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FDIC Should Not Allow Banks to Make Payday Loans, says Coalition Letter

Thursday, August 23, 2018
Rebecca Borné

As Chair of FDIC considers policy, broad coalition urges regulators and banks to avoid toxic loans that trap consumers in debt

WASHINGTON, D.C. – The head of the Federal Deposit Insurance Corporation (FDIC), Jelena McWilliams, is “reviewing whether to rescind guidelines for ‘deposit advance’ loans,” according to an interview she had with the Wall Street Journal. “Deposit advance” is a euphemism for bank payday loans, which – before the FDIC’s 2013 guidance – had triple-digit interest rates, lacked an ability-to-repay standard, and trapped consumers in debt. For this reason, consumer, civil rights, faith, and community groups are urging the FDIC Chair to keep in place the agency’s guidance advising ability-to-repay determinations on such loans. A copy of the letter is included at bottom and linked here.

Center for Responsible Lending (CRL) Senior Policy Counsel Rebecca Borné said, “Bank payday loans offer a mirage of respectability, but in reality, they are financial quicksand. The FDIC has a responsibility to protect consumers from being pulled into these debt traps and to protect banks from a race to the bottom.”

The letter states, in part, that the “data on bank payday loans made indisputably clear that they led to the same cycle of debt as payday loans made by non-bank lenders…. [They] drained roughly half a billion dollars from bank customers annually. This cost does not include the severe broader harm that the payday loan debt trap has been shown to cause, including overdraft and non-sufficient funds fees, increased difficulty paying mortgages, rent, and other bills, loss of checking accounts, and bankruptcy…. Payday lending by banks was met by fierce opposition from virtually every sphere – the military community, community organizations, civil rights leaders, faith leaders, socially responsible investors, state legislators, and members of Congress.”

The coalition’s letter also calls for the FDIC to ensure small dollar installment loans are capped at 36% or less and to prevent bank partnerships that evade state interest rate limits.

Additional Background

The data on bank payday loans are clear: They were harmful to consumers as well as to banks’ reputations and safety and soundness. Deposit advance borrowers were seven times more likely to have their accounts charged off than their counterparts who did not take deposit advance loans. Moreover, these loans did not “protect” bank customers from overdraft fees: former borrowers, compared to non-borrowers, did not incur an increase in overdraft or NSF fees when deposit advance was discontinued.

This letter is the latest in a series of warnings from a broad coalition concerned about high-cost bank loans. In October of 2017 after the OCC rescinded its guidance on bank payday loans, groups wrote to banks urging them to stay away from this usury. In May, groups wrote to regulators urging them to keep or reinstate guidance preventing the reemergence of bank payday loans, and then forwarded this letter to banks warning them of the reputational risk of bank payday loans.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Matthew Kravitz at matthew.kravitz@responsiblelending.org or 202-349-1859. 

Full text of the letter, including signatories and endnotes:

August 21, 2018

The Honorable Jelena McWilliams
Chairman
Federal Deposit Insurance Corporation
1776 F Street, NW
Washington, DC 20006

Re: Bank Payday Lending

Dear Chairman McWilliams:

We, the undersigned community, civil rights, faith, and consumer groups, urge you not to open the floodgates to predatory small dollar loan practices by banks and payday lenders. Existing protections—including state usury laws and existing FDIC guidance on small dollar loan products—are critical tools to ensure safe, responsible lending practices are not pushed out of the marketplace by high-cost, unaffordable debt trap products. Specifically, we urge you to (1) retain the FDIC’s critical guidance addressing payday loans (“deposit advances”) made by banks; (2) ensure that small dollar installment loans are priced at 36% APR or less and based on the consumer’s ability to repay considering both income and expenses; and (3) prevent bank partnerships that evade state interest rate limits.

