Payday Lenders Use FDIC Banks and Sham Rebates to Peddle Exorbitantly Priced Small Loans

New CFA Report Updates Status of Payday Lending in States

March 31, 2004
Jean Ann Fox

Washington, DC - In a new report titled "Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank Charters to Peddle Usury," Consumer Federation of America (CFA) documents the tactics used by payday lenders to evade state usury and small loan laws to market payday loans. These are quick cash loans at triple-digit interest rates based on personal checks or electronic access to borrowers' bank accounts due in full on the borrowers' next payday.

"Payday lenders use loopholes in state laws, rent bank charters, and offer sham "rebates" to get around state usury and small loan laws intended to protect cash-strapped consumers from predatory loans," stated Jean Ann Fox, director of consumer protection for CFA. "States that try to protect vulnerable borrowers are being invaded by usurious lenders and banks willing to rent their charters."

According to industry analysts, consumers paid up to $4.3 billion in 2002 to borrow about $25 billion from payday lenders, double the fee revenue in just two years. Fifteen states have not legalized small loans at rates that average 470% annual interest, while some other states have set loan limits that the industry seeks to evade. The industry push for safe harbor state laws in every state has hit greater resistance this year. Michigan's Governor Granholm vetoed a bill to legalize payday loans. Georgia's legislature enacted a tough enforcement bill to prohibit payday lending, while industry bills have failed to move in West Virginia and Pennsylvania.

Rent-a-Bank Payday Loans

Eleven of the thirteen largest payday loan chains partner with ten state-chartered FDIC banks to make loans they cannot legally make on their own. Over a thousand payday outlets in Texas use out-of-state bank arrangements to charge higher rates than Texas rules allow. North Carolina and Pennsylvania are overrun by payday loan stores despite state small loan laws that cap interest rates at up to 36% annual interest.

"Federal bank regulators put a stop to their banks partnering with payday lenders due to unsafe and unsound practices," Jean Ann Fox said. "Only the Federal Deposit Insurance Corporation permits its state banks to partner with payday lenders."

The FDIC adopted guidelines last July for payday lending by the banks it oversees but has yet to take action. The FDIC even permitted a Federal Reserve member bank to switch regulators to continue its lucrative payday loan operations. The Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve took enforcement action to sever ties between banks they supervise and store front payday lenders who claim the banks' rights to export home-state interest rates and to preempt state laws. The CFA report details how FDIC guidelines fail to regulate payday loans or replace state consumer protections.

"Congress must put a stop to charter renting by federally insured banks," stated Ms. Fox. "States cannot protect their consumers if store front lenders can evade state usury laws by partnering with banks in South Dakota and Delaware that have no limits on interest rates."

Shams and Ruses to Hide Payday Loans

The report describes new tactics to hide payday loans behind the "sale" of Internet access and phone cards with a "rebate" that is really a loan. In cases brought by the Indiana Department of Financial Institutions, consumers paid $2,190 over a year for a $300 "rebate," and many consumers did not use the Internet service or have computers. In a North Carolina case brought by the Attorney General, consumers were charged $20 per $100 loaned every two weeks for a year, with payments electronically withdrawn from their bank accounts.

Similar loans hidden as a sale of phone cards with a "rebate" are at issue in a Georgia enforcement case. A Georgia consumer was charged $1,755 for a $300 loan or $67.50 every two weeks for long distance cards that often didn't work. The store advertised "Up to $500 Instant Cash," and was ordered by state regulators to cease and desist from making loans that violate Georgia usury laws.

"Payday lenders will use every loophole, try every tactic, exploit any opportunity to trap consumers in debt at triple digit interest rates," stated Ms. Fox. "States are starting to enact legislation to close loopholes, but Congress must step in to stop federally insured banks from renting their rate exportation authority to payday lenders."

The report is available online at


The Consumer Federation of America is a nonprofit association of 300 consumer groups, established in 1968 to advance the consumer interest through research, education, and advocacy.