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March 18, 2003
Federal Deposit Insurance Corporation
550 17th Street, NW,
Washington, DC 20429
RE: Draft Guidelines for Payday Lending
Dear Mr. Zamorski:
The Conference of State Bank Supervisors (CSBS) is pleased to have
the opportunity to comment on the Federal Deposit Insurance
Corporation?s (FDIC?s) proposed examiner guidance on banks that
have payday lending programs[1]. The guidance
applies to banks that offer payday loans directly or through a
third party. State Bank Supervisors have devoted significant
attention to payday lending, including careful consideration to
the practice of banks partnering with payday lenders. Such
relationships raise important policy issues. CSBS supports the
direction and approach of the recent examiner guidance regarding
banks with payday lending programs.
Background
In recent years a number of insured depositories have developed
various subprime lending programs that have elevated the overall
level of risk in their loan portfolios. Among the various types of
subprime loans that have emerged, ?payday loans? are now offered
by a relatively small number of insured depository institutions.
Payday loans (also known as deferred deposit advances) are
small-dollar, short-term, unsecured loans that borrowers promise
to repay from an upcoming paycheck or regular income payment (such
as a social security check). Payday loans usually feature fixed
dollar fees, and because these loans have such short terms, the
cost of borrowing, expressed as an annual percentage rate (APR),
can be extremely high[2]. Furthermore, if the
borrower does not have the funds to repay the loan, it is often
refinanced[3] through payment of an additional
fee. If the borrower does not repay the loan in a timely fashion
and it is not refinanced, the lender may place the initial check
received from the consumer through the payment system where it is
often returned due to insufficient funds. If this occurs, the
borrower may incur NSF fees and the lender may try to collect a
returned check fee plus the cost of collection. Each of these
scenarios continues to increase the cost associated with these
small loans.
Insured depository institutions may have payday lending programs
that they administer directly or they may enter into arrangements
with third parties. If a bank partners with a third party/payday
lender, the institution typically establishes an agreement in
which the institution funds the payday loans originated through
the third party. In some of these agreements, the bank would then
immediately sell 90-95% of the loan back to the third-party.
States have addressed the issue of payday lending in various ways.
Some states view payday loans as a viable short-term lending
option for consumers and have determined that instead of placing
restrictions and limiting access to the product, the marketplace
should shape how the business evolves and functions. Other states
have viewed the fees as usurious and have attempted to limit the
costs associated with the payday loans or have prohibited payday
lending altogether. Still other states view payday lending as a
short-term rational choice, but limit the consumer?s ability to
continually rollover the advances. Such states have passed
legislation or are considering legislation to limit repeated
rollovers/refinancing due to the view that cumulative fees
associated with multiple rollovers make it difficult for the
consumer to repay the debt.
Analysis
CSBS endorses the FDIC guidance that requires an examiner?s
scrutiny of a bank?s proposed or existing payday lending program
based on an assessment of the primary risks associated with this
form of subprime lending. Such risks may include reputation risk
that could result from a perception that banks are charging
exorbitant rates to subprime borrowers; credit risk due to limited
underwriting procedures, transactional and other risks due to
reliance on a third party, and compliance risk associated with
potential exposure to challenges involving a series of consumer
protection laws and regulations.
CSBS believes that directing examiners to evaluate how a bank has
managed these risks is a sound approach that facilitates safety
and soundness and consumer protection without preempting existing
models that state bank supervisors and state legislatures have
adopted. It should be clearly noted that, as the licensing and
chartering authority for banks and independent payday lenders,
states may have certain restrictions that should be preserved.
As the professional association of regulators that charter and
supervise more than two thirds of the nation?s commercial banks,
CSBS is committed to regulatory initiatives that maintain and
facilitate existing authority that state legislatures and
regulators have to grant and interpret powers and activities for
state chartered banks, such as numerous small loan laws and
specific payday lending statutes. The guidance indicates that FDIC
examiners will note relevant state examinations. It also instructs
banks that have payday lending programs through a third-party to
ensure that the third-party complies with all ?applicable? state
laws. We support this approach. As noted previously, in order to
combat abusive lending practices, many states have enacted
restrictions on payday lending programs that are designed to
benefit consumers. Violations of state standards by an affiliated
third party could expose the institution to significant
consequences that should be considered during the examination
process.
As CSBS has previously stated on various occasions, state banking
departments support the FDIC?s approach in its examiner guidance.
It has been noted that some banks have negotiated credit
enhancement from third-party payday lenders. We support the
language in the guidance that acknowledges that ?examiners would
not normally classify loans for which the institution has
documented adequate paying capacity of the obligors and/or
sufficient collateral protection or credit enhancement.? This
provides flexibility and allows for examiner discretion.
Conclusion
CSBS commends the FDIC?s effort in reviewing the risks associated
with banks? payday lending programs. We welcome opportunities to
work with the FDIC to develop joint initiatives in this area and
to continue to establish a seamless examination process. Thank you
for your consideration and we invite you to call on us for any
additional information or assistance.
Best personal regards,
Neil A. Milner, CAE
President and CEO
___________________________________
[1] CSBS is the professional organization that represents
the regulators of the nation?s 6,500 state chartered banks and
works to advance the state banking system. To prepare our response
to the proposed guidance, CSBS worked with numerous state banking
departments.
[2] A typical charge is $15 to $20 per $100 advanced for a
two-week period, resulting in an APR of nearly 400%.
[3] Payday lenders generally use the term ?rollover.? Other
terms used may include extension, deferral, renewal or rewrite. |
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