FDIC's 2013 Letter: Banks Doing Business with Payday Lenders Is 'Unacceptable'

The Federal Deposit Insurance Corp. told an Ohio bank early last year that doing business with payday lenders is generally unacceptable, according to a letter released Friday by House Republicans.

The letter, signed by the FDIC's Chicago regional director, adds to the controversy over Obama administration actions that target the ability of certain merchants to access the mainstream payment system. Administration officials maintain that their efforts are focused on preventing consumer fraud, while critics say they represent an attack on legal but politically disfavored industries.

The newly released FDIC letter was written in February 2013, before the agency's actions had become the focus of public controversy. It was sent to the bank's board of directors, and signed by M. Anthony Lowe, the FDIC's Chicago regional director. The name of the Ohio bank that received the letter is blacked out in the version that was released publicly.

"It is our view that payday loans are costly, and offer limited utility for consumers, as compared to traditional loan products," the letter states.

The letter expresses concern about the bank's processing of transactions on behalf of one particular payday lender – the name of that company is also blacked out. It states that the bank's relationship with this payday lender "carries a high degree of risk to the institution, including third-party, reputational, compliance and legal risk, which may expose the bank to individual and class actions by borrowers and local regulatory authorities."

"Consequently, we have generally found that activities related to payday lending are unacceptable for an insured depository institution," the letter states.

Following the document's release, FDIC spokesman David Barr noted that the letter was sent seven months before the agency released relevant new guidance. The guidance states that banks operating with appropriate systems and controls will not be criticized for processing payments for legally operating businesses.

"The February 2013 letter is not reflective of FDIC policy," Barr said. "Because we have been asked many questions, the FDIC issued guidance in September 2013 making clear that financial institutions operating with the appropriate systems and controls are neither prohibited nor discouraged from providing services to customers complying with applicable federal and state laws."

"We have made this policy clear to our bank supervision managers and examiners, and worked hard to make sure that the policy is being followed," he continued. "We have asked banks to report any communications they've received that do not appear to be consistent with our guidance to the FDIC's management, ombudsman or inspector general."

The FDIC is currently defending itself in a lawsuit filed by a payday lending trade group, which accuses federal banking regulators of trying to drive payday lenders out of business by exerting pressure on the banks they use to access the payment system. In an August court filing, the FDIC wrote that any decisions by banks to cut ties with payday lenders were the banks' own business decisions.

The February 2013 letter was released in connection with related document requests that Republicans on the House Oversight Committee sent Friday to Federal Reserve Board Chair Janet Yellen and Comptroller of the Currency Thomas Curry.