According
to a press release issued February 21, by the First Bank of Delaware,
FDIC regulators have directed the bank to discontinue offering
short-term “payday” loans. Reports indicate that the basis of the FDIC
order were problems in the short-term loan and installment products
First Bank of Delaware was marketing and servicing through third-party
brokers. At this point, the only information available regarding the
nature of these “problems” is that they were serious enough to prompt
FDIC action; First Bank of Delaware did not disclose what they were.
“This
is a welcome example of the increased scrutiny being placed on this
predatory industry. Payday lenders trap vulnerable consumers into
vicious cycles of debt,” said Jim Swoyer, Consumer Advocate with the
Pennsylvania Public Interest Research Group (PennPIRG), “It is no
wonder that they are seeking legislative cover from both FDIC
regulations and existing Pennsylvania small loan laws.”
The
Pennsylvania State Senate Committee on Banking and Insurance is
currently considering two bills concerning this burgeoning industry.
Senate Bill 101 would tighten up the brokering loophole payday lenders
currently exploit to evade Pennsylvania consumer protection laws. SB
101 would eliminate the industry’s ability to ignore sensible limits on
the interest rates they can charge, and it would help borrowers avoid
the destructive debt trap payday lending almost invariably creates.
Conversely, HB 1478 opens the door statewide for payday lenders to
engage in some of the most predatory aspects of the industry. Not only
would HB 1478 insulate payday lenders from many consumer protections
under Pennsylvania law, it would allow the industry to operate outside
the very guidelines the FDIC enforced against the First Bank of
Delaware.
Advance
America, which currently operates 101 payday lending centers in
Pennsylvania, indicated in a press release issued yesterday that a
similar FDIC action may be pending against its partner bank. FDIC
intervention may eliminate Advance America’s ability to continue its
Pennsylvania payday lending operations. That is why Advance America is
pushing HB 1478; HB 1478 exempts the industry from existing
Pennsylvania protections as well as FDIC oversight. Last week a
committee vote on HB 1478 was postponed until mid-March.
“This
action by the FDIC highlights why we should all be wary of the payday
loan industry coming to Harrisburg and proposing ‘regulation.’” said
Irv Ackelsberg of Community Legal Services, “What they are really
looking for is a free pass to conduct the very kind of business
model--using a very expensive short-term loan product to trap borrowers
into long-term dependence on the product--that the FDIC considers
irresponsible.”
In
most cases, payday lenders make no determination of a borrower’s
ability to repay, one of the factors the FDIC considers in determining
whether a loan product is “predatory.” 99% of payday loans are issued
to repeat borrowers, and payday lenders generate the overwhelming
majority of their profits from the debt traps created by triple-digit
interest rates.
