2009 

by originator size. Because several banks with longstanding programs had disproportionately large origination volumes, results for banks originating 50 or more 

loans per quarter were isolated from the rest of the group 

to prevent skewing the loan volume. Interestingly, 

several banks with new programs produced enough 

volume to move into the large originator category.

Smaller originators made, on average, 10 SDLs in 

fourth quarter 2009, compared with 9 SDLs in the third 

quarter, 13 SDLs in the second quarter, and 15 SDLs in 

the first quarter. Smaller originators made, on average, 

11 NSDLs in fourth quarter 2009, versus 18, 13, and 13 

loans in the third, second, and first quarters of 2009, 

respectively.

Table 2

Small-Dollar Loan Pilot Program 

Cumulative Statistics

SDL Originations NSDL Originations

Number Amount ($) Number Amount ($)

1Q08 1,523 1,013,118 1,617 2,696,996 

2Q08 2,388 1,495,661 1,918 3,202,358 

3Q08 2,225 1,502,456 2,113 3,651,934

4Q08 2,210 1,492,273 2,033 3,434,906

1Q09 1,650 1,079,999 1,745 2,943,952

2Q09 2,229 1,553,296 2,389 4,135,785

3Q09 2,928 2,135,767 2,178 3,744,603

4Q09 3,010 2,168,295 2,301 3,972,694

Total 18,163 $12,440,864 16,294 $27,783,227

Source: FDIC.
FDIC Quarterly 31 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

age. For SDLs, the final, cumulative charge-off ratio was 

6.2 percent as of fourth quarter 2009 versus 5.7 percent 

in the third quarter, 5.2 percent in the second quarter, 

and 4.3 percent in the first quarter.8 These compare 

with ratios of 5.4 percent, 5.4 percent, 5.3 percent, 

and 4.9 percent for unsecured “loans to individuals,” 

8

 Cumulative charge-off ratios for SDLs are calculated from the beginning of the pilot period. 

quency ratios for both SDLs and NSDLs are much 

higher than for general unsecured “loans to individuals.” According to the FDIC Call Report, delinquency 

ratios for those loans were 2.5 percent in fourth quarter 

2009, 2.6 percent in the third quarter, 2.4 percent in 

the second quarter, and 2.5 percent in the first quarter.

However, charge-off ratios for SDLs and NSDLs, 

although climbing, are in line with the industry averTable 3

Small-Dollar Loan Pilot 4Q09: Origination Data by Program Size

Number of Banks 

Reporting Total Average Minimum Maximum

Loans up to $1,000 (SDLs)

All Banks

# of Notes 22 3,010 111 1 1675

Note Volume 22 $2,168,295 $98,559 $500 $1,140,660

Banks Originating Fewer Than 50 Loans

# of Notes 15 146 10 1 26

Note Volume 15 $99,880 $6,659 $500 $15,800

Banks Originating More Than 50 Loans

# of Notes 7 2,864 409 51 1,675 

Note Volume 7 $2,068,415 $337,437 $38,700 $1,140,660

Loans over $1,000 (NSDLs)

All Banks

# of Notes 12 2,301 192 1 1,151 

Note Volume 12 $3,972,694 $331,058 $1,200 $1,942,837

Banks Originating Fewer Than 50 Loans

# of Notes 7 78 11 1 38

Note Volume 7 $135,064 $19,295 $1,200 $64,868

Banks Originating More Than 50 Loans

# of Notes 5 2,223 445 109 1,151 

Note Volume 5 $3,837,630 $767,526 $193,355 $1,942,837

Source: FDIC.

Table 4

Small-Dollar Loan Pilot 4Q09: Summary of Loan Characteristics

Number of 

Banks Reporting Average Minimum Maximum

Loans up to $1,000

Loan amount 22 $724 $445 $1,000

Term (months) 22 12 2 24

Interest rate 22 13.09% 4.00% 31.90%

Non-zero fees 9 $31 $8 $70

Loans over $1,000

Loan amount 12 $1,727 $1,200 $2,070

Term (months) 12 15 10 24

Interest rate 12 13.99% 4.00% 33.53%

Non-zero fees 6 $46 $15 $70

Source: FDIC.
FDIC Quarterly 32 2010, Volume 4, No. 2

Program and product profitability calculations are not 

standardized and are not tracked through regulatory 

reporting. Profitability assessments can be highly subjective, depending on a bank’s location, business model, 

product mix, cost and revenue allocation philosophies, 

and many other factors. Moreover, many of the banks 

in the pilot are community banks that indicated they 

either cannot or choose not to expend the resources to 

track profitability at the product and program level.

Nevertheless, as a general guideline, pilot bankers indicated that costs related to launching and marketing 

small-dollar loan programs and originating and servicing small-dollar loans are similar to other loans. 

However, given the small size of SDLs and to a lesser 

extent NSDLs, the interest and fees generated are not 

always sufficient to achieve robust short-term profitability. Rather, most pilot bankers sought to generate 

long-term profitability through volume and by using 

small-dollar loans to cross-sell additional products.

Board and Senior Management Support Was Most 

Important Element Related to Program Feasibility

According to interviews with pilot bankers, several 

overarching elements directly affect the feasibility of 

small-dollar loan programs. Banks indicated that strong 

senior management and board of director support over 

the long term is the primary factor in ensuring the 

success of small-dollar loan programs. They also cited 

the importance of an engaged “champion” in charge 

of the program, preferably with lending authority, 

significant influence over bank policy decisions, or 

both. One of the champion’s key challenges was to 

convince branch staff, local loan officers, or similar 

personnel to promote the small-dollar loan product 

among the bank’s many products and services.

