WASHINGTON — Lawmakers sharply criticized the Federal Deposit Insurance Corp. on Wednesday over a watchdog report that said the agency used abusive tactics to stop banks from offering refund anticipation loans.
The FDIC's Office of Inspector General released a report a day earlier that said the agency never provided sufficient evidence that refund anticipation loans were a safety-and-soundness threat and should have released guidance instead of employing dubious tactics to force banks to stop.
"The Inspector General's report reveals a troubling pattern by FDIC officials of targeting legitimate and legal activities through abusive and unfair regulatory practices," said Rep. Sean Duffy D-Wis., chairman of the House Financial Services Subcommittee on Oversight and Investigations. "It is hard enough to comply with rules that are put out that people are trying to read and try to comply with but it is even harder when you have a regulatory body of our financial industry that tries to enforce first and give guidance later. We should know what the rules are, the rules of the game should be clear."
Duffy said it raised questions about the FDIC's activities.
"I am concerned that the FDIC has repeatedly demonstrated a disregard for the rule of law, for the limitations of its own power and for the financial institutions that it is supposed to serve," Duffy said.
According to the report, FDIC officials first cracked down on refund anticipation loans after then-Chairman Sheila Bair asked questioned whether they harmed consumers. Ultimately, the FDIC forced three banks to drop the product.
"I think this involved a decision that was made at the headquarters level and passed down to the field to execute," the agency's acting inspector general, Fred Gibson, said during questioning.
The hearing did not include FDIC witnesses who could respond to the charges. But in a letter to the IG, the FDIC largely denied wrongdoing, saying refund anticipation loans presented a growing threat to certain institutions.
Gibson said the larger matter was a lack of transparency coming from the agency.
"One of the issues that is raised by the facts that are contained in this report relate to the transparency of the decisions that are being made by the government," Gibson said. "At the time, there was no transparency associated with the FDIC's reasons" for discouraging refund anticipation loans.
Rep. French Hill, R-Ark., said that the FDIC's exam manual does not cite such loans as a cause for concern.
There is "just nothing per se that distinguishes these loans from another kind of consumer loan in the exam process," he said.
Gibson said that in one instance one of the banks was downgraded to a Camels 3, which not only affected what it paid in insurance assessments, but also prevented the bank from acquiring failed institutions.
Other lawmakers pointed out that refund anticipation loans are not without risk.
"I have long been critical of refund anticipation loans. These short-term, high-cost bank loans secured by taxpayers' expected tax refund are almost always predatory and expensive," said Rep. Henry Ellison, D-Minn.
Rep. Al Green, D-Texas, the lead Democrat on the panel, said, "I think that we have to have some protection for consumers, particularly low-income people," and noted that the annual percentage rate on some of the loans was as high as 500%.