In November 2018, the Federal Deposit Insurance Corporation (“FDIC”) published a request for information on small-dollar loans, such as payday loans. On January 22, 2019, Oregon’s Attorney General, Ellen Rosenblum, joined the attorneys general of twelve other states and the District of Columbia in submitting a letter to the FDIC addressing some of the risks associated with such loans. A copy of the letter is found here.
In the letter, the AGs state that the “short-term credit needs of [the unbanked and underbanked] households are largely met by the fringe financial sector” which are “‘often usurious, sometimes predatory, and almost always worse for low-income individuals than the services offered by traditional banks to their customers.’” The borrowers of such loans can become trapped in an endless cycle of debt since they are often unable to pay the loans when they become due and have to take out new loans (and pay additional fees) to pay of the previous loans. The letter outlined several legal risks for state-chartered banks seeking to enter the small-dollar loan sector.
I. Evasion of State Laws
While noting that “[m]any states have enacted laws to protect consumers from abuses associated with high-cost small dollar credit offered by fringe lenders” the AG’s letter recommends that the FDIC discourage state-chartered banks from entering into relationships with fringe lenders that are structured to evade state rate caps in any guidance it issues on small-dollar lending.
One way in which fringe lenders have attempted to evade state restrictions is by associating with traditional banks to take advantage of the fact that traditional banks are generally not subject to state interest rate caps. As asserted in the letter, “this method became known as ‘rent-a-bank’ lending because the bank participated only by lending its name and charter to the transaction. Payday lenders would claim the bank was the lender, allowing it to take advantage of the bank’s ability to export its home state’s interest rate and evade the usury and other interest rate caps in the state where the borrower resides.” Recently, payday lenders have attempted to evade state restrictions by turning to Native American tribes in an attempt to take advantage of their tribal sovereign immunity.
II. Ability to Repay
The AG also recommended that the FDIC discourage banks from extending small-dollar loans without considering the consumer’s ability to repay. In particular, the Ags recommended that “the FDIC suggest that banks consider a consumer’s monthly expenses such as recurring debt obligations and necessary living expenses in evaluating ability to repay and take into account a consumer’s ability to repay the entire balance of the proposed loan at the end of the term without re-borrowing.” The AGS “also recommend that the FDIC suggestthat banks at least consider the consumer’s capacity to absorban unanticipated financial event –for instance, in the unexpected event of a loss of income or the added expense of a medical emergency–and, nonetheless, still be able to meet the payments as they become due.”