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Online Lending Rules Clarity Promised by FDIC’s Gruenberg

The Federal Deposit Insurance Corp. will clarify how banks can lawfully do business with online lenders who have been the subject of a regulatory crackdown.

The FDIC will issue the new guidelines, known as a financial institutions letter, explaining how banks should work with online lenders who may run afoul of state laws, its chairman, Martin J. Gruenberg, wrote in a Sept. 17 letter to lawmakers.

“The FDIC’s focus is the proper management of the banks’ relationships with their customers, particularly those engaged in higher-risk activities, and not underlying activities that are permissible under state and federal laws,” Gruenberg wrote.

Congressional Republicans including Blaine Luetkemeyer of Missouri have pressed the FDIC to explain why it has pressured banks to cut ties with the online lenders, which typically offer loans with short terms and high interest rates. Without ties to banks, the online landers can’t access a nationwide network for processing their customers’ payments.

Pressure from the FDIC, subpoenas from the Department of Justice and public comments by Benjamin Lawsky, the New York state superintendent of banking, have led banks to end relationships with some online lenders in recent months.

Lisa McGreevy, head of Online Lenders Alliance, a trade association, said that the letter shows that the FDIC is correcting a “misstep” in pressuring the banks.

“The FDIC is clarifying that it’s perfectly appropriate for banks to process for online lenders,” McGreevy said in an interview.

Response Promised

Andrew Gray, a spokesman for the FDIC, declined to comment. FDIC Vice Chairman Thomas Hoenig told lawmakers in a briefing last week that the financial institutions letter would come within two weeks, according to a person present, who requested anonymity because the meeting was private.

Mark Kaufman, Maryland’s commissioner of financial regulation, said the FDIC’s stance will continue to pressure banks to reconsider long-term relationships with lenders. The cost of complying with its directives may be enough to shut out the lenders, he said.

“The question is: Is the due diligence and oversight required to process these transactions so costly that it’s not economical?” Kaufman said in an interview.

Credit checks for online loans have fallen between 40 percent and 50 percent over the last month, according to Clarity Services Inc., a Clearwater, Florida-based company that handles the inquiries for lenders.

August Swoon

“Traffic in this business was really pretty normal until mid-August, and then it fell off,” Tim Ranney, the company’s president.

Clarity recently delivered data about online lending to the Consumer Financial Protection Bureau under a contract to aid with an unrelated study the agency is conducting, Ranney said.

Banks are the gatekeepers to an automated clearing house system that enables direct payments into and from checking accounts. Without access to the system -- often facilitated through independent payment processors -- the online lenders can’t credit loans to customer accounts or debit repayments.

Banks that handle transactions for online lenders have faced a campaign by senior FDIC officials to reconsider this business, according to a document prepared by the Online Lenders Alliance. The document, which was circulated to lawmakers last week, details specific threats made by the FDIC against banks -- they are not named -- that continue handling lender transactions.

Ending Relationships

For example, one bank told a lender the FDIC had refused to close out its current audit of the bank until it ended the work for lenders. Another bank that was considering an online lender as a client faced a threat of an unplanned audit, according to the document.

Current FDIC rules do not explicitly bar banks from working with online lenders. In 2012 guidance, the FDIC told banks to monitor their business with “high risk” merchants and independent payment processors, the firms that act as middlemen between the banks and merchants, including the online lenders.

Some of the independent payment processors in August formed a Washington-based trade group, the Third Party Payment Processors Association, to push back against the government’s actions.

The FDIC and Justice have told processors “you must do it this way or be cut off,” Marsha Jones, the group’s director, said in an interview.

Prefers Regulation

The industry advocates carrying out these types of policies by regulation, rather than the guidance the FDIC has issued, she said. Guidance is a banking agency directive intended to work within existing regulations and doesn’t provide opportunities for public comment.

Processors often use a single bank account to handle transactions for multiple merchants. Pressure from the FDIC has led banks to demand the banks cease processing for certain merchants -- the lenders -- or shut their accounts with the banks entirely, Jones said.

When processors lose whole bank accounts, companies that have nothing to do with lending end up having to use checks to meet their obligations.

“It not only causes a problem for the lender, it also causes a problem for the company that’s trying to pay their employees,” Jones said.

Short-Term Lenders

Subpoenas from the Justice Department have only targeted processors’ work with short-term lenders, including loans made by companies that operate from storefronts, Jones said. The Justice Department has said its crackdown aims broadly at mass-market fraudsters, like telemarketing scams, fraudulent health-care deals and fake government grants.

Ranney of Clarity Services said that the “statistics simply do not support” Justice’s claims that they are focused on combating fraud, rather than stopping online lending itself. According to research it conducted, less than 1 percent of transactions did consumers complain about fraud.

Gruenberg’s letter doesn’t explicitly state whether the FDIC regards online lenders who do not comply with individual state laws to be illegal operations.

‘Reasonable Measures’

“When a bank has a customer relationship with a company whose business line is prohibited or restricted in at least some states, the bank must take reasonable measures to ensure that the company is operating only where the activity is legally permitted,” Gruenberg wrote.

Lenders affiliated with Native American tribes have argued that they are exempt from state laws -- such as licensing requirements or interest-rate caps -- under the doctrine of sovereign immunity for tribal governments in the U.S. Other companies assert they are not subject to the laws of one state when they base their operations in another.

Consumer Financial Protection Bureau Director Richard Cordray was more explicit in a Sept. 13 appearance before the House Financial Services Committee. He said lenders should be “licensed and qualified” to do business.

Making illegal loans and lending without a license, “that’s a business model that we don’t want to endorse,” Cordray said.

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