April 14, 2005
Mr. Donald E. Powell
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Re: Implementation of Revised Payday Loan Guidelines
Dear Mr. Powell:
Thank you for taking action to address one of the major issues of payday lending. On March 2, the Federal Deposit Insurance Corporation announced revisions to the Payday Lending Guidelines. The press announcement stated: “The FDIC believes that providing high-cost, short-term credit on a recurring basis to customers with long-term credit needs is not responsible lending, and increases banks’ credit, legal, reputational and compliance risks.” The revised guidelines set a bright line of halting loans to consumers who have had 90 days of loans from all lenders in the prior twelve month period. Twelve federally-insured depository institutions were required to file plans to comply with the revised guidelines and to come up with alternative products.
We appreciate two points made in the original Guidelines: the FDIC recognizing that the non-bank firms associated with state banks are subject to state regulation and the agency instructing its examiners to look at the “economic substance” of a transaction to determine the number of rollovers that have occurred.
The bank-payday partnership was created not to serve credit needs of consumers and communities, but to evade state laws which protect consumers from abusive lending.
We appreciate that our concerns regarding implementation of the FDIC payday loan guidelines have been heard and that the FDIC is responding to the evidence of continuous payday lending found by your examiners. The payday business model is built on treating short term closed end credit as a long term open-ended credit product which generates fees beyond the principal borrowed within ninety days. Thousands of payday customers find themselves caught in a debt trap. New studies have been released recently documenting the targeting of minority and military consumers by payday lenders.
The FDIC’s cost in time, manpower and expenses of supervising the dozen rent-a-banks is an indicator of future expenses in monitoring an exceptionally controversial product that is designed to avoid state consumer protection laws. We anticipate that future FDIC supervisory action will end these relationships altogether, not just find an unsatisfactory solution to an unacceptable proposition.
In applying the revised guidelines, we request that customers who have had 90 days worth of payday loans in the year immediately preceding the issuance of the guidance be transferred to alternative long term products immediately. These consumers are not served by the FDIC starting the clock again to pay another 90 days worth of fees. In considering proposals for alternative bank products for payday loans, we recommend that loans be based on ability to repay from the outset, that there be no check-holding or agreement to electronically access accounts, that loan cost and repayment terms be affordable, and that borrowers get credit with reporting services for successful completion of loans. We anticipate that a number of consumers who have multiple loans from payday lenders will find themselves in a particular credit crunch and encourage the banks to accommodate them.
We look forward to seeing the outcome of the FDIC regulatory oversight to determine the effectiveness of this recent action.
Jean Ann Fox
National Community Reinvestment Coalition
H. C. Klein
Arkansans Against Abusive Payday Lending
James W. Speer
Virginia Poverty Law Center
Monsignor Egan Campaign for Payday Loan Reform (Illinois)
SC Appleseed Legal Justice Center