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

2Q09 Summary of Results for Small Dollar Loans

Number of Banks

Reporting Total Average Minimum Maximum

Loans Up to $1000Number of Notes 25 2,229 89 1 1,503

Note Volume 25 $1,553,296 $62,132 $900 $1,020,753Loan Amount 25 N/A $697 $407 $1,000Term (months) 25 N/A 10 3 33Interest Rate 25 N/A 14.15% 4.00% 30.34%

Non-zero Fees 11 N/A $34 $8 $70

Source: FDIC

2Q09 Summary of Results for Nearly-Small Dollar Loans

Number of Banks

Reporting Total Average Minimum Maximum

Loans $1000 - $2500Number of Notes 16 2,389 149 1 898

Note Volume 16 $4,135,785 $258,487 $1,500 $1,501,485Loan Amount 16 N/A $1,731 $1,379 $2,500Term (months) 15 N/A 16 11 24Interest Rate 16 N/A 13.66% 4.00% 27.98%

Non-zero Fees 8 N/A $45 $15 $70

Source: FDIC

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• ½ of Proceeds go to pay down debt, ½ 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 ProgramOur 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 7,386,507B2Unsecured Secured

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

Bank/CU Employee

Employer

• EmployersEmployers offer loan program as entity-wide benefit (i.e. like medical, dental, 401K, sup. insurance, etc.)

• Banks & CUsBanks & CUs provide the benefit service in contract with the employer (i.e. similar to 401K services today)

• EmployeesEmployees request the loan program & repay the loan via payroll deductions (i.e. similar to 401K loans and other benefit withholdings today)

DFM Group, Inc. US Patent 7,386,507B2Unsecured Secured

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

Stripping Cost - The Economics of Secured, Automated Lending

The technology & programmatic “Walled Garden” of the ELBP allows for the majorityof today’s consumer loan making costs to be eliminated. Consumers enjoy lowerpriced loans because lenders leverage existing Employer IT infrastructure to affordablyre-enter small loan making

Summary

A PartnershipA Partnership

VirginiaState EmployeeAssistance Fund

VirginiaCredit 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 GuidelinesLoan 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

BorrowerBorrower DemographicsDemographics

Number of Loans by Gender

Female130375%

Male43225%

100

390

797

282

102

9 46

0

100

200

300

400

500

600

700

800

1 2 3 4 5 6 Other

Number of Loans by Payband

258

1449

19

0

500

1000

1500

White Black All Other

Number of Loans by Ethnicity

“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 Black

75% of borrowers are Female52% of State workers are Female

46% 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 RealizedPilot 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

31

Cardmember Demographics

Age Demographics

20.1%

0.1%

36.9%

27.9%

15.0%Under 20

20-30

30-40

40-50

50+

Job Tenure Demographics

52.1%

12.1%

5.2%

13.1%

9.8%

7.7%

Under 1 Year

1-2 Years

2-3 Years

3-4 Years

4-5 Years

Over 5 Years

Salary Demographics

0.4%

3.3%

33.7%

0.7%0.9%

29.5%

14.5%

16.9%

Under $20K

$20K-$30K

$30K-$40K

$40K-$50K

$50K-$75K

$75K-$100K

$100K-$125K

Over $125K

• ~50% between the ages of 25-50

• Majority at current employer over 5 years

• 63% earn between $20k - $40k

Cardmember Demographics Summary

32

Forecasted

Key Credit Metrics

0

100

200

300

400

500

600

700

800

900

330 390 450 510 570 630 690 750 810 870

FICO Score Stratification

FICO Scores

# of

Acc

oun

ts

0%

5%

10%

15%

20%

25%

30%

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-

08A

ug-0

8Se

p-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-

09A

ug-0

9Se

p-09

Oct

-09

Nov

-09

Net Charge-O ffs 2-5 Cycle Delinquencies

Annualized Charge-offs

0%

2%

4%

6%

8%

10%

12%

1Q082Q08

3Q084Q08

1Q092Q09

E-Duction Discover Amex CapO neJPM BofA Citi

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

33

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%

• 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

Progreso “Store in a Store” Locations

34

Petra RosalesOwner, Porcelain Dolls By Petra and Jorge

ACCION ACCION Texas.LouisianaTexas.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