A Payday Alternative

It didn't take long for Citizens Trust Bank in Atlanta to learn how difficult it is to make money on short-term loans to cash-strapped consumers. In late 2007, Citizens was one of 28 banks the Federal Deposit Insurance Corp (FDIC) selected to participate in a two-year pilot program designed to determine if banks could make small-dollar loans profitably. By the fall of 2009, with default rates on its small consumer loans approaching 13%, Citizens dropped out of the FDIC program. Still, the $394 million-asset Citizens hasn't given up on small-dollar lending -- and a provision tucked into the Dodd-Frank Act might be just the motivation it needs to try once more. The legislation sets up a government-backed fund that certified Community Development Financial Institutions (CDFI) like Citizens can access to help cover losses on consumer loans of less than $2,500. Technical assistance grants are also available to CDFIs that are Interested in establishing small-dollar loan programs.