Location was also linked to program feasibility. Banks 

with offices in communities with large populations of 

low- and moderate-income, military, or immigrant 

households tended to benefit from greater demand for 

small-dollar loan products. Banks in rural markets with 

few nonbank alternative financial services providers 

also benefitted from limited competition for SDL and 

NSDL products.

Banks, particularly those in suburban locations with less 

demand at the branch level, cited the importance of 

strong partnerships with nonprofit community groups to 

refer, and sometimes qualify, potential borrowers. These 

partnerships were especially useful for fostering word-ofmouth advertising for their small-dollar loan products. 

according to fourth, third, second, and first quarter 

2009 Call Reports, respectively.

The cumulative charge-off rate for NSDLs, at 8.8 

percent, is higher than for SDLs and general unsecured 

loans to individuals.9 However, the charge-off rate for 

these larger loans compares favorably with other types 

of unsecured credit. For example, the charge-off rate for 

“credit cards” on bank balance sheets was 9.1 percent as 

of the fourth quarter 2009 Call Report, and defaults on 

managed credit cards exceeded 10 percent throughout 

2009.10 Performance statistics of loans originated during 

the pilot show that while small-dollar loan borrowers 

are more likely to have trouble paying loans on time, 

they have a default risk similar to those in the general 

population.

Lessons Learned

Best practices and elements of success emerged from the 

pilot and underpin the Safe, Affordable, and Feasible 

Small-Dollar Loan Template. In particular, a dominant 

business model emerged: most pilot bankers indicated 

that small dollar loans were a useful business strategy for 

developing or retaining long-term relationships with 

consumers. In terms of overall programmatic success, 

bankers reported that long-term support from a bank’s 

board and senior management was most important. 

The most prominent product elements bankers linked 

to the success of their program were longer loan terms, 

followed by streamlined but solid underwriting.

Long-Term, Profitable Relationship Building 

Was Predominant Program Goal

About three-quarters of pilot bankers indicated that 

they primarily used small-dollar loans to build or retain 

profitable, long-term relationships with consumers and 

also create goodwill in the community. A few banks 

focused exclusively on building goodwill and generating 

an opportunity for favorable Community Reinvestment 

Act (CRA) considerations, while a few others indicated 

that short-term profitability was the primary goal for 

their small-dollar loan programs.11

9

 The cumulative charge-off ratio for NSDLs was calculated only for 

fourth quarter 2009 because data regarding NSDL charge-offs were 

not collected until 2009. The cumulative ratio for NSDLs is calculated 

from the beginning of 2009.

10 “Credit Card Charge-Off Rate on the Rise Again,” Washington Post, 

December 30, 2009. This article reports the results of Moody’s Investor Service’s Credit Card Index.

11 The extent to which a bank’s small-dollar loan program may be 

subject to positive CRA consideration is described in the “Affordable 

Loan Guidelines.” See footnote 3.
FDIC Quarterly 33 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

to choose this payment method. It is difficult to draw 

empirical conclusions about the effect of automatic 

payments on performance because not all borrowers 

chose this option. Nevertheless, pilot bankers in general 

believed that automatic repayments can improve performance for all credit products, not just small-dollar loans.

Pilot Bankers Had Mixed Views on Optional Linked 

Savings and Financial Education

As part of the pilot application process, the FDIC 

specifically sought to test whether savings linked to 

small-dollar credit and access to financial education 

would improve loan performance, and ultimately, build 

a savings cushion to reduce future reliance on high-cost 

emergency credit. Cumulatively, pilot banks reported 

opening more than 4,000 savings accounts linked to 

SDLs with a balance of $1.4 million. These numbers are 

likely understated because of the limited ability of some 

banks to track this information.

On the surface, it appears that default rates for loans 

made under programs featuring savings and financial 

education are lower than for programs without those 

features. To illustrate, about one-half of pilot banks 

required or strongly encouraged SDL customers to open 

savings accounts linked to SDLs.13 About 80 percent of 

the SDL funds originated during the pilot were made by 

banks that offered and encouraged, but did not require, 

a linked savings account. The cumulative charge-off 

rate on SDLs was 6.4 percent at banks with optional 

linked savings versus 11.4 percent at banks that did not 

feature linked savings as part of their programs. Slightly 

more than 10 percent of SDL funds were originated by 

banks that required linked savings accounts; these 

banks had the lowest cumulative charge-off rate during 

the pilot period, at just 1.6 percent.

Almost one-half of pilot banks strongly encouraged or 

required formal financial education. Because many of 

the largest SDL programs had educational components, 

more than 90 percent of SDLs were made by banks that 

featured education as part of their lending programs. 

The cumulative SDL charge-off rate was 5.7 percent 

where financial education was featured compared with 

12.0 percent where it was not.

Given the limited sample size and variances in the 

program requirements and other features, it is unclear 

13 Performance data for linked savings and financial education components are limited to SDLs, as data for NSDLs were not collected until 

later in the pilot, which limited their usefulness.

While some banks used mass media, Web page links, 

and targeted promotional efforts, word of mouth 

emerged as the dominant form of advertising for small 

dollar loans, particularly for established programs.

Longer Loan Term and Streamlined but Solid 

Underwriting May Have Been Key Performance 

Determinants

Pilot bankers indicated that a longer loan term was critical to loan performance because it gave consumers more 

time to recover from a financial emergency than a single 

pay cycle for payday loans, or the immediate repayment 

often required for fee-based overdrafts. Several banks 

experimented with relatively short loan terms, largely in 

an attempt to mimic the customer’s experience with 

payday lenders. For example, as described in the text 

box on page 39, Liberty Bank in New Orleans, Louisiana, initially required that loan terms coincide with 

three paycheck cycles, but found that borrowers often 

could not repay the loans on time and returned to the 

bank for multiple renewals.12 To avoid the cycle of 

continuously renewed “treadmill” loans, Liberty Bank 

extended loan terms to a minimum of six months. For 

the pilot overall, a 90-day loan term emerged as the 

minimum time needed to repay a small-dollar loan.

