Three years ago Federal Deposit Insurance Corp. Chairman Donna Tanoue became the first regulator to publicly slam banks that "rent" their charters to payday loan companies, letting them circumvent state consumer protection laws.
Fast forward to today, and the agency is alone on the issue again, this time on the other side. Recent crackdowns by the other three banking and thrift regulators leave the FDIC as the last federal supervisor that allows partnerships between banks and payday lenders.
Though the practice is rare about eight banks have such arrangements the agency's position, and its promise to release guidelines soon, has put it squarely in the middle of a fight that involves consumer groups,some banks and payday lenders, and lawmakers.
Just what current FDIC Chairman Don Powell plans to do is still uncertain, but the agency sent signals that it might strengthen the guidelines to align itself more closely with its fellow regulators.
George French, the deputy director for policy and examination, said that final examiner guidance would be released "very soon" and promised that it would "raise the bar for banks involved in this business significantly and appropriately so."
Not Encouragement To Enter
He would not give specifics but hinted that it would go well beyond a draft released in January.
"I don't think when this guidance is issued, institutions will see it as an encouragement to enter this business," French said. "In fact, quite the opposite. We recognize this business is a risky business for banks to get involved with. It raises substantial safety and soundness issues, and because of the third-party relationship, there are substantial legal and reputational risks. There are also substantial consumer protection issues. We believe it is appropriate to take a very strong stance in our written guidance."
Payday lenders, which advance money against a customer's paycheck, team up with banks to get around the interest rate caps imposed by roughly 15 states. Banks are not subject to these caps, because the courts and Congress, to facilitate a national market for credit cards, mortgages, and other products, let banks "export" the more favorable rates permitted in certain states to others that have stiffer usury laws.
So far none of the regulators has banned the partnerships. Instead, the Office of Thrift Supervision and Office of the Comptroller of the Currency have set tough standards that make it hard for banks to offer the loans or partner with a payday lender without incurring high capital charges and extra attention from examiners.
Their rhetoric is even harsher. Comptroller John D. Hawke Jr. was the bluntest about his agency's actions in February, when he told payday lenders to "stay the hell away from national banks."
French said that the FDIC guidelines would be just as tough as those of other agencies, if not tougher. They will be "more specific, and in many ways more stringent" than what the OTS and OCC have released, he said. But he also said he was not sure whether they would necessarily drive away all payday lenders.
"The guidance, we believe, is fair and appropriate," he said. "It is appropriate to the level of risk and concern. It is not a punitive strike because we find them offensive."
The Federal Reserve Board, meanwhile, has remained largely silent on the issue and would not discuss it for this article. But the Federal Reserve Bank of Philadelphia has asked First Bank of Delaware in Wilmington the only entity in the Fed system to partner with payday lenders to voluntarily cease the program, according to disclosures filed by its parent with the Securities and Exchange Commission in mid-May. The bank announced that it would exit the business.
"The board of the bank made its determination based on materially increased regulatory requirements for participation in that line of business that the bank does not believe it can satisfy," Republic First Bancorp Inc. said in an 8-K filing. It also said ending the partnership would have "a material adverse effect" on earnings that could not yet be calculated.
Community activists have pressed the FDIC to follow the lead of its sister agencies. Peter Skillern, the executive director of the Community Reinvestment Commission of North Carolina, said that his group and others have been anxiously awaiting the FDIC's final guidance. The delay has enabled payday lenders to strengthen their argument against tougher state laws, since they can correctly argue that if the law is too tough, they will partner with an out-of-state bank, he said.
The agency "is allowing this to play out to the payday lending industry's favor before they implement," Skillern said. "If that is not the intent, it is the effect."
FDIC officials said it had to slow down to consider the approximately 1,000 comment letters on its draft guidance, which would have instituted limits on certain payday practices, including the number of rollovers allowed, and instituted higher capital requirements. They also said they have been delayed by the need to fulfill Freedom of Information Act requests from a few organizations for copies of the letters.
About 900 of the letters were sent as part of a concerted effort by the payday industry. Most were handwritten accounts by borrowers describing how they used the loans to meet short-term needs and urging the FDIC not to make them harder to acquire.
'Legislation By Anecdote'
Billy Webster, the chief executive officer of Advance America Cash Advance Centers Inc. and a former president of the Community Financial Services Association, a trade group of payday lenders, said the campaign was meant to combat community groups that accuse the lenders of abuses.
"The consumer advocates often like to legislate by anecdote," Webster said.
Regulators need to know that there is a large demand for these loans and that most lenders act appropriately, he said. The letters came from "real people that went to the trouble to hand-write a real letter, as opposed to a postcard they just sign," he said.
"I think it is real evidence there are real people on other end of the decision."
The rest of the comment letters came from industry and consumer groups, as well as five of the banks that currently partner with payday lenders. The banks praised the FDIC for being more open-minded than other regulators in allowing the practice to continue.
'A Welcome Change'
"The guidelines are a welcome change from the comptroller, who has transparently masked hostility to payday lending by attacking program after program under the guise of safety and soundness," wrote Trent Sorbe, a vice president at Fishback Financial Corp., the parent company of Community State Bank in Milbank, S.D., which partners with payday lenders. "The guidelines, in our view, represent an attempt by the FDIC to fulfill the agency's statutory mission rather than formulate public policy."
Similar letters were sent by County Bank of Rehoboth Beach, Del., First Fidelity Bank of Burke, S.D., BankWest Inc. of Pierre, S.D., and First Community Bank of Washington in Lacey.
They argued that the draft guidelines were already too tough and did not take into account the "nontraditional" type of lending involved. (Two other banks are known to have payday partnerships: First South Bank of Spartanburg, S.C., and Republic Bank and Trust Co. in Louisville.)
Lawmakers have divided along party lines on the issue. House Financial Services Committee Chairman Michel G. Oxley of Ohio and other Republicans have urged the FDIC not to issue overly restrictive guidelines, but Rep. Barney Frank of Massachusetts, the panel's ranking Democrat, has asked them to follow the lead of the other agencies.
Rep. Brad Miller (D-NC) said again in a recent interview that he hoped the FDIC would strengthen its guidelines.