10/07/2011 12:05 pm ET | Updated Dec 07, 2011

Addressing the Credit Needs of the Unbanked

Last week, Nobel Prize winning economist Mohamed Yunnus appeared on MSNBC's Morning Joe to promote his work in the area of micro-lending and he was welcomed with open arms by the show's hosts for his good work. Yunnus is trying to address the need for access to affordable credit among the unbanked.

He is not alone. Just last week, the House of Representatives' Financial Services Committee held a hearing to assess how the credit needs of the unbanked are being met. And a quick Internet search on the unbanked reveals numerous federal and state projects attempting to reach this population.

The need for access to affordable credit among the unbanked has been met by a steady call for banks to offer small dollar loans. Yet, at last week's hearing, Robert Mooney, the FDIC's deputy director of consumer protection and community affairs, testified that a recent FDIC pilot program of 31 banks that offered loans of up to $2,500 was not profitable, as reported in American Banker. Moreover, Congress recognized the inability of banks to make profitable small dollar loans when it included a provision to provide a taxpayer funded subsidy to banks to offset their losses.

So what's the answer? That brings us back to Yunnus' micro-lending model. While I am excited about Yunnus' positive reception into the industry and welcome him myself, his model isn't new. In fact, it's been around and working quite successfully for more than 100 years. A staple of consumer credit, the personal installment loan is available in thousands of finance company branches across the country.

When the Defense Department issued its 2007 regulations prohibiting payday, title and refund anticipation loans to servicemembers, it noted that it wrote them in a fashion to preserve access to "installment loans with favorable terms." Why did they do this? Because the personal installment loan is not only the oldest form of consumer credit, it is also the safest form.

The personal installment loan has the following features:

  • A payment plan structured as monthly payments over a set period of time provides a pathway to get out of or avoid the cycle of debt;
  • Fixed rate;
  • Underwriting based on the consumer's ability to repay;
  • Transparent and simple terms;
  • Performance reported to the credit bureaus;
  • Effectively regulated in the states for decades.

According to the Center for Financial Services Innovation, the nation's leading authority on financial services for low to moderate income consumers, these characteristics make the personal installment loan a high quality affordable loan product. Rather than encouraging or incentivizing banks to get into the small dollar loan business where they have no experience, Congress should take the opportunity to promote the safest consumer credit product out there -- the personal installment loan -- which has been provided by America's consumer finance companies for generations.