Underwriting processes varied somewhat among pilot 

banks and were streamlined compared with other loans, 

but bankers reported that some basic elements were 

important in minimizing defaults. Notably, most pilot 

banks required a credit report to help determine loan 

amounts and repayment ability and to check for fraud 

or recent bankruptcy. Few banks used credit scoring in 

the underwriting process, but those that did had low 

minimum thresholds, such as a Fair Isaac Corporation 

(FICO) score in the low to mid-500s. In addition to the 

credit report, all pilot banks required proof of identity, 

address, and income.

Virtually all of the pilot banks could process loans 

within 24 hours, and many processed loans within an 

hour if borrowers had the proper documentation. Banks 

tended to have strong opinions about the merits of 

centralized versus decentralized loan approval processes, 

based on the bank’s size and business model, but no 

clear link to performance under either method emerged. 

About three-fourths of banks offered borrowers the 

option of automatically debiting payments, and some 

provided interest rate discounts to encourage borrowers 

12 Financial institutions, companies, community groups, and other 

organizations mentioned in this article are for illustration only. The 

FDIC does not endorse any individual organization or specific products.
FDIC Quarterly 34 2010, Volume 4, No. 2

Strategies to Scale Small-Dollar Loans

Banks other than those in the pilot provide small-dollar 

loans, but it is likely that most banks do not offer these 

loans.14 Pilot bankers and other banks that have started 

or have expressed interest in starting a small-dollar loan 

program indicated that the primary obstacles to entry 

are the cost of launching and maintaining the program 

and concerns about defaults. The strategies described 

below could help overcome these obstacles and increase 

the supply of small-dollar loans.

Highlight Facts about Existing Models

A straightforward way to encourage more banks to 

offer small-dollar loans is to emphasize the facts about 

successful programs. The key facts are that safe, affordable, and feasible small-dollar lending does occur in 

mainstream financial institutions; that small-dollar 

lending can be part of a cornerstone for creating profitable relationships; and that defaults on these loans are 

in line with other types of unsecured credit. Indeed, 

other small-dollar loan programs have reported loan 

performance results similar to those of the pilot.

For example, the Pennsylvania Credit Union Association’s Credit Union Better Choice program reported an 

approximate 5 percent default rate as of third quarter 

2009.15 This program was launched in early 2007 in 

partnership with the Pennsylvania Credit Union 

Association and the State Treasurers’ Office, and about 

80 credit unions are currently participating. The maximum loan amount is $500, the maximum fee is $25, 

and the maximum interest rate is 18 percent. The loan 

term is 90 days, and financial counseling is offered but 

not required. At disbursement, an amount equal to 10 

percent of the loan is placed in a mandatory savings 

account.

In another example, the country’s largest microlender, 

ACCION Texas, also indicated its loss rate is about 

14 The FDIC Survey of Banks’ Efforts to Serve the Unbanked and 

Underbanked, published in December 2008 (http://www.fdic.gov/

unbankedsurveys/), included a question regarding whether banks offer 

small-dollar loans. However, the response to this question was materially skewed, apparently by widespread misinterpretation by banks that 

believed small-dollar loans included standard overdraft lines of credit. 

This question will be clarified in subsequent survey efforts. 

15 Data regarding the Better Choice Program were reported to the FDIC 

Committee on Economic Inclusion on December 2, 2009, http://www.

vodium.com/MediapodLibrary/index.asp?library=pn100472_fdic_

advisorycommittee&SessionArgs=0A1U0100000100000101. See also 

the Better Choice Program Web site at http://www.pacreditunions.

com/betterchoice.html.

whether linked savings or formal financial education 

directly affected loan performance. Moreover, it is 

uncertain whether these factors reduced future reliance 

on high-cost credit, particularly since reducing reliance 

on credit is a long-term goal that may extend beyond 

the pilot period and it is difficult to track based on data 

available to banks. Anecdotally, some pilot bankers 

indicated that some small-dollar loan borrowers subsequently used linked savings or financial management 

skills in positive ways.

All of the pilot bankers recognized the importance of 

both savings and financial education, but perhaps the 

most interesting finding regarding program design was 

the difference in opinion among bankers about the 

effectiveness of requiring or even strongly encouraging 

these features. Some bankers felt that linked savings 

and formal financial education must be hardwired into 

the small-dollar loan product to break the cycle of highcost lending. Others believed that requiring extra 

features for a loan complicates the process and can drive 

an already stressed consumer to the ease of the payday 

lending process; these bankers thought that financial 

education counseling should be provided during the 

application process.

Small-dollar loan programs at two of the pilot banks—

BankPlus in Belzoni, Mississippi, and Liberty Bank and 

Trust Company, of New Orleans, Louisiana—illustrate 

these differences in opinion. BankPlus required both 

formal education seminars and a significant savings 

component to qualify for its small dollar loan program 

(see text box on page 38). The bank strongly believed 

that these components were the driving factor in minimizing defaults and rehabilitating small-dollar loan 

customers with problematic credit histories into what it 

believes will be future mainstream banking customers.

On the other hand, Liberty Bank and Trust Company 

believed that its program’s initial formal financial 

education and linked savings requirements introduced 

an unwanted level of complexity for borrowers already 

facing a financial emergency (see text box on page 39). 

