Online-Lending Rules Clarification Promised by FDIC’s Gruenberg
The Federal Deposit Insurance Corporation will clarify how banks should do business under U.S. rules with online lenders who have been the subject of a regulatory crackdown over their practices.
The FDIC will issue the new guidelines, known as a financial institutions letter, explaining how how banks should do business under U.S. rules 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.
The FDIC promise comes in the wake of demands from Republicans in the U.S. Congress to explain why it has pressured banks to cut ties with the online lenders, which offer loans, typically with short terms and high interest rates, over the Internet.
The letter was a response to Representative Blaine Luetkemeyer, a Missouri Republican, who had pressed the FDIC in writing and in person to explain its stance. Since the summer, signals from FDIC and some subpoenas from the Department of Justice have led banks to end relationships with many online lenders.
Lisa McGreevy, head of Online Lenders Alliance, a trade association, said that the letter suggests 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.
Andrew Gray, a spokesman for the FDIC, declined to comment. FDIC Vice Chairman Thomas Hoenig told lawmakers in a briefing last week that the letter would come within two weeks, according to a person present, who requested anonymity because the meeting was private.
Mark Kaufman, the commissioner of financial regulation for Maryland, said the FDIC’s stance will still 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.
Banks are the gatekeepers to an automated clearing house system that enables direct payments into checking accounts. Without access to the system, the online lenders can’t credit loans to customer accounts, or debit repayments.
Banks that handle transactions for online lenders have faced a concerted campaign by senior FDIC officials to reconsider this business, according to a document prepared by the online lending industry. The document, which was circulated to lawmakers last week, details specific threats made by the FDIC against banks - they are not named -- that continue processing lender transactions.
For example, one bank told a lender the FDIC had refused to close out its current audit of the bank until it ended the processing work. 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. FDIC guidelines from 2012 order banks to monitor their business with “high risk” merchants and independent payment processors.
The letter from Gruenberg does not explicitly state whether the FDIC regards online lenders who do not comply with individual state laws to be illegal operations.
“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. Other companies assert they can legally evade laws of one state by basing 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.
“If they’re making loans that are illegal, or if they’re making loans where they’re not licensed to make loans,” Cordray said, “that’s a business model that we don’t want to endorse.”
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