1. Retain deposit advance guidance addressing high-cost payday loans.

In 2013, a handful of banks were making high-cost payday “deposit advance” loans, structured just like loans made by non-bank payday lenders. The bank repaid itself the loan in full directly from the borrower’s next incoming direct deposit, typically wages or Social Security, along with annual interest averaging 225% to 300%. The data on bank payday loans made indisputably clear that they led to the same cycle of debt as payday loans made by non-bank lenders. The annual median number of advances was 14, and over a third of borrowers had more than 20 advances in a year—all despite so-called protections banks touted, like installment options.

At their peak, bank payday loans—even with only six banks making them—drained roughly half a billion dollars from bank customers annually. This cost does not include the severe broader harm that the payday loan debt trap has been shown to cause, including overdraft and non-sufficient funds fees, increased difficulty paying mortgages, rent, and other bills, loss of checking accounts, and bankruptcy. Payday lending has a particularly adverse impact on African Americans and Latinos. A disproportionate share of payday borrowers come from communities of color, and bank payday loans that jeopardize their bank accounts can leave these communities even more disproportionately underserved by the banking mainstream.

Payday lending by banks was met by fierce opposition from virtually every sphere—the military community, community organizations, civil rights leaders, faith leaders, socially responsible investors, state legislators, and members of Congress. The FDIC and OCC’s 2013 guidances requiring an income-and-expense-based ability-to-repay determination, and the Federal Reserve’s supervisory statement emphasizing the “significant consumer risks” bank payday lending poses. As a result of these actions, most bank payday lending programs were suspended and bank customers were protected from these devastating debt traps.

We were deeply discouraged by the OCC’s rescission of its deposit advance guidance in October 2017. In response, more than 230 groups signed an open letter to banks urging them to stay out of payday lending. The OCC rationalized this rescission in part by noting that the Consumer Financial Protection Bureau’s finalization of its payday lending rule earlier that day subjected banks to potentially inconsistent regulation.[i] But the CFPB’s rule and the deposit advance guidance are both necessary and are complimentary. Moreover, the CFPB has since publicly announced that it is reconsidering its rule, and rescission of the deposit advance guidance could leave borrowers entirely unprotected from debt-trap lending by our nation’s banks.

The OCC also noted that banks should offer more short-term credit because banks are more regulated than non-bank lenders and thus can do so at less risk to the consumer. The Treasury Department expressed the same notion in its fintech paper last month. But again, the data on bank payday loans left no question that bank payday loans were the same as those made by non-bank lenders—high-cost, unaffordable, debt-traps.[ii]

2. Ensure installment loans cost no more than 36% and are based on ability-to-repay considering both income and expenses.

The Treasury paper also recommended that the FDIC issue installment loan principles similar to the OCC’s May installment loans bulletin. We urge the FDIC to be clear that any installment loans should be reasonably priced at 36% APR or less, consistent with the FDIC’s 2007 Affordable Small-Dollar Loan Guidelines. We reject the notion that bank loans as high as 99% APR will drive out higher-priced credit by non-banks. To the contrary, high-cost lending by banks will undermine the most effective measure against predatory lending: state interest rate limits. Rate caps in the nearly one-third of states—home to approximately 100 million Americans—have meaningful restrictions on payday loans that prevent the debt trap business model, and most states cap rates on longer-term loans. We further urge that the FDIC insist that installment loans be based on the borrower’s ability to repay with consideration of both income and expenses. Income-only underwriting will easily lead to unmanageable debt burdens for borrowers who are already likely financially distressed. New research underscores the dangers of high-cost installment loans, such as in Colorado, where borrowers in many cases reported that unaffordable payments on these loans triggered significant additional financial hardships, either immediately or down the road.[iii]