Liberty reported a surge in loan demand when it 

removed these requirements. A common theme that 

Liberty and other banks cited was the importance of 

informal financial education and counseling as part of 

the loan closing process. For many small-dollar loan 

consumers, obtaining a loan from a bank is an exciting 

and sometimes life-changing event, and part of relationship building is capitalizing on a teachable moment—

explaining the importance of repaying the loan—when 

the loan is delivered.
FDIC Quarterly 35 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

$20 million in state operating funds are deposited in a 

corporate federal credit union and receive a market rate 

of return. The difference between that rate and the 

corporate credit union’s earnings on the deposit is used 

to fund a loan loss reserve pool. Participating credit 

unions can apply to the pool to have up to 50 percent 

of their losses offset. While it is not a guarantee fund 

per se, the Pennsylvania Credit Union Association 

helps offset the cost of entry into small-dollar lending 

by paying for traditional advertising for credit unions 

that wish to enroll in the Better Choice Program.

In addition to guarantee programs, opportunities may 

exist to create larger and more broadly available guarantees. For example, recently proposed legislation would 

amend the Community Development Banking and 

Financial Institutions Act of 1994 to provide financial 

assistance to help defray the costs of operating smalldollar loan programs.18 Elements of the Safe, Affordable, and Feasible Small-Dollar Loan Template were 

incorporated into this proposed legislation.

Encourage Partnerships

Pilot bankers and other successful small-dollar lending 

programs reported that partnerships with community 

groups were crucial to the success of their programs. 

Among other things, these partnerships can serve as an 

incentive to banks by providing client referrals and the 

opportunity for other parties to share in program costs. 

In some instances, the partnerships are direct and oneon-one relationships, such as the Wilmington Trust and 

WENH partnership described above. Other models, 

such as the state and local “Bank On” campaigns, use 

broad-based coalitions and strategies, which often 

include the provision of short-term emergency credit, to 

increase access to the financial mainstream.19

The Alliance for Economic Inclusion (AEI) is the 

FDIC’s national initiative to establish coalitions of 

financial institutions, local policymakers, communitybased and consumer organizations, and other partners 

in 14 markets across the country to bring unbanked and 

underserved populations into the financial mainstream. 

The focus is on expanding basic retail financial services, 

including savings accounts, affordable remittance products, small-dollar loan programs, targeted financial 

education programs, and asset-building programs, to 

underserved populations. The number of AEI members 

18 S. 3217, 111th Cong. § 1206 (2010). 

19 See the National League of Cities Web site for a general description 

of Bank On campaigns at http://www.nlc.org/ASSETS/7E6FA32D3A364

733B3172E44818A0CE3/IYEF_BankOnOnePagerFinal_4-10.pdf.

5 percent.16 Its maximum loan amounts are higher, 

up to $100,000, and the average amount is about 

$10,000, but 75 percent of its loans are for $1,500 or 

less. ACCION Texas’s active portfolio was $24 million 

as of third quarter 2009, and loans are targeted to 

Latina women seeking to start or expand small businesses. Most applicants do not have a credit history, 

and the average FICO score is 575.

The FDIC has taken steps to highlight the facts about 

the small-dollar loan pilot program by releasing program 

results and lessons learned, as well as setting forth the 

Safe, Affordable, and Feasible Small-Dollar Loan 

Template. In addition, the FDIC has been discussing 

the pilot and template in speeches and public forums 

with a number of groups, including banks; other regulators; policymakers; academics; nonprofit, community, 

and philanthropic groups; and innovators in the smalldollar lending area.

Study Creation of Pools of Nonprofit Funds or 

Government Operating Funds to Serve as 

“Guarantees” for Safe Small-Dollar Loan Programs

Several existing small-dollar loan programs feature 

“guarantees” in the form of loan loss reserves or linked, 

low-cost deposits provided by government bodies or 

philanthropic groups. These guarantees provide important assurances to banks that are interested in offering 

small-dollar loans but are concerned about the costs of 

doing so.

For example, pilot bank Wilmington Trust in Wilmington, Delaware, originates small-dollar loans solely to 

clients of West End Neighborhood House (WENH), a 

social services nonprofit organization. WENH screens 

applications, performs loan underwriting (based on 

bank-approved criteria), and provides a full range of 

counseling and social services for prospective borrowers. 

In addition, all of the loans are fully guaranteed by 

WENH and backed by a loan loss reserve funded by 

grants and donations from other program partners.17

In another example, as part of the Better Choice 

Program, the Pennsylvania State Treasurers’ Department has established a loan guarantee pool whereby 

16 Ibid. See also ACCION Texas’s Web site at http://www.acciontexas.

org/. 17 The partnership between Wilmington Trust and WENH was profiled 

in “The FDIC’s Small-Dollar Loan Pilot Program: A Case Study after 

One Year,” page 38. See footnote 1. See also WENH’s Web site at 

http://www.westendnh.org/financial-management-services/# for more 

information about the program.
FDIC Quarterly 36 2010, Volume 4, No. 2

Virginia Credit Union. An Internal Revenue Code 

§501(c) 3 nonprofit organization called the Virginia 

State Employee Assistance Fund (VSEAF) provided a 

$10,000 guarantee to fund a loan loss reserve. Previously, the VSEAF was being used for direct emergency 

aid to state workers, and the VSELP provided a way to 

leverage those funds to assist more employees who 

might need emergency funds.

VSELP loans are for amounts up to $500, and terms are 

up to six months with an interest rate of 24.99 percent. 

Loans are also conditioned on taking a short computerbased financial education course and passing a tenquestion financial education quiz. After about three 

months, more than 2,000 VSELP loans had been originated with a cumulative balance of over $1 million; this 

represented about 2 percent of Virginia’s 100,000 state 

employees who were using the loans. According to the 

Commonwealth of Virginia, borrowers are disproportionately minority, female, and low-income.

