Credit unions and banks would be encouraged to make small loans to low-income consumers by the creation of a fund to help them recover the majority of a lost loan, under a bill introduced today by Sen. Herb Kohl (D-Wis.).
Kohl's bill, which he said is aimed at reducing the need for consumers to use pay-day lenders, would establish a loan-loss reserve fund which would reimburse an institution up to 60% of an amount lost on loans of $2,500 or less if a consumer defaults.
The loan must have a repayment period of more than 60 days and have a "reasonable" interest rate.
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The bill mandates that the fund's administrator take into consideration the overall default rate of the loan program that the institution offers to determine the reimbursement rate. The financial institutions would also be required to report payment history to the credit reporting bureaus which will help consumers build credit or repair bad credit.
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