Community
Reinvestment Association of North
Carolina
P.
O. Box 1929, 114 W. Parrish St. 2nd
Floor, Durham, NC 27702
Consumer
Federation of America
1424
16th St. NW, Suite 604,
Washington, DC 20036
Consumers Union
1666 Connecticut Avenue NW, Suite
310, Washington, DC 20009
U.
S. Public Interest Research Group
218 D Street SE, Washington, DC
20003
May 21, 2002
The Honorable
Donald E. Powell
Chairman
Federal Deposit
Insurance Corporation
550 17th
St., NW
Washington, DC
20429-9990
Dear Chairman
Powell:
Thank
you taking the time to meet with us
last week to discuss the FDIC’s
responsibilities regarding
FDIC-insured banks that engage in
payday lending through third-party
companies such as check cashers, pawn
shops, and payday loan companies.
Our
organizations are disappointed that,
unlike other federal (and state) bank
regulators, the FDIC is refusing to
play a role in ensuring that its
regulated institutions do not make
loans directly or indirectly that pose
a risk to their reputation, safety and
soundness, or CRA rating.
It is particularly disturbing
to us that it is the FDIC that has
failed to act publicly to quash
rent-a-bank payday lending, while
other regulators with chartering
authority have moved decisively.
We
strongly urge you to alter the course
of the agency on the following
specific issues.
1)
Payday lending represents a
market failure that harms vulnerable
consumers.
Based on our discussion at the
meeting, the FDIC appears to believe
that the demand for short-term credit
has created payday lending and that
consumers willingly chose to pay the
high fees for short-term credit.
The harm to borrowers from
repetitive back to back lending is the
responsibility of consumers.
The FDIC does not feel that its
role is to provide regulatory
protection for consumers from
state-chartered banks exporting payday
loans. The solution to the payday lending problem, according to your
comments, is in the provision of
cheaper alternatives by the market
place.
We
disagree.
An essential role of the FDIC
is to provide protection to consumers
from abusive bank lending practices.
The FDIC shares safety and
soundness regulation with state bank
regulatory officials. The FDIC is solely responsible for enforcing the Community
Reinvestment Act at state-chartered
banks. The business model of payday lending is based on the
profitability of fostering chronic
borrowing.
To argue that the market
created it, thus it is justified, is
to overlook the fact that government
regulators regularly protect consumers
by correcting market failures such as
the Savings and Loan crisis and Enron.
We must conclude that the FDIC
has abandoned its dual roles of
providing consumer protections and of
protecting taxpayers who back deposit
insurance in deference to predatory
payday lending.
Just because there is a market
for a product or service does not
logically lead to abdication of
regulatory oversight or law
enforcement.
2)
Payday
lending presents serious safety and
soundness concerns. At the meeting, the FDIC’s position appeared to be that it
will continue to approve the business
plans of state-chartered banks that
facilitate payday lending as being
safe and sound if adequate capital
reserves are set aside, the loan
volume is not disproportionate to the
lender’s size and the bank maintains
controls over the credit process.
We
disagree.
Payday lending underwriting has
little to do with the ability of
borrower to repay the loan.
Lenders do not consider the
ability of borrowers to repay loans.
Yet, the FDIC argues that
because the loan loss for the product
is capitalized with private capital
rather than FDIC insured deposits,
this will not risk bank stability.
Banks that lose private capital
are likewise at risk of destabilizing
the bank’s overall fiscal health.
The
FDIC has not issued a public advisory
on the conditions that apply to state
chartered bank payday lending.
Nor has it taken any public
actions on the issue of safety and
soundness for banks conducting payday
lending.
This contrasts starkly with OTS
and OCC rulings and actions.
On one hand, the OCC has
charged that People’s National Bank
of Paris, TX is engaging in unsafe and
unsound practices in its payday loan
arrangements with Advance America in
North Carolina and Pennsylvania.
The FDIC has found nothing
wrong with BankWest, Inc.’s payday
loan arrangements with Advance America
in Virginia and Georgia.
We must conclude that contrary
to public assertions, the FDIC is
likely not fulfilling its obligations
to ensure safety and soundness.
3)
Exportation of payday loans is
undermining the legal authority of
states to regulate consumer credit
transactions. The FDIC position appears to be that although payday loans
are prohibited in states such as North
Carolina and Maryland, the FDIC finds
no legal grounds to oppose out of
state banks exporting payday loans to
pre-empt state consumer protection
laws in those and other states.
It is not the position of the
FDIC to advise whether this is an
abuse of the state charter or federal
law.
Since the FDIC does not issue
bank charters, it claims to have less
authority over state-chartered, FDIC
regulated banks.
We
disagree.
An honest debate of the balance
of powers between state and federal
law has been underway since the
beginning of the country. In this
situation, the important principle of
whether states are able to regulate
credit for the purpose of consumer
protection is being fundamentally
threatened by the abuse of exportation
laws.
We conclude that the FDIC has
failed in its obligation as a federal
agency to discern when a legal action
is undertaken for an illegal purpose,
such as violating a state’s usury or
small loan rate cap.
4)
Payday lending should be
considered as part of a bank’s CRA
evaluation.
The FDIC concluded in the
BankWest CRA evaluation that its
payday lending activities were not
considered in its CRA performance,
because the loans are not conducted
within its assessment area.
We
disagree.
This ruling highlights the
arbitrariness of the FDIC’s
willingness to enforce federal laws. Small banks that rent their charters to national payday loan
operations should not be evaluated
solely on lending within a small
geographic area.
While arguing that federal law
allows for loan exportation, the FDIC
fails to apply the federal CRA law to
the bank’s out of state lending
activities.
By comparison, the Office of
Thrift Supervision downgraded Crusader
Bank’s CRA rating due to its payday
loan activities. Crusader was a Philadelphia thrift that at one time partnered
with payday lenders outside the
bank’s assessment area. In years
past, the OCC took the same position
on Eagle National Bank’s CRA
evaluation, but ended up ordering the
bank to withdraw from payday lending
altogether due to safety and soundness
risks.
We conclude that the FDIC has
chosen to weaken enforcement of the
Community Reinvestment Act to the harm
of communities and vulnerable
consumers.
The
FDIC appears to have decided to
support the payday lender/state
chartered bank affiliation model
despite its negative impacts on
consumers and the banking system. In
doing so, the FDIC is condoning the
practice off insured banks making
loans that average 470% APR, that
snare needy consumers in debt traps,
that do not involve underwriting, and
that encourage consumers to write
checks without money in the bank. Apparently, the FDIC is not troubled by the use of insured
state banks to aid and abet third
party companies to evade state usury
and consumer protection laws.
Once
again, we strongly urge you to
reconsider your position and to issue
an advisory to FDIC-regulated banks on
payday lending comparable to the one
issued by the OCC and OTS, to adopt a
policy on unfair and deceptive trade
practices under the Federal Trade
Commission Act, to conduct safety and
soundness inspections based on this
advisory for all state-charted banks
involved in payday lending, and to
include the payday loan line of
business in CRA evaluations.
We
have not received a written response
to the letters previously sent to you
on this issue and ask that you respond
in a timely fashion to the important
public policy questions that we posed
at the meeting and the issues
highlighted in this letter.
Sincerely,
Community
Reinvestment Association of North
Carolina
Peter Skillern
Consumer
Federation of America
Jean Ann Fox
Consumers Union
Frank Torres
U. S. Public
Interest Research Group
Edmund
Mierzwinski
CC:
The Honorable Paul S. Sarbanes
The Honorable Phil Gramm
The Honorable Michael G. Oxley
The Honorable John J. LaFalce
The Honorable Paul O’Neil