E-Duction is a for-profit company that offers openended loans through employers with credit lines delivered through MasterCard®. The maximum loan amount 

is 2.5 percent of annual pay, which, for example, would 

be $1,000 for an employee earning $40,000 per year.23

There is no interest rate; rather, the company charges 

an annual fee, which as of late 2009 was $36 to $40 per 

year. Equal payments are made through payroll deduction over two to six months, depending on the type of 

expense. The company has been in business since 2002 

and reports that it has about 18,000 accounts. According to E-Duction, about two-thirds of its borrowers earn 

between $20,000 and $40,000, and more than half have 

been employed for five or more years. Their average 

FICO score is 568.

Several pilot banks have been experimenting with 

innovative program features. For example, as described 

in the text box on page 40, Lake Forest Bank & Trust, 

of Lake Forest, Illinois, began working with a local 

municipality to offer small-dollar loans to city workers. 

These loans are structured along the terms of the bank’s 

standard small-dollar loan but are repaid through automatic payroll deductions. As described on page 41 

Mitchell Bank, Milwaukee, Wisconsin, created a 

unique low-cost financial education aspect to its loan 

program in which borrowers sign a pledge that they will 

not incur another payday loan during the term of their 

Mitchell Bank loan.

23 Ibid. See also e-Duction’s Web site at http://www.e-duction.com/

html2.0/index.html for more information.

nationwide is 967, and 35 banks offer or are developing 

small-dollar loan programs.20

Study Feasibility of Safe and Innovative Small-Dollar 

Loan Business Models

The relationship-building small-dollar loan model is as 

costly to originate as other, larger loans because of the 

“high-touch” nature of the loan delivery process. 

Emerging technologies and delivery channels could 

reduce handling costs and, potentially, credit losses.

For example, employer-based lending is an emerging 

model whereby loans are delivered through the workplace as an employee benefit, like medical insurance or 

401(k) plans. Banks or credit unions could process loans 

using employment information as a proxy for most of its 

underwriting criteria. That is, the employee’s name, 

address, social security or tax identification number, 

salary, and length and status of employment would 

already be known, potentially reducing or eliminating 

the time a bank employee would spend gathering that 

information. Moreover, payments would be made automatically from payroll deduction, and features such as 

financial education screens and required savings could 

be factored into the loan origination process.

There are no large-scale examples of employer-based 

lending, but some organizations are experimenting with 

the concept. For example, Employee Loan Solutions 

(ELS) is a start-up company that has a patented process 

for delivering closed-end installment loans as an 

employee benefit.21 According to ELS, underwriting 

costs would fall to virtually zero because of an automated process with no consumer interaction. Defaults 

also would be limited through automated payroll deduction for payments. While ELS has not had any practical 

application of its process yet, there are a few operating 

examples of employer-based small-dollar lending.

In July 2009 the Commonwealth of Virginia launched 

a pilot program, the Virginia State Employees Loan 

Program (VSELP), to deliver loans to state employees 

through its payroll system.22 The program does not 

involve any state funds, and loans are funded by the 

20 Some of the AEI member banks offering small-dollar loans are also 

in the pilot. See the FDIC’s Web site at http://www.fdic.gov/consumers/

community/AEI/index.html for more information about the AEI. 21 Information regarding Employee Loan Solution’s proposed business 

model was reported to the FDIC Committee on Economic Inclusion on 

December 2, 2009. 

22 Ibid. See also the State of Virginia’s Web site for more information 

about the loan program at http://www.dhrm.virginia.gov/vaemploan/.
FDIC Quarterly 37 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

Authors: Rae-Ann Miller, Special Advisor to the Director

Division of Insurance and Research

Susan Burhouse, Senior Financial Economist

Division of Insurance and Research

Luke Reynolds, Chief, Outreach and 

Program Development Section

Division of Supervision and Consumer 

Protection

Aileen G. Sampson, Financial Economist

Division of Insurance and Research

The authors would like to thank Jack Webb, Senior Executive Vice President and President–South Region, BankPlus; 

Kelly Dixon, Manager of E-Commerce and Howard 

Brooks, Executive Vice President, Liberty Bank and Trust 

Company; Cassandra Slade, Vice President, Lake Forest 

Bank & Trust Company; and James Maloney, President, 

Mitchell Bank for their contributions to this article, and all 

of the volunteer pilot bankers for their assistance in the 

successful execution of the pilot.

Consider Ways That Regulators Can Encourage 

Banks to Offer Affordable and Responsible Products 

and That Small-Dollar Loan Programs Can Receive 

Favorable CRA Consideration

Pilot bankers and others have reported that a more flexible regulatory environment could encourage more 

banks to offer small-dollar loans. The SDL Guidelines 

and the pilot application process indicated that smalldollar loan programs can already receive favorable 

consideration for CRA purposes. However, several pilot 

bankers believe that small-dollar lending should receive 

more emphasis in CRA examinations, even if the 

program is relatively small. The FDIC is reviewing this 

suggestion and other types of regulatory and supervisory 

incentives to encourage small-dollar lending.

Conclusion

The FDIC small-dollar loan pilot program, conducted 

between December 2007 and December 2009, demonstrated that banks can offer alternatives to high-cost, 

emergency credit products, such as payday loans or overdrafts. The pilot resulted in a Safe, Affordable, and 

Feasible Small-Dollar Loan Template that other banks 

can replicate. Loans originated under the program have 

a default risk similar to other types of unsecured credit. 

Small-dollar loan programs can be an important tool in 

building and retaining customers, can be eligible for 

favorable CRA consideration, and could help banks’ 

consistency with regulatory guidance regarding offering 

customers alternatives to fee-based overdraft protection 

programs. The FDIC continues to work with the banking industry, consumer and community groups, nonprofit 

organizations, other government agencies, and others to 

research and pursue strategies that could prove useful in 

expanding the supply of small-dollar loans.
FDIC Quarterly 38 2010, Volume 4, No. 2

BankPlus

Belzoni, Mississippi

BankPlus is a $2.1 billion institution headquartered in 

Belzoni, Mississippi. In addition to its main office, the 

bank has 61 branches throughout northwest, central, 

and southeastern Mississippi. BankPlus operates in a 

largely nonmetropolitan environment; of the bank’s 

four designated assessment areas, only one is in a metropolitan statistical area (Jackson). The bank’s business 

strategy of placing branches near businesses may provide 

banking services to residents of rural, sparsely populated 

environments who commute to work. For example, 

BankPlus operates a branch inside the Nissan plant in 

Canton, Mississippi.

