Remarks
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
The
Seventh Annual Greenlining Economic Development Summit
Sacramento, California
June 13, 2000
Thank you.
It is late, so I will be brief.
This conference is about building communities. It is about creating opportunity. About
expanding prosperity. And about sustaining the development of our greatