- Posted August 25, 2013 by
new york, New York
Federal Investigation of Online Lenders Could Harm Consumers Say Members of Congress
The letter protested that the crackdown could also shutter legitimate lenders, including at least 15 legal operations owned by congressionally recognized Native American tribes. The enforcement action has already caused the layoff of more than 300 employees of a lending operation in Tennessee.
Several federal agencies, including the DOJ and FDIC, launched a probe earlier this year into the business of Internet lenders. As part of the investigation, federal regulators sent subpoenas to several such companies. They also contacted many of the banks and payment processors who do business with online lenders and, without whose assistance, online lenders cannot survive.
The blanket approach represents a change in the way federal regulators had been enforcing industry rules. Rather than investigating individual companies, federal regulators are employing a broader approach. An anonymous source at the Justice Department told the Wall Street Journal that with the change in strategy, they were "choking them off from the very air they need to survive.”
The members of Congress objected to way the federal government was going about its investigation. They made it clear that they did not approve of the blanket approach because it was going to put not only the bad companies out of business, but also the online lenders who run law-abiding businesses that supply a critical service to many low-income people.
“Your efforts to stop banks from processing these lawful transactions would destroy many legitimate, legally compliant companies and small businesses, and adversely impact tens of millions of low-income American families who depend on short-term credit provided by online lenders because they do not qualify for traditional loans or credit cards,” said the letter.
The Congressional representatives added that they have received reports that both the DOJ and FDIC have warned banks and processors that continuing to work with payday lenders might subject them to heightened scrutiny by the federal regulators.
The group of representatives asked that the federal agencies instead limit their investigation to those companies against whom there are legitimate charges of breaking existing laws. Additionally, they suggested that the FDIC should redirect its energy into finding reasonable alternatives to the banking problems faced by low-income families.
They pointed out that it was the FDIC, in a 2011 report, determined that more than one in four American households conduct some or all financial transactions outside of mainstream banks. “If the government cuts off underserved consumers’ credit options, it will force many Americans who live paycheck-to-paycheck to turn to unregulated and unsafe alternatives that are much more expensive than currently available short-term credit products.”
They also remind the agencies that their actions are on par with changing the structure of the financial system, which is outside the scope of their authority. They also appear to undermine the power of Congress which passed legislation, the Dodd-Frank Act, which acknowledged the need for short-term credit products and refused to limit payday lenders’ ability to offer short-term loans.
“Dodd-Frank also included a specific provision designed to prohibit the Consumer Financial Protection Bureau (CFPB) from imposing rate limitation on short-term loans. Neither Dodd-Frank nor any other legislation passed by Congress, has given the DOJ, FDIC or any other federal agency the authority to “take away the very air” that online lenders “need to survive.”
Last week, federal regulators met with Native American tribes who have online payday lending companies, but who may not be subject to regulation by the U.S. government because they are sovereign entities. According to a letter by the tribes’ lending association memorializing the meeting, representatives of the federal government assured the tribal owners that their investigation is not aimed at tribal businesses.
Nevertheless, the tribes explained that the probe has already damaged their companies because the banks and payment processors are backing away from working with online payday lenders.
The state of New York has launched its own investigation into the industry, claiming that interest rates on these loans often exceed state limits. Like federal regulators, the state Department of Financial Services warned banks and processors about working with online loan companies.
The Native American Financial Services Association, a trade association representing tribal lenders, sued New York in U.S. District Court for attempting to infringe on the sovereign right of Native Americans to own and run such companies.