The bank learned that there was a strong need for a 

small-dollar loan program after it opened branches in 

Jackson. As a result of the bank’s community outreach 

and partnerships, it soon discovered that many local 

residents had not received financial education and, as a 

result, were unaware of the high costs of using alternative financial services. The bank studied the predominate users of payday loans in the local community and 

found that public servants such as teachers, firefighters, 

and police officers were particularly vulnerable to a 

cycle of high-cost lending.

The bank launched its CreditPlus program in April 2008. 

CreditPlus is a small, short-term loan product designed 

to encourage participants to break the cycle of high-cost 

debt while developing a regular savings plan. BankPlus 

opens a new checking and savings account for those 

approved for a CreditPlus loan. One-half of the loan 

proceeds are deposited into an interest-bearing personal 

savings account, and these funds are “on hold” until the 

loan is repaid. The bank encourages participants to use 

the remaining loan proceeds to eliminate outstanding 

debts to alternative financial services providers.

BankPlus reported that the educational component has 

been the “key to [the program’s] success.” Consumers 

must complete a three-hour seminar based on the 

FDIC’s Money Smart financial education curriculum 

before they can apply for a small-dollar loan.* Owing to 

the popularity of the seminars, the bank capped registrations at 50 people per class. In fourth quarter 2009, 

the bank held 21 seminars and reached 667 people. 

Slightly more than half (51 percent) of those who 

attended the financial education workshops came to 

the bank for a small-dollar loan.

CreditPlus applicants also receive one-on-one credit 

counseling so they can better understand their credit 

report at the time of application. Bank staff also encourages CreditPlus customers to save 10 percent of their 

income each pay period through electronic transfer 

from the checking account into the savings account.

CreditPlus loans range from $500 to $1,000, and all are 

closed-end with a 12- or 24-month term (the average 

being 21 months). The interest rate is fixed at 5 percent. 

No fees are charged, and proof of recurring income (for 

at least 60 days), identity, and address is required. A 

credit report is obtained as part of the underwriting 

process, but the bank does not require a particular credit 

score. Rather, those with a FICO score above 500 

receive a $1,000 loan, while those with a FICO score 

below 500 receive a $500 loan. If the customer’s documents are in order, a loan can be underwritten in less 

than one hour after the financial education workshop is 

completed. The bank conducted training for loan officers so that the underwriting process could be decentralized and made in the community.

BankPlus joined the pilot in 2009 and originated 610 

SDLs in fourth quarter 2009. At the conclusion of the 

pilot, 1,404 SDLs with a cumulative balance of about 

$1 million were outstanding. Only 58 SDLs totaling 

$34,000 were 30 days or more delinquent at the end of 

the pilot. The bank’s cumulative charge-off rate during 

the pilot period was 1.8 percent.

Bank management indicated that SDLs are not profitable on a stand-alone basis but can help establish 

customer relationships and improve the bank’s community, which benefits the bank over the long term. 

According to Senior Executive Vice President and 

President–South Region Jack Webb, “We see CreditPlus as an investment in the future—it is about building 

a relationship over the long term. Financial education 

improves habits, and the change of habits improves the 

future of customers.” One of many success stories the 

bank cites is of a customer who had bad credit, received 

a CreditPlus loan, improved her credit score by making 

timely repayments, and was later able to qualify for a 

mortgage through BankPlus and become a first-time 

homebuyer.

Financial Education, Savings, and Small-Dollar Lending 

at Work for Public Servants

* See the FDIC’s Web site at http://www.fdic.gov/consumers/

consumer/moneysmart/ for more information on Money Smart.
FDIC Quarterly 39 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

Liberty Bank and Trust Company

New Orleans, Louisiana

Liberty Bank and Trust Company is a minority-owned 

$424 million bank headquartered in New Orleans, Louisiana. Liberty has 24 branches in six states. Ten branches 

are in New Orleans; four are in Baton Rouge; one is the 

New Orleans suburb of Harahan, Louisiana; and one is 

in Opelousas, Louisiana. The bank has two branches 

each in Jackson, Mississippi; Detroit, Michigan; and 

Kansas City, Kansas. It also has one branch in Kansas 

City, Missouri; and one in Houston, Texas. Most of the 

small-dollar loans made by Liberty are originated out of 

the New Orleans and Kansas City, Missouri, branches. 

With the exception of the Harahan branch, all of Liberty’s branches are in urban areas, and most of the branches 

are in low- and moderate-income neighborhoods.

The bank did not have an active small-dollar loan 

product when it applied for the FDIC pilot. In its initial 

application, the bank cited providing affordable “antipayday” loans to the qualified public, attracting new 

clientele, and increasing future cross-selling opportunities as its objectives for offering small-dollar loans. The 

pre-launch, conceptual product outlined in its application was called the Payday Assistance Loan. It featured 

a $300 to $1,000 line of credit, a $15 initial saving 

deposit, a $15 refundable financial literacy course fee, 

a $10 processing fee, a 17.99 percent interest rate, and 

a three-payment term structure incorporating a $15 

savings deposit into each payment. The financial literacy fee was to be refundable upon completion of a 

literacy class within 30 days of application.

