We, the consumer and civil rights groups named above, write to strongly oppose the Federal Deposit Insurance Corporation (FDIC)’s proposed rule on Federal Interest Rate Authority (proposal or proposed rule). The proposed rule would allow predatory non-bank lenders to route their loans through banks to evade state interest rate caps. The proposal is outside the FDIC’s statutory authority; it is not justified by any evidence of problematic impact on legitimate bank operations; and the FDIC has failed to consider the strong likelihood that the proposal will unleash a torrent of predatory lending. The proposal will take away powers that states have had since the time of the American Revolution to protect their residents.
Our concerns are not speculative. The FDIC has directly supported the claim that a predatory non-bank lender, World Business Lenders, can charge 120% APR on a $550,000 loan despite Colorado law to the contrary. In that context, the FDIC used the same Chicken Little claims and revisionist history it uses to justify this proposal. The FDIC failed to restrain FDIC-supervised Bank of Lake Mills from fronting for WBL on similarly abusive loans. In the consumer space, predatory rent-a-bank lending is happening through several FDIC-regulated banks: payday installment lending at rates of 99-160% APR, and auto title lending through one bank at rates up to 222% APR. More FDIC-supervised banks are likely to follow if this proposal is finalized.
Some online lenders are responsible market participants, complying with applicable law, not evading state interest rate limits, and succeeding through efficiencies in operations, customer acquisition, and underwriting. But others seek competitive advantage by avoiding state usury laws. Some flood the market with loans at interest rates and fees of 60% to 180% APR or higher that most states ban. Stateregulated lenders are increasingly looking to federal bank regulators to help them avoid state laws against high-cost loans and predatory lending.
This proposal comes as non-bank lenders have been clamoring for ways to avoid state interest rate limits. It follows on the heels of the OCC’s attempt, which has failed to date, to allow non-bank lenders to evade state rate caps through a special purpose charter under the National Bank Act (NBA). The OCC and FDIC are now offering non-bank lenders another approach to avoiding state law, namely the socalled “bank partnership model,” which this proposal threatens to endorse by broadly validating a wide array of arrangements by which a non-bank might assert a bank’s exemption from state usury law. The loans this proposal would encourage by facilitating rent-a-bank schemes are among the most exorbitantly priced, irresponsible, ugly loans on the market. These include the loans currently being peddled through these schemes: high-cost installment loans and lines of credit, typically directly accessing the borrower’s checking account on payday; car title installment loans; subprime business loans; and mortgages masquerading as business loans. In addition, the proposal could bring back the rent-a-bank balloon-payment payday and car title loans that have not used rent-a-bank schemes since the mid-2000s but that used the same legal arguments and similar arrangements to justify their schemes. This risk is particularly great if the FDIC weakens or rescinds its 2005 and 2013 guidances addressing payday lending.