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FDIC Opens Door for Online Lenders to Practice Abusive Lending, Drown Consumers in Debt

Wednesday, March 18, 2020

WASHINGTON, D.C. - Today in a board meeting, the Federal Deposit Insurance Corporation (FDIC) announced that it has approved industrial loan company (ILC) applications for Square Financial Services, Inc. and federal student loan servicer Nelnet Bank. The agency also recently announced a notice of proposed rulemaking on ILCs.

By approving these ILC applications, the FDIC has broadened the ability of commercial companies to engage in banking activities, including online lending. ILCs provide a way into the banking system for commercial companies, which are otherwise not permitted to own depository institutions.

The FDIC’s approval means an ILC enjoys deposit insurance, as well as access to the Federal Reserve discount window and payments system, but is not, in turn, subject to the consolidated oversight that banks have. Moreover, because federally insured depository institutions are generally permitted to preempt state interest rate limits, an ILC charter permits companies that would otherwise be subject to state-by-state regulations to avoid those critical consumer protection laws.

Earlier this week, the Center for Responsible Lending (CRL) joined civil rights and industry groups in sending a letter to FDIC Chairwoman Jelena McWilliams, urging the agency not to approve deposit insurance applications until its ILC rulemaking is final and to hold public hearings on pending ILC deposit insurance applications.

CRL Senior Policy Counsel Rebecca Borné released the following statement:

Without public input, the FDIC has just created a pathway for loosely regulated online lenders to evade state interest rate caps and circumvent consumer protections. Making it easier for lenders to ignore state usury laws is bad for consumers and for states that want to keep predatory lending out of their markets. Companies that want to become a bank should be subject to rigorous oversight rather than be shown a backdoor into the banking system with little accountability. The FDIC should halt this practice until its rulemaking is complete and allow public feedback before any more applications are approved.


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