By the launch of the bank’s small-dollar loan program in 

April 2008, the Payday Assistance Loan had been 

rebranded as the Liberty Bank Fast Cash Loan. The Fast 

Cash loan required a minimum FICO score of 525, the 

opening of a Liberty checking account with direct 

deposit, deposit of 9 percent of the loan amount into a 

Liberty savings account, completion of a 90-minute 

financial literacy course, and a $4.50 application fee. 

The loan had an 18 percent interest rate and was payable 

in three installments commensurate with the borrower’s 

paycheck schedule. The minimum loan size remained 

$300, while the maximum was increased to $2,500. If all 

required customer documents were provided at the time 

of application, the Fast Cash approval process, featuring 

localized underwriting authority in most cases, was 

designed to take 15 minutes on average. A complete 

application consisted of the applicant’s two most recent 

pay stubs, most recent mortgage statement, utility bills, 

and proper identification.

In response to customer needs, Liberty refined the Fast 

Cash program over the remaining quarters of the pilot. 

According to Kelly Dixon, Liberty Bank’s manager of 

E-commerce, the savings component proved too 

complicated for potential borrowers. Thus, it was 

dropped before the end of 2008. Similarly, potential 

borrowers viewed the financial education requirements 

as too burdensome, and the bank modified them to 

allow customers to take out and repay two Fast Cash 

loans before completing a literacy class to qualify for a 

third loan. The three-payment term structure was 

dropped in favor of 6- to 12-month terms for loans up 

to $1,000 and 18-month terms for loans up to $2,500, 

to give borrowers more time to repay. Also, the smalldollar loan approval process was centralized and the 

underwriting guidelines were made more flexible. Rates 

on Fast Cash loans are 18 percent and fees are $4.50.

After implementing the program refinements, Liberty 

originated more SDL and NSDL loans in the first quarter of 2009 than it had in the previous three quarters 

combined. Liberty’s marketing efforts initially included 

media advertising, point-of-sale displays, Web site 

advertising, and dissemination of information at local 

churches. As the pilot progressed, Liberty came to rely 

more on word of mouth and the dissemination of 

brochures at gatherings to market the program.

Subsequently, the Fast Cash program continued to 

evolve. By November 2009, the financial education 

component had been dropped altogether. The program 

was modified to accommodate more credit history 

“glitches,” such as payment problems due to medical 

issues, job losses, hourly employment cutbacks, unexpected spikes in expenses affecting household budgets, 

and divorce, and to give greater consideration to borrowers using small-dollar loans to support educational 

purposes or to military families. According to Liberty 

Bank and Trust’s Executive Vice President Howard 

Brooks, “We needed more flexibility to avoid pushing 

our low- and moderate-income consumers to high-costdebt products such as payday loans. In particular, our 

customers told us that they don’t have the time or the 

resources to fulfill mandatory financial literacy or savings 

requirements.” He believes that the modifications to the 

Fast Cash program allowed Liberty Bank and Trust to be 

of greater service to its communities.

During the pilot, Liberty originated 102 SDLs and 82 

NSDLs. In all, Liberty originated approximately 

$217,000 in small-dollar loans during the pilot. The 

bank did not report any charge-offs, and its 30-day 

delinquency rate was about 5.60 percent. The bank 

reported a positive net income on small-dollar loans.

Product Simplification Leads to Small-Dollar Loan Success
FDIC Quarterly 40 2010, Volume 4, No. 2

Lake Forest Bank & Trust

Lake Forest, Illinois

Lake Forest Bank & Trust is a $1.8 billion institution 

headquartered in Lake Forest, Illinois, in the northern 

suburbs of Chicago. In addition to the main office, the 

bank has seven branches throughout the state. It is 

owned by the Wintrust Financial Corporation holding 

company, which also owns 14 other banks serving the 

Chicago, Illinois, and southern Wisconsin metropolitan areas.

To expand the bank’s community reinvestment activities, Lake Forest initiated a small-dollar lending program 

in late 2008. The program was designed to meet the 

FDIC’s Guidelines on Affordable Small-Dollar Loans, 

and the bank joined the ongoing pilot program in fourth 

quarter 2008. All seven of the bank’s branches offer the 

small-dollar loan product. Lake Forest has encouraged 

its sister banks—which, including Lake Forest, have 84 

branches—to offer the product as well, and many have 

started their own programs. Although Lake Forest was 

a relatively late entrant into the pilot program, the 

program has grown quickly, from 5 loans originated in 

its first quarter of participation to 51 in the final quarter 

of the pilot.

Lake Forest’s small-dollar loans range from $250 to 

$1,000. One of the most successful changes the bank 

made to its program over the past year has been reducing the minimum loan amount to accommodate borrowers who did not need large amounts of credit. The bank 

charges a fixed interest rate of prime plus 5 percent, 

which has hovered around 8.5 percent since it implemented the loan product, with no fees. Interest rates are 

reduced by 0.25 percent if the borrower chooses to use 

auto-debit payments or payroll deduction. Loans must 

be repaid within 24 months, but are paid off in 18 

months, on average. The underwriting process allows 

for loan decisions within 24 hours at the branch level. 

There are no minimum credit score requirements. 

While the bank initially required a minimum credit 

score, it found this requirement was an obstacle for too 

many applicants. Underwriting processes now consist of 

completing the application for credit, which collects 

information on employment history, income, assets, 

and debts. A credit report is also ordered to help determine the borrower’s ability to repay.

Since joining the pilot program, Lake Forest has made 

more than 100 SDLs for nearly $86,000. Forty-four loans 

had been paid off by the end of 2009. With just one loan 

delinquent and 11 loans charged off by fourth quarter 

2009, the bank reports that losses on the SDL product 

are no higher than those on other consumer loans. In 

addition to the positive effect the SDL program has had 

on community development, the bank has been able to 

earn a small profit on the loans and intends to develop 

long-term relationships with performing SDL borrowers.

