WASHINGTON - Federal Deposit Insurance Corp. Chairman Donna Tanoue on Tuesday urged Congress to crack down on banks that are so eager for fee income they "rent" their charters to payday loan companies.

"The practice of renting a charter merely to collect a fee to allow a high-cost payday lender to circumvent state law is inappropriate," according to the text of a speech Ms. Tanoue was scheduled to deliver in Sacramento, Calif., last night. "I urge lawmakers and the bank trade associations to come up with an approach to this unbecoming practice."

Payday lenders - which advance money against a customer's paycheck - team up with banks to get around 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 such products as credit cards and mortgages, permit banks to "export" the rate permitted in one state to another state that might have a tougher usury law.

"For the moment, the number of banks renting out their charters is small, but that could change - and that possibility triggers public policy concerns," Ms. Tanoue planned to tell the seventh annual Greenlining Economic Development Summit.

Payday loans are designed to meet emergency funding needs. They are typically small, short-term cash advances. A customer post-dates a personal check that the lender agrees not to cash until the next payday. The lender gives the customer fast cash and collects a fee of about 20%.

The payday loan business is booming, more than doubling its outlets, to 10,000, in roughly five years. According to estimates Ms. Tanoue cited, by 2002 there may be 25,000 stores reaping $6.75 billion of fee income per year by processing $45 billion of loan volume.

"Clearly the industry has tapped into a real need for short-term, small-dollar-denomination credit," according to Ms. Tanoue's text.

She encouraged bankers to go after these customers.

"I urge financial institutions to compete in this market to provide appropriately underwritten and priced small loans to the large segment of the market that has fallen prey to the high rates and fees of many payday lenders," she was to say. "The involvement of banks in these endeavors will increase competition, lower prices, and improve service."

It also could be a good way for bankers to "build long-term customer relationships," according to the text.

As examples, Ms. Tanoue cited two California institutions. One invested in a check-cashing firm and then reduced the rate of interest charged for payday loans and limited the number of times a customer could roll over his debt. A community group was given a 5% stake in exchange for credit counseling and other customer services.

Another institution makes payday loans but only to customers with regular deposits wired to their accounts. Loans are limited to half the amount deposited, up to $200. The bank charges $1 per $20 borrowed.

According to the FDIC, roughly a dozen banks are actively involved in payday lending, either directly or through a partnership.

Lawmakers have criticized payday lenders during this session, mainly for repeatedly rolling over these loans and piling up huge fees. In response, the industry's trade group, the Community Financial Services Association of America, unveiled a self-regulation effort in January including a seal of approval for lenders that follow a list of 10 best practices.

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