Consumer Groups Urge Tougher Rules to Prevent Evasion of Usury Laws

March 17, 2003
Jean Ann Fox, 757-867-7523

Washington, D.C.-In comments filed late Friday, Consumer Federation of America (CFA) and fifteen national and local consumer groups called on the Federal Deposit Insurance Corporation (FDIC) to overhaul proposed regulations that will continue to allow state-chartered FDIC-insured banks to help payday lenders evade state usury and small loan laws.

Payday loans are short-term cash advances based on personal checks held for future deposit. These loans cost an average of 470% in annual interest and often lead to coercive collection tactics by the lenders who hold consumers' personal checks.

"The plain truth is that FDIC's draft guidance condones rent-a-charter arrangements between store-front lenders and the handful of state-chartered, FDIC-insured banks willing to partner with them," said Jean Ann Fox, director of consumer protection for CFA. "Payday lenders will continue to turn to banks supervised by the FDIC to provide cover for loans that would otherwise be illegal."

Other federal bank regulators have taken firm action to halt rent-a-bank lending by national banks and thrifts. In the last year, the Office of the Comptroller of the Currency (OCC) signed consent orders with the four national banks partnering with payday lenders, citing a range of safety and soundness risks and violations of federal consumer protection laws. The Office of Thrift Supervision (OTC) has taken similar action to stop thrifts from partnering with payday lenders.

"There is no reason to believe that the payday lenders found to be operating in an unsafe and unsound manner with national banks will safely conduct payday loan operations through the even smaller, state-chartered nonmember banks overseen by the FDIC," said Fox.

Unlike bank advisories from the OCC and OTS issued in late 2000, the draft FDIC rules do not warn third parties that they cannot assume bank powers to export home state interest rates. Instead the FDIC guidance spells out how state banks can partner with payday lenders.

Twenty-nine states authorize payday lending with a range of restrictions, while seventeen states still have usury or small loan limits. The other four states do not limit interest rates for licensed lenders. Payday lenders partner with banks from states that don't regulate interest rates and use these partnerships to do business in states that have laws protecting their citizens from abusive lending practices.

Six FDIC-insured non-member state banks are currently partnering with payday lenders:

County Bank of Rehoboth Beach, DE; BankWest, Inc., Pierre, SD; Republic Bank and Trust Company, KY; First Community Bank of Washington; First South Bank, Spartanburg, SC; and First Fidelity Bank, Burke,SD. One Federal Reserve member bank, First Bank of Delaware, also partners with payday lenders.

In their comments on the proposed guidance, the consumer groups called on the FDIC to:

  • Definitively prohibit rent-a-bank payday lending by FDIC-insured banks.
  • Clearly state that third parties cannot "rent" bank powers to export interest rates or preempt state laws.
  • Strengthen requirements for direct bank loans so that they must be based on the borrower's ability to repay and to discourage the repeated "flipping" or rolling over of loans.
  • Immediately inspect state-chartered nonmember banks that currently partner with third parties to make payday loans to assess their safety and soundness and compliance with consumer protection laws.

CFA was joined in filing comments with the FDIC by Consumers Union, the Community Reinvestment Association of North Carolina, U. S. Public Interest Research Group, National Consumer Law Center on behalf of its low income clients, the Foreclosure Prevention Project at South Brooklyn Legal Services (NY), National Community Reinvestment Coalition, Neighborhood Economic Development Advocacy Project (NY), Legal Aid Society of Texas, Monsignor John Egan Campaign for Payday Loan Reform (IL), Economic Justice Institute (WI), Michigan Consumer Federation, Maryland Consumer Rights Coalition, Inc., Florida Public Interest Research Group, North Carolina Public Interest Research Group, and the National Association of Consumer Advocates.

# # #

Consumer Federation of America is a nonprofit association of about three hundred pro-consumer organizations, founded in 1968 to advance consumer interests through research, advocacy and education.

CFA comments to the FDIC are posted at