What Is a Morris Plan Bank?
The term Morris Plan Bank refers to a type of bank that was established to lend money to individuals who could not otherwise obtain loans from mainstream banks. Their name is derived from the Virginia lawyer Arthur Morris, who founded the Fidelity Savings & Trust Corporation in 1910.
By 1931, there were 109 Morris Plan Banks operated via the Morris Plan Co. of America. However, that number declined after the economy recovered from the Great Depression and commercial banks began offering similar loans.
- Morris Plan Banks were a type of bank oriented toward the needs of poor and working-class customers.
- Their name was derived from Arthur Morris, who founded the first such bank in 1910.
- Morris Plan Banks were innovative in that they focused on the community standing and personal character of loan applicants, rather than their collateral assets.
Understand Morris Plan Banks
The key feature of Morris Plan Banks was their so-called "Morris Plan" approach to lending, which was designed to benefit poor and working-class borrowers. Morris Plan Banks did not require collateral for loans, but they instead considered the character and community standing of applicants by requiring an applicant to submit two references from peers of similar character and financial status. All three were required to fill out an application covering character, financial history, employment, and wages; the references were required to speak to the creditworthiness of the loan applicant as well.
If the loan was granted, the borrower would pay interest and fees out of the principal balance of the loan, and they would then commit to purchasing Class C Installment Thrift Certificates on a weekly basis in order to pay off the loan.
Morris Plan Banks were among the first banks to offer consumers auto financing, through a partnership with the Studebaker Corp. They were also one of the first banks to offer credit life insurance to allow a loan to be repaid in the event of the death of the borrower during the loan's term. These policies were offered through the Morris Plan Insurance Society.
At the time the first Morris Plan Banks began operating, consumer credit for poor and working-class borrowers was unavailable from other banks. By 1924, however, other commercial banks had started offering small loans to poor and working-class customers. And as the economy began to gradually recover from the Great Depression, most commercial banks began offering consumer credit products. The growing popularity and availability of installment credit and credit cards in the postwar period further rendered Morris Plan Banks obsolete.
Real-World Example of a Morris Plan Bank
To illustrate, suppose a borrower takes out a Morris Plan loan for $150, at 6% interest, with a $1 fee. The customer would then pay interest for $9, and the fee of $1, out of the starting balance of the loan. Therefore, they would initially receive $140 from the loan.
The customer would then purchase a Class C certificate each week for the life of the loan. At the end of the loan period, the borrower would redeem their Class C certificates for cash, which they would use to repay the loan.