If an applicant's credit score is below 570, the bank refers the person to a one-time, one-hour session with a credit counselor who prepares a budget for the borrower.
Maloney says the bank currently has about 45 loans outstanding and that at least 80 percent of them are for $1,000. Borrowers have the option to take six or 12 months to repay. Seventy percent of the borrowers opt for 12 months, which significantly lowers the monthly payment.
"We require that borrowers put 10 percent of the amount of the loan into a dedicated savings account," Maloney says. "We pay an interest rate that's 1 percent above our normal rate on that account. They can't take the 10 percent until they pay off the loan but they can use it to make the last payment. What we really want them to do is keep adding to the account so they don't have to come back for a payday loan, and they're doing that. By and large, about 80 percent to 90 percent of the accounts remain open."
To further help break the cycle of borrowers rolling from one loan to the next, the bank limits the number of loans to two in a 12-month period.
Re-creating the wheelRepresentatives of the traditional payday-lending industry say the FDIC appears to be trying to re-create the wheel when it comes to serving the needs of low- and moderate-income consumers.
"If I were to guess, I would tell you that they can't do it more cheaply because I think their cost structure is different," says Edward D'Alessio, deputy general counsel for Financial Service Centers of America. "They're not going to be able to make as many loans because they're not set up to handle the volumes that the industry is set up to handle.
"If they can come up with a better mousetrap, then they should; competition is a good thing. But there's no reason why alternative financial service providers need to be looked at in a negative way just because they're not a bank. We believe that the issue is not a matter of whether everybody needs to get their financial services through a bank; it's that everybody needs financial services, whether they get them through a bank or an alternative provider. The more important thing is that people get the products they need."
Maloney is cautiously optimistic that the FDIC's program will succeed.
"We're kind of surprised about how it has performed. We weren't anticipating it performing this well. We went into it skeptically. The FDIC was encouraging banks to participate. It's cost-effective as long as we continue to not have losses. A loss of $1,000 could put the whole thing 'underwater' because we're not making a lot of money on it."
Maloney says he doubts that banks that participate in fee-based overdraft protection, sometimes called bounce protection, would switch to these loans because there's just too much money being made from the fee income.