Lake Forest is also involved in several innovative 

approaches to its small-dollar lending. In fourth quarter 

2009, the bank began working with a local municipality 

to offer workplace-based loans to city employees to 

reduce their reliance on payday loans and other alternative financial services. City workers can get a loan 

application directly from their employer, can fax the 

complete application to the bank, and will go in to the 

bank only to close the loan. The loans are structured 

along the terms of the bank’s standard small-dollar loan 

but are repaid through automatic payroll deductions.

In addition, the bank is working with the State of Illinois on the Micro Loan Program and was the first bank 

approved by the state as a lender under this program. 

This program is designed to provide affordable capital 

to credit unions and community banks so they can 

make micro loans to low-income residents who might 

otherwise turn to payday lenders. If a bank is accepted 

into the program, the Micro Loan Program will deposit 

up to $250,000 at a reduced rate at the bank for one 

year. These funds are then used to make loans to borrowers. The bank plans to work on modifying its product to 

meet the state guidelines, and the state program will 

become a subset of the small-dollar loan program.

While these partnerships are successful in providing loan 

prospects for the bank, the majority of the small-dollar 

loan borrowers come from outside of these relationships. 

Lake Forest consistently advertises the small-dollar loan 

in a community newspaper, which is the biggest driver 

of applications. Program information and the loan application are also available on the bank’s Web site, which 

is becoming a more important channel for applicants. 

Also, the bank’s successful track record with the program 

is generating positive word of mouth that is reaching 

increasing numbers of potential borrowers.

Innovating to Build Profitable Relationships
FDIC Quarterly 41 2010, Volume 4, No. 2

Small-Dollar Loan Pilot Program

Mitchell Bank

Milwaukee, Wisconsin

Mitchell Bank is a $74 million institution headquartered in Milwaukee, Wisconsin. In addition to the main 

office, the bank has four branches. The bank’s main 

office and branches are located in communities with 

concentrations of Latino and low- and moderate-income households.

Mitchell Bank’s small-dollar loan program was new 

when the pilot began in February 2008. The bank’s 

goals for the program were to provide consumers with 

an alternative to high-cost credit, build multiple account 

relationships, and provide opportunities for financial 

education. Initially, loans were offered only to existing 

customers who had had an account for six months or 

more and also had a Social Security number. In 2009, 

Mitchell Bank relaxed the existing customer requirement but required borrowers who were new customers 

to open a Mitchell Bank deposit account and to have 

their payroll or benefits check direct deposited into the 

account. Because of its large immigrant customer base, 

the bank also altered its program requirements to allow 

customers who had only an Individual Taxpayer Identification Number (ITIN) to apply for a loan.

Loans range from $300 to $1,000, although loans up to 

$2,500 may be made on a case-by-case basis. The interest rates range from 15 to 22 percent, depending on the 

borrower’s credit score; the average rate is about 19 

percent. Each loan application requires a credit report. 

Generally, the bank requires borrowers to have a minimum FICO score of 570 but will extend loans to those 

below that threshold if the borrower agrees to a single 

financial counseling session. An $8 fee is charged to 

cover the cost of the credit report. Loan terms range 

from 6 to 12 months, with an average of 9 months. In 

addition, borrowers must have a minimum income of 

$1,000 per month and are required to provide Mitchell 

Bank with two months’ evidence of payroll or other 

recurring income.

A unique aspect of Mitchell Bank’s program is that 

borrowers must sign a pledge that they will not incur 

another payday loan during the term of their Mitchell 

Bank loan. The bank also requires that the borrower set 

aside 10 percent of loan proceeds in a savings account 

that is restricted until the loan is paid. The interest rate 

on the savings account is three times higher than 

Mitchell Bank’s regular accounts to encourage smalldollar loan customers to add to savings and avoid future 

reliance on short-term credit. The bank also offers a 2 

percent discount for customers who agree to have 

payments automatically debited from their accounts.

The bank made 84 SDLs and one NSDL during the 

pilot, with cumulative balances of about $56,000. Eight 

loans were charged off. The bank found that a borrower’s status as an existing customer (versus a new customer) 

had little effect on loan performance. However, the lack 

of credit history, as opposed to a poor credit history, was

correlated to performance. Of the eight loans charged 

off, six were ITIN loans whose borrowers, for the most 

part, had no credit score. Mitchell Bank also reported 

that loans that became 30 days delinquent were 

frequently charged off. Management attributed the 

correlation between late payments and default to state 

laws that limit the penalty for late charges.* Recent 

collection efforts have resulted in recovery and payment 

of three of the previously charged-off loans, and the 

bank anticipates collecting on several more.

In terms of successful program components, Mitchell 

Bank reported that extended loan terms significantly 

reduced the incidence of repeat customers. Several 

customers have taken two loans per year (the bank’s 

maximum), but all have paid as agreed. The program 

also provides for a discount on subsequent loans if 

initial loans performed as agreed. Mitchell Bank indicated that the savings component was well received by 

consumers and resulted in substantial savings balances. 

Sixty-two percent of savings accounts opened by loan 

customers remained open at the end of the program, 

and most were active. Most accounts are in the $250 to 

$300 range, but several accounts are in the five-figure 

range. Overall, Mitchell Bank reported that its smalldollar loan program was profitable and met the emergency credit needs of the community it serves. Mitchell 

Bank plans to continue to offer small-dollar loans and 

will continue to develop and refine its program.

* The Wisconsin Consumer Act (§422.203(1) Wis. Stats.) limits late 

charges to the lesser of 5 percent of the payment or $10. A late 

charge may be assessed only once on an installment, however long 

it remains in default. A borrower who misses a $30 installment 

payment on a small-dollar loan will be charged a $1.50 penalty.

A Pledge to Break the High-Cost Lending Cycle