WASHINGTON, D.C. – Attorney General Karl A. Racine today led a coalition of 14 states in a letter to the Federal Deposit Insurance Corporation (FDIC) urging the agency to ensure strong consumer protections in guidance on small-dollar loans. The letter responds to a request for comments the FDIC issued in November about how FDIC-insured banks might meet consumer demand for small-dollar-amount lending and what the FDIC can do to help banks “offer responsible, prudently underwritten credit products.” AG Racine’s letter urges the FDIC, in any guidance it produces, to ensure that such loans comply with state laws that ban high-interest payday loans and other abusive lending practices.
“People should have access to loans that don’t trap them in endless cycles of debt,” said AG Racine. “Our letter urges the FDIC to ensure consumers are protected from high-interest predatory loans.”
The FDIC’s potential new guidance could alter or rescind previous guidance to banks issued in 2013 that discouraged high-cost payday “deposit advance” lending by state-chartered banks. While state-chartered banks must obey the interest-rate laws of their own states, they generally are not bound by the interest-rate laws of other states. Therefore, the attorneys general fear that unscrupulous fringe lenders could use state-chartered banks in states with lax interest laws as fronts to offer predatory, high-interest loans across the country – a practice known as “rent-a-bank” payday lending. The maximum annual interest rate that lenders may charge in the District of Columbia is 24 percent, but the effective annual interest rate for a typical payday loan can be 400 percent or more.
Payday lending can trap lower-income people who don’t otherwise have access to consumer credit into endless cycles of debt. According to the Pew Charitable Trusts, the average payday loan borrower earns about $30,000 per year, and about 58 percent have trouble meeting their monthly expenses. The average payday borrower is in debt for nearly half the year because they borrow again to help repay the original loan. The average payday borrower spends $520 per year in fees to repeatedly borrow $375.
In the letter, the attorneys general request that the FDIC, in any potential guidance to banks:
- Discourage banks from becoming fronts for payday lenders: The letter asks the FDIC to discourage a revival of the rent-a-bank schemes that cropped up in the early 2000s. In these arrangements, payday lenders would contract with federal and state-chartered banks to offer loan services in other states. The bank participated only by lending its name and charter to the transaction, while the actual lending work was done by a payday lender. Payday lenders use this practice and export its home state’s interest rate, evading the usury laws and other interest-rate caps in the state where the borrower resides.
- Encourage banks to thoroughly consider the consumer’s ability to repay: The letter urges the FDIC to develop guidance with clear rules and tests that ensure banks make small-dollar loans with a reasonable expectation that the consumer will be able to repay. These tests should consider factors like the borrower’s monthly income, the borrower’s monthly expenses (including payments on other debts), and their ability to repay the loan in full at the end of the loan term without re-borrowing. The attorneys general also recommend that any such test account for the possibility of unforeseen or emergency expenses that the borrower may incur (such as losing a job or medical costs).
In addition to AG Racine, attorneys general from Connecticut, Colorado, Illinois, Iowa, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, and Virginia joined the letter.
The multistate letter to the FDIC on small-dollar-lending guidance is available at: http://oag.dc.gov/sites/default/files/2019-01/FDIC-Small-Dollar-Lending-Letter.pdf
The comment letter is part of a broader OAG effort to protect District residents from predatory lending. Late last year, AG Racine led a 15-state coalition in a friend-of-the-court brief filed in a case in which payday lenders attempted to evade state laws by contracting with Native American tribes to offer loans.
Consumer Credit Resources
The Office of the Attorney General (OAG) offers resources for consumers who want to learn more about how to build or improve their credit on OAG’s Consumer Protection website. If you are a District resident who believes you have been the victim of a predatory lender or a scam, you can contact OAG’s Office of Consumer Protection by calling our Consumer Hotline at (202) 442-9828, by e-mailing email@example.com, or by filing a complaint via our web form.