COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA
April 6, 2004
Docket No. 04-06
Communications Division
Public Information Room, Mailstop 1-5
Office of the Comptroller of the Currency
250 E Street, SW
Washington, D.C. 20219
email: regs.comments@occ.treas.gov
Docket No. R-1181
Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, D.C. 20551
email: regs.comments@federalreserve.gov
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, D.C. 20429
email: comments@fdic.gov
Regulation Comments, Attention: No. 2004-04
Chief Counsel's Office
Office of Thrift Supervision
1700 G Street NW
Washington, D.C. 20552
email: regs.comments@ots.treas.gov
Re: Community
Reinvestment Act Regulations – Joint Proposed
Rulemaking
The Community
Financial Services Association (“CFSA”)
appreciates the opportunity to comment on the revisions to the Community
Reinvestment Act (“CRA”) regulations jointly proposed
by the federal banking agencies (69 Fed. Reg. 5729, February 6, 2004).
CFSA is a national trade association for state-licensed lenders and
insured depository institutions that are engaged in payday lending.
As discussed
below, CFSA believes that (1) payday loans should be subject to
a CRA evaluation
only upon the request of a bank, and
only if such loans are made within a bank’s assessment area;
(2) should a bank elect to have its payday lending evaluated as part
of a CRA review, the bank should receive favorable consideration
for such lending if its payday loans are offered in compliance with
the FDIC’s Guidelines on Payday Lending; and (3) the proposed
revision related to abusive lending practices is not supported by
the text of CRA or its legislative history, and, therefore, should
not be adopted.
Payday Loans
Should be Evaluated As Part of CRA Only Upon the Request of a Bank
and Only
Within a Bank’s Assessment Area
Currently, the
CRA regulation provides for the consideration of consumer loans
in only two instances:
(1) at the request of a bank,
or (2) upon a determination that such loans constitute a “substantial
majority” of the bank’s business.1 CFSA believes that
payday lending should only be evaluated as part of a CRA review in
the first instance, i.e., upon the request of a bank.
The phrase “substantial majority” has been interpreted
to mean “so significant a portion of the institution's lending
activity by number or dollar volume of loans that the lending test
evaluation would not meaningfully reflect its lending performance
if consumer loans were excluded.”2 Payday
lending performed in compliance with the FDIC’s Guidelines
on Payday Lending cannot exceed the dollar volume standard set forth
in this test.
Those Guidelines limit a bank’s payday lending to no more than
25 percent of its Tier 1 capital. Therefore, as long as a bank’s
payday lending activities comply with the Guidelines, a substantial
majority of the bank’s loans, in dollar volume terms, cannot
be devoted to payday lending.
Technically,
given the small denominations of payday loans and the frequency
in which
such loans may be made, it is possible that a
bank’s payday loans could constitute a substantial majority
of a bank’s loans on a numerical basis. We believe, however,
that mandating a review of payday lending solely upon the basis of
the number of payday loans would be inappropriate. The safety and
soundness constraints imposed by the FDIC’s Guidelines on Payday
Lending are clearly intended to avoid excessive loan concentration.
Moreover, like any other type of lending, payday lending should be
considered within a bank’s “performance context.” In
such a context, a disproportionate emphasis on payday lending typically
would misrepresent a bank’s core business lending activities.
We also respectfully
recommend that, as a general matter, only those payday loans made
within
a bank’s assessment area should be
evaluated as part of a CRA examination. We believe that this recommendation
is fully consistent with the existing regulations, which focus exclusively
on activities within a bank’s assessment area. Nonetheless,
since several of the banks engaged in payday lending do so exclusively
outside their assessment area, we thought it appropriate to emphasize
this point.
Payday Loans Should Receive Favorable Consideration Under CRA
If a bank voluntarily
elects to have consumer loans considered as part of its CRA evaluation,
we believe that payday loans offered
within the bank’s assessment area should qualify for favorable
consideration. The Interagency Questions and Answers regarding CRA
provide that small, unsecured consumer loans that are offered in
a safe and sound manner and upon reasonable terms may warrant favorable
consideration in a CRA examination.3 Payday loans can satisfy these
conditions. They are small, unsecured consumer loans. If offered
consistent with the FDIC Guidelines on Payday Lending, they are safe
and sound. And the terms for payday loans are reasonable given consumer
demand, operating costs and risk.