3. Prevent bank partnerships that evade state laws.

Finally, we urge the FDIC to stop banks from renting out their charter to facilitate high-cost loans that evade state interest rate limits. The FDIC’s 2005 guidelines advise against bank partnerships that keep borrowers in unlimited cycles of debt, yet high-cost payday installment loans often do just that. Elevate makes loans at 100% interest, with very high charge-off rates, using Republic Bank & Trust in Kentucky, ignoring the voter-approved 36% or lower rate caps in Arkansas, Montana, South Dakota and other states. As recently as March of this year, Enova was also using Republic Bank & Trust to make loans at rates that exceed state limits. CashCall made loans up to 99% in Maryland and West Virginia using First Bank of Delaware and First Bank & Trust, though courts later shut them down. On Deck Capital makes small business loans with rates up to 99.7% APR, originating loans through Celtic Bank in states where it cannot make the loans directly. Online lenders are also using banks to charge rates up to 36% that are not permitted in many states for large loans of $30,000 to $40,000; the State of Colorado has sued two lenders, Avant and Marlette, for using rent-a-bank schemes to hide that these state-regulated lenders are the true lender.

Depository involvement in high-cost lending is both a consumer protection and a safety and soundness concern. It violates the basic safety and soundness principle of lending based on the borrower’s ability to repay a loan without relying on collateral (in this case, the borrower’s incoming deposits); it poses severe reputational risk, as evidenced by sweeping negative reaction; and it risks violation of consumer protection laws, which itself poses safety and soundness risk. Ultimately, high-cost loans erode the assets of bank customers and, rather than promote savings, make checking accounts unsafe for already financially distressed customers. It is therefore incumbent on the FDIC to ensure that banks not make high cost payday loans, whether short-term or installment, whether directly or through partnerships. Please reject calls to authorize such loans and take every necessary step to prevent them.

We appreciate your consideration of our concerns.

Sincerely,

Americans for Financial Reform
Arkansans Against Abusive Payday Lending
CASH Campaign of Maryland
Center for Global Policy Solutions
Center for Responsible Lending
Chapter 7, Reserve Officer's Association (Indianapolis Chapter)
Congregation of Our Lady of the Good Shepherd, US Provinces
Consumer Action
Consumer Federation of America
Consumers Union, advocacy division of Consumer Reports
Delaware Community Reinvestment Action Council, Inc.
Demos
Dominican Sisters of Hope Cincinnati
Empire Justice Center
Florida Alliance for Consumer Protection
Florida Consumer Action Network
Fund 17
Georgia Watch
Heartland Alliance for Human Needs & Human Rights
Illinois People's Action
Indiana Catholic Conference
Indiana Institute for Working Families
Kentucky Equal Justice Center
The Leadership Conference on Civil and Human Rights
Maryland Consumer Rights Coalition
Metropolitan Milwaukee Fair Housing Council
Mississippi Center for Justice
Montana Organizing Project
NAACP
National Advocacy Center of the Sisters of the Good Shepherd
National Consumer Law Center (on behalf of its low income clients)
Neighborhood Housing Services of Baltimore
New Economics for Women
New Economy Project
New Jersey Citizen Action
The One Less Foundation
Oregon Food Bank
PathWays PA
Pennsylvania Council of Churches
Public Citizen
Public Justice Center
Reinvestment Partners
RESULTS Columbus
SC Appleseed Legal Justice Center
Syracuse Habitat For Humanity Inc
UnidosUS
VOICE - OKC
Woodstock Institute

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[i] The OCC’s rescission following finalization of the CFPB rule was immediate, even as the CFPB rule’s compliance date is not until August 2019.
[ii] Deposit advance borrowers were seven times more likely to have their accounts charged off than their counterparts who did not take deposit advance loans. Further, following discontinuation of deposit advance, former borrowers, compared to non-borrowers, did not incur an increase in overdraft or NSF fees. CFPB, Supplemental findings on payday, payday installment, and vehicle title loans, and deposit advance products at 39 (June 2016), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/Supplemen...
[iii] Center for Responsible Lending, Sinking Feeling: Colorado Borrowers Describe Their Experiences with Payday Loans (July 2018), available at http://bit.ly/COSinking