Banking Law

In addition to keeping busy squawking about the slow pace of across-the-board loan modifications for subprime mortgagors (h/t Calculated Risk), an alert reader pointed out that our "Little Mz. Sheila" has been busy with one of her pet projects: roping poor FDIC-insured commercial banks into making unprofitable "affordable small dollar loans" (unsecured, of course) to subprime borrowers. When we last visited this bad idea, both lenders and state bank regulators in North Carolina were sleeping in late at the prospect of engaging in this line of banking business. Of course, whether or not the biz actually makes banks any money is irrelevant to Ms. Bair. As the world knows by now, her agenda is all about what's good for the consumer, not what's good for the institutions her agency insures and regulates. She's on record as saying that what's good for consumers is always good for banks. You know, like what's good for General Motors is good for the country, and vice versa.

Key features of small dollar loan programs at these banks include loan amounts of up to $1,000, payment periods that extend beyond a single pay cycle, interest rates below 36 percent, low or no origination fees, and no prepayment penalties. Many of the programs also include features such as automatic savings components, streamlined processing of loan applications, and access to financial education.

Yep. Those are all the constrictions that are sure to make these loans a regular Roto-Rooter to any bank's net worth. Where can I get a piece of that action? Excuse me: I've got a short seller on hold. I'll be right back.

These banks might as well fly to Vegas, take a limo to the Bellagio, walk up to the roulette table, half-smile at the croupier, utter the immortal line, "Bond, James Bond,"  as they flash their French-linked shirt cuffs outside the confines of the sleeves of their white dinner jackets, and lay all the bank's capital down on black 35. Now, THAT'S a winning strategy!

Nevertheless, on Monday, the FDIC announced that it had lassoed a passel of banks (twenty, to be exact) and corralled them long enough to brand them with the mark of the Anti-Christ "affordable small loan lenders." The FDIC even has one in North Carolina listed, and an uncomfortable number of Texas-based banks, as well. Maybe they all can use the "extra credit" toward CRA compliance that is promised by the FDIC.

I assume they all get to put the following sign outside their premises, right next to the "FDIC-Insured" logo:

As long as they're well-stocked with ukuleles, they might actually make a buck, no matter what happens with the loans.