Payday Loans are Small, Unsecured Consumer Loans
Typically, payday loans are offered in amounts below $1,000 and
have maturities of 14 days. Payday loans are not secured by real
property or any other form of collateral. Instead, a borrower usually
provides the lender with a check or debit authorization for the amount
of the loan plus the fee. The check is either post-dated to the borrower's
next payday or the lender agrees to defer presenting the check for
payment until a future date, usually two weeks or less. When the
loan is due, the lender expects to collect the loan by depositing
the check or debiting the borrower's account or by having the borrower
redeem the check with a cash payment. Payday loans appeal to individuals
who are starting new careers or families, and who face a need for
short-term, low-denomination credit to pay for unexpected life events,
such as medical expenses, car repairs or school expenses.
Payday Loans Offered in Compliance with FDIC Guidelines are Safe
and Sound
In recognition
of the growth of payday lending, the FDIC has issued an advisory
on payday
lending for state nonmember banks that “describes
the FDIC's expectations for prudent risk-management practices for
payday lending activities.” These expectations include a limitation
on the volume of payday loans in relation to a bank’s Tier
1 capital (no more than 25 percent), dollar-for-dollar capital against
each loan, an adequate allowance for losses, and a limitation on
the time such loans may be outstanding before they must be classified
as a loss (60 days). Additionally, the FDIC’s Guidelines require
compliance with federal consumer protection laws, such as the Truth-in-Lending
Act and the Equal Credit Opportunity Act. Payday loans offered in
compliance with these Guidelines are, per se, safe and sound.
The Terms of Payday Loans Are Reasonable
It is a simple
fact that the shorter the term of a loan, the higher the APR. For
example, the APR on a $200 credit card charge that is
repaid in one month may be as high as 50 percent,4 and
the APR on a bounce protection fee of $20 for an overdraft of $100
will be 541
percent, assuming the consumer repays the overdraft in 14 days.5 It is not surprising, therefore, that the APR on a 14-day, $100
payday
loan with a $15 dollar fee is 391 percent. Such an APR, however,
does not mean that the loans are excessively priced. It only means
that the APR is a more relevant measure of a loan with a maturity
of one or more years.
The real issue
for consumers is not the APR, but how the dollar cost of a payday
loan compares
with other credit alternatives.6 As
the FDIC has recognized, payday loan customers often have “few,
if any, lower-cost borrowing alternatives.” For example, the
average annual percentage rate of an NSF fee, in conjunction with
associated merchant fees, is three times as great as the average
annual percentage rate of a payday
loan.7 Similarly, so-called “bounce
protection” plans typically exceed the cost of a payday loan,
assuming a consumer is able to determine the cost of such plans.
Moreover, a payday loan may be the most readily accessible source
of credit for many consumers. The payday lending industry has seen
tremendous growth in recent years largely because traditional lenders
no longer make short-term, low-denomination, unsecured consumer loans.
They ceased providing the product because the cost of doing so exceeded
the traditional fee. Payday loan offices, in turn, are conveniently
located and the application procedures are both simple and quick.
Even Comptroller Hawke, who has raised concerns about relationships
between national banks and payday lenders, has acknowledged the attraction
of payday lending:
Today, up to
10,000 outlets nationwide make payday loans — and
earn fees that may total as much as $2.2 billion. While many will
say that fees for these services are unreasonably high, bankers in
this country can't afford to ignore the number of consumers using
these services. They clearly demonstrate a market opportunity. Is
it realistic to think that bankers can gain a bigger share of this
promising market? Clearly, it won't be easy. The nonbank providers
that currently control the market possess a number of advantages — not
the least of which is public acceptance. Check cashers and payday
lenders have attracted customers for a reason — or for a host
of reasons. They keep longer hours than banks. They tend to be more
conveniently located. They speak their customers' languages. They
don't ask for a lot of intrusive paperwork. They frequently offer
more of the retail products and services these customers need than
banks do — including money orders, wire transfers, and bill
payments, as well as short-term, low-denomination loans. They're
set up to work fast — a fact of paramount importance to many
payday borrowers, who are usually impatient for their money and won't
wait days or weeks for a loan to be approved. In short, they're more
user-friendly. And nonbank providers can often claim — correctly — that
their services cost no more — and sometimes less — than
the same services provided by banks — that is, when those services
are even available at banks.8
In sum, the fees for payday loans are based upon consumer demand
and reflect the cost to market, originate, process and collect these
loans.
