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January 23, 2019

ATTORNEY GENERAL RAOUL URGES FDIC TO INCLUDE STRONG CONSUMER PROTECTIONS FOR SMALL-DOLLAR LOANS MADE BY BANKS

Raoul, 13 Attorneys General Want Proposed Bank Guidance to Protect Borrowers from High-Interest Loans and Abusive Lending

Chicago — Attorney General Kwame Raoul joined a coalition of 13 states in sending a letter to the Federal Deposit Insurance Corporation (FDIC) urging the agency to ensure strong consumer protections in guidance on small-dollar loans.

Raoul and the coalition submitted the letter Tuesday in response to a request for comments the FDIC issued in November 2018 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.” The letter urges the FDIC, in any guidance it produces, to ensure that such loans comply with state laws that regulate high-interest small-dollar loans and other abusive lending practices.

“The FDIC must guard against predatory and abusive practices,” Raoul said. “Any FDIC guidance should encourage an ability to repay assessment. Evasion and rent-a-bank schemes should not be condoned.”

The FDIC’s potential new guidance could alter or rescind previous guidance to banks issued in 2013 that discouraged high-cost “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. Raoul and the other attorneys general said unscrupulous 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.

Payday and high cost small-dollar installment lending can trap lower-income earners who do not 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, Raoul and the other attorneys general request that the FDIC, in any potential guidance to banks:

  • Discourage banks from becoming fronts for payday and installment 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 and high cost installment 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 or installment lender. This practice allows the lender to take advantage of the bank’s ability to export its home state’s interest rate and evade 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).

Joining Raoul in submitting the letter were the attorneys general from California, Connecticut, Colorado, the District of Columbia, Iowa, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, and Virginia.

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