By Andrew A. Turner, J.D.
The Federal Deposit Insurance Corporation has updated previous guidance on payday lending by banks to make clear that it does not apply when banks are providing services to payday lenders. Banks that can effectively manage the resulting risks are not discouraged from offering services to any business that operates legally.
“Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws,” the FDIC said (FIL-52-2015, Nov. 16, 2015).
Payday loans are small-dollar, unsecured, short-term advances that have high fees relative to the size of the loan. When used frequently or for long periods, the total costs can rapidly exceed the amount borrowed. The payday loan guidance warned of risks from making high-cost, short-term loans on a recurring basis to customers with long-term credit needs.
The guidance, as clarified, is to be applied to banks with payday lending programs for consumers that the bank administers directly or that are administered by a third party contractor. It does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders.
The FDIC action comes amidst a swirl of controversy and activity regarding payday lending regulation.
CFPB payday loan plan. The Consumer Financial Protection Bureau is considering proposals that would require lenders to make certain that consumers can repay their loans while also restricting lenders from attempting to collect payments from consumers’ bank accounts in ways that tend to rack up excessive fees. The proposals are intended to stop the “debt traps” caused by payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.
Operation Choke Point. Charging that the federal banking regulatory agencies are “engaged in a concerted campaign to drive them out of business by exerting back-room pressure on banks,” an association representing the payday lending industry and the association’s largest member have joined in a suit that attempts to put an end to what has become known as “Operation Choke Point.” The suit principally targets what it characterizes as efforts by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to pressure banks to end banking relationships with payday lenders due to risk to the banks’ reputations.
Most recently, the U.S. District Court for the District of Columbia dismissed the counts of the complaint pertaining to alleged violations of the federal Administrative Procedure Act (APA) but refused to dismiss the counts pertaining solely to the regulators’ alleged violations of the payday lenders’ procedural due process rights under the Fifth Amendment to the U.S. Constitution (Community Financial Services Association of America, Ltd. v. FDIC, Sept. 25, 2015, Kessler, G.).
Meanwhile, the FDIC’s Office of Inspector General found the agency’s involvement in Operation Choke Point “inconsequential to the overall direction and outcome of the initiative.” More specifically, the IG audit report said that the FDIC’s supervisory approach was within its “broad authorities,” and there was no evidence that the FDIC used the high-risk list to target financial institutions. At the same time, however, the manner in which the FDIC’s supervisory approach was executed was not always consistent with written policy and guidance; moreover, in some instances, the FDIC “created the perception” that it discouraged institutions from conducting business with certain merchants, particularly payday lenders, the report found.
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