The Proposed Anti-Predatory Lending Standards Are Not Supported
by the CRA Statute or its Legislative History
While we oppose
abusive lending practices,9 we respectfully suggest that the proposed
revisions to the regulations related to discriminatory,
other illegal, and abusive credit practices are not supported by
the CRA statute or its legislative history, and, therefore, should
not be adopted as part of this rulemaking process.
CRA was enacted
for one purpose only: to encourage regulated financial institutions
to
increase credit in the areas where they maintain
deposit facilities. The statute does this by placing an “affirmative
obligation” on regulated financial institutions “to help
to meet the credit needs of the local communities in which they are
chartered,” and by requiring the federal banking agencies to
consider an institution’s record of doing so when evaluating
an application for a deposit facility. The statute does not otherwise
empower the federal banking agencies to police the manner in which
regulated financial institutions make credit available to consumers.
Credit practices are subject to other federal laws, many of which
were in effect prior to the enactment of CRA, including the Equal
Credit Opportunity Act, the Federal Trade Commission Act and the
Truth In Lending Act.
The legislative history accompanying the passage of CRA reinforced
the affirmative, not punitive, nature of CRA:
The need for
new legislation arises because regulating agencies lack systematic,
affirmative programs to encourage lenders to give
priority to credit needs of their home areas.10 (emphasis added)
The principal author of CRA, Senator Proxmire, was specifically
concerned about the redlining. During the Senate floor debate on
the Act, he noted that the focus of the law was new loans:
The committee
included title IV to reaffirm that banks and thrift institutions
are indeed chartered to serve the convenience and needs
of their communities, and as the bill makes clear, convenience and
needs does not just mean drive-in teller windows and Christmas Club
accounts. It means loans.11
He also noted that the bill created an incentive for banks to make
these new loans:
The act provide
that bank examination shall assess how well the lender is serving
the local community, and that this assessment will
be taken into consideration if the institution makes application
for a new branch. Those who are serving their communities should
be rewarded. Those who are utterly neglecting their communities should
not.12
At no point in the debate did he suggest that CRA was intended to
police specific lending practices.
In sum, neither the text nor history of CRA support the establishment
of the proposed anti-predatory lending standard.
Sincerely,
Lynn DeVault
President
____________________________
1 § ___22(a).
2
Interagency Questions and Answers Regarding Community Reinvestment, § ___.22(a)(1)-2.
3
Interagency Questions and Answers Regarding Community Reinvestment, § ___.22(a)-1.
4 Show
Me The Money! A Survey of Payday Lenders and Review of Payday Lender
Lobbying in State Legislatures, Consumer Federation of America and
State PIRGs, February
2000, page 9.
5 Comments
of the Consumer Federation of America and the National Consumer Law
Center to the Federal Reserve Board on Proposed Revisions
to Official Staff Commentary to Regulation Z, January 27, 2003, Appendix,
page 2.
6 The purpose
of the APR disclosure requirement is to permit a consumer to compare
the cost of alternative forms of credit by using a common basis. However, many
of the alternatives to a payday loan are not expressed in APR terms. For example,
no APR is provided with a loan from a friend or family member, a checking account
overdraft arrangement, a check subject to an NSF fee or merchant fee, or a late
credit card fee. Thus, knowledge of the APR for a payday loan often does not
provide a basis for comparison with other credit alternatives.
7 Payday Advance:
A Cost Effective Alternative, Community Financial Services Association of America
(February 2003).
8 Remarks of Comptroller
John D. Hawke, Jr. before the Consumer Bankers
Association,
April 8, 2002.
9 CFSA
has adopted its own Best Practices to ensure that payday loans offered by CFSA
members are offered
in a fair and responsible
manner.
10 Senate Report 95-175, page 33.
11 Congressional Record, June 6, 1977, page S8958.
12 Id.
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