1) Explain the primary goal for small loan programs and the role of FDIC in the loan scheme.
Small dollar loan program is a project organized by FDIC (Federal Deposit Insurance Corporation) for banks to research whether banks can profit offering such small loans to general public and get closer to their communities by building profitable relationships. Such small loans are offered by banks at the expense of high-cost financial instruments like pay-day loans and other expensive fee-based loan programs. Therefore, the primary goal of small dollar loan program is to observe whether banks are able to build long-term profitable relationships with the public by offering small loans that are at higher demand, and what are the ways to offer such affordable, safe, and profitable small-dollar loans. Participants of the program are required to submit quarter reports about the performance of the program, and based on these reports, FDIC analyses the run of the small dollar program and identifies the most successful features in building profitable business models for banks using small dollar loans.
The FDIC as a government regulator that insures bank deposits and ensures the stable, safe and sound banking practices created this SDL (Small Dollar Loan) project to encourage banks to offer small loans that are at demand for general public. The FDIC sets up the basic directions for the participating banks and, also allows some creativity in the execution of the program from the volunteered banks. The role of the FDIC in this loan program is to analyze the performance of the pilot through quarterly reports and identify what are the main features of the SDL’s program that help banks with different business strategies to offer profitable, low-cost small loans.
2) Describe any six main primary loan product features of Small Dollar Loan guideline. The FDIC provided participating banks with general guidelines that should be followed by, though some of these requirements can be changed due to different ways of program performance by banks. These changes include, for example, variations in loan size. Some banks originate not only up to $1,000 loans but also loans with the range of $1000-$2,500 in its size. So, depending on the business strategies adopted, some of the guidelines can vary. These general guidelines include: * Loans originated under the SDL program have to amount for up to $1,000. And as already mentioned, there are some exceptions of NSDL that includes loans from $1000 to $2500. This size of the loans tells that FDIC wants to check whether banks can offer such kind of loans at lower interest rates compared with other kinds of financial institutions. And it is already indentified that such small loans are at high demand, but predominantly, customers use credit unions to purchase such loans and usually at higher rates and bearing higher risk. Therefore, in this SDL program FDIC want to adapt these SDLs to banks to compete with other financial organizations.
* Most of the banks exercise streamlined underwriting where SDLs and NSDLs can be underwritten within a maximum of 48 hours (many banks reported that they can underwrite for an hour on the condition of all appropriate documentation is submitted by the client). Though, underwriting procedures differs from bank to bank. For example, some banks require a specified amount of minimum credit scores because credit scoring for some banks is an indicator of risk assessment. Also, approval process of underwriting depends on the management structure of the bank (whether the bank uses centralized or decentralized structure where the authority is lent to managers). The main information that should be submitted by the borrowers to form a loan includes address, financial position (income), proof of identity; and credit report that identifies the loan amount and risk taken by banks.
* Access to financial education. Seventeen of the 31 reported banks do not specify an...
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