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.

 

Follow Bill Himpler on Twitter: www.twitter.com/AFSA_DC

Comments

[Sundialsvc4]

01:30 AM on 10/11/2011

Usury is as old as the hills. Banks underwrite the payday-loan vendors because a nine-thousand percent interest rate is a lot more profitable than three percent. And they're not going to stop doing that until the usury laws that once were a flagship in the law of all 50 states are returned.

[SUPPERMAN]

12:58 PM on 10/10/2011

Anything would be better then Americans being screwed by the Payday Loan industry 300 plus percent interest. Which also put's them in a cycle of debt that takes months or years to get out of while paying hundreds or thousand of dollars in fees. Just to keep that $500.00 for another couple of weeks.

[AlanBannacheck]

02:31 AM on 10/09/2011

The reason these "unbanked" don't have a bank account is often due to poor credit, hence giving them loans wouldn't be a wise idea.

[energeticsong]

12:12 AM on 10/09/2011

There's a bigger capital need out there...the micro-business whose capital needs are too small to be addressed by the SBA and "business loans" and whose model is too small for angel investors or others. There are millions of us out there who would gladly repay investments with either a stake, a percentage of profits, or actual payments, but who do not want to encumber our small businesses with debt. Amounts as small as 5K would make such a big difference, but we are invisible to society.

I know someone who operates on a cash-basis only. He has a checking/savings account, which he uses only as a holding place for his meager funds to gain a bit of interest on them. He has little to no credit.

Ideas such as Kiva do great work across the world; however, there's also a great need here in the US, which is being under served and largely ignored by all involved.