Federal regulators requested comments on proposed guidance about “third-party relationships.” In a letter dated Oct. 18, The Pew Charitable Trusts warned that these so-called rent-a-bank partnerships—which enable payday lenders to effectively lease a bank’s charter and use it to originate high-cost loans that would otherwise violate state usury laws—put the whole banking system at risk. Pew’s letter called on regulatory agencies to do more to eliminate such arrangements and offered specific recommendations on how to do that.
The letter also noted that at least five banks supervised by the Federal Deposit Insurance Corp. (FDIC) are engaged in partnerships that appear to raise rent-a-bank concerns. Despite the small number of banks involved, these arrangements have expanded into more than a dozen states, including seven in which unlicensed payday lenders use them to charge more than licensed lenders and some in which payday or other high-rate loans are otherwise prohibited.
As Pew’s extensive research, outlined in the letter, makes clear, federal regulators must take immediate action to prevent these harmful partnerships before they take deeper root in the banking system and do so in a way that fosters more beneficial partnerships between banks and nonbank financial service providers. Specifically, the letter called on the FDIC and other regulators to give clearer guidance to smaller banks, which generally lack the resources to assess the critical risks involved in small-dollar credit partnerships, and to discourage those banks from lending to customers who do not hold a deposit account with them before taking the loan.
Pew’s other recent letters and publications on rent-a-bank partnerships are available at the Banks and Credit Unions resource page.