FDIC To Rule on Bank-Online Lender Relationships

Posted by: Jeff Brownlee

Alan Zibel
September 26, 2013
The Wall Street Journal

Pressure from lawmakers is prompting a federal banking regulator to clarify how banks should handle relationships with controversial online lenders.

The Federal Deposit Insurance Corp.’s move, expected in the coming days, comes amid growing scrutiny on Capitol Hill over efforts by the agency and the Justice Department to stamp out fraudulent or illegal transactions made online.

The FDIC plans to make clear to banks what responsibilities they have in processing transactions for online lenders and will instruct them to ensure they are handling payments for legal activities, according to Doreen Eberley, the director of the FDIC’s division of risk management supervision.

The guidance could provide a measure of relief for banks who had been cutting off relationships with such businesses in the face of regulatory scrutiny. The FDIC is expected to make clear the regulator isn’t cracking down on online lending operations that operate legally. But banks will still have to decide on their own whether to do business with some lenders—such as Indian tribes—that are operating in disputed legal territory.

The Wall Street Journal reported in August the government was putting a squeeze on banks that process payments for online lenders, as well as a wide range of allegedly fraudulent merchants, as part of a broad effort to stamp out illegal or deceptive scams. Some online lenders can charge interest rates of more than 700%.

But critics say the government crackdown will unfairly rein in legal activity, including online and storefront payday lenders who are abiding by state-imposed interest rate regulations.

Rep. Blaine Luetkemeyer (R., Mo.) and 30 other GOP lawmakers a sent a letter last month accusing officials of intimating banks and processors of electronic payments with threats of stepped up scrutiny unless they stop doing business with online lenders. Mr. Luetkemeyer met with the FDIC’s vice chairman, Tom Hoenig, on the issue last week.

“My concern was that were trying to run these online lenders and payday lenders out of business,” said Mr. Luetkemeyer, in an interview. “This type of judgmental type of behavior on the part of the FDIC is not their mission.”

Mr. Luetkemeyer, a member of the House Financial Services Committee, has been an ally of the banking industry since his election in 2008. He has received campaign contributions of $42,500 from donors tied to the Independent Community Bankers of America, $36,000 from the American Bankers Association and $6,000 from the Online Lenders Alliance, according to the Center for Responsive Politics.

The lawmaker pressure comes amid a growing controversy over what kind of online lending activity is permissible. New York’s top banking regulator in August launched an effort to stop online lenders from doing business in his state, arguing lenders are violating the state’s interest rate caps. However, two Indian tribes quickly sued Mr. Lawsky’s office, arguing that they don’t need to comply with the state’s laws.

An FDIC spokesman declined to comment on allegations that the agency’s examiners overstepped in pushing banks to cease doing business with online lenders.

“They need to assure themselves that they’re not facilitating fraudulent or other illegal activity,” Ms. Eberley said in an interview. “They have to recognize: Where the law is not clear, they could be challenged, and they could still be exposed.”

The FDIC’s stance could help the online lending industry, which has been worried its business will dry up due to the regulatory crackdown. The agency should “clarify that banks aren’t being told to sever their relationships with online lenders,” said Lisa McGreevy, president of the Online Lenders Alliance.

A Justice Department spokeswoman declined to comment.

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