Herring urges FDIC to strengthen consumer protections for small-dollar bank loans
Attorney General Mark Herring today joined a coalition of 14 states in a letter to the FDIC urging the agency to ensure strong consumer protections in guidance on small-dollar loans.
The letter responds to a request for comments the FDIC issued in November 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, which was led by District of Columbia Attorney General Karl A. Racine, urges the FDIC, in any guidance it produces, to ensure that such loans comply with state laws that ban high-interest payday loans and other abusive lending practices.
“For too long the small-dollar loan space has been dominated by predatory lenders whose products trap financially needy Virginians in a cycle of debt,” said Attorney General Herring. “I’m hopeful the FDIC will maintain robust protections in any new guidance, and become a partner in our efforts to protect Virginians from loans that are often little more than financial quicksand.”
The FDIC’s potential new guidance could alter or rescind previous guidance to banks issued in 2013 that discouraged high-cost payday “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. Therefore, the attorneys general fear that unscrupulous fringe 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 lending can trap lower-income people who don’t 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 2017 more than 96,000 Virginians took out more than 309,000 payday loans worth nearly $123 million. Each borrower averaged 3 loans, and the average loan was $397. Lenders sued borrowers to recover approximately $1.8 million.
Car title lenders issued more than 145,000 loans in 2017 to 122,000 individuals averaging approximately $1,000 per loan. Nearly 43,000 borrowers were unable to make their payments, resulting in 14,621 cars being repossessed and 11,771 being repossessed and sold.
In the letter, the attorneys general request that the FDIC, in any potential guidance to banks:
- Discourage banks from becoming fronts for payday 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 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 lender. This practice allows the payday 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).
In addition to Attorney General Herring, attorneys general from the District of Columbia, California, Connecticut, Colorado, Illinois, Iowa, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, and Virginia joined the letter.
Attorney General Herring’s Consumer Protection Section includes the OAG’sfirst dedicated Predatory Lending Unit to investigate and prosecute suspected violations of state and federal consumer lending statutes, including laws concerning payday loans, title loans, consumer finance loans, mortgage loans, mortgage servicing, and foreclosure rescue services. The Unit also focuses on consumer education so Virginians are aware of the potential risks of these loans, as well as alternatives.
During his administration, Attorney General Herring’s Consumer Protection Section, and its Predatory Lending Unit, has successfully brought enforcement actions against, among others, motor vehicle title loan lenders, online payday lenders, online closed-end, installment loan lenders, online open-end credit plan lenders, mortgage servicing companies, and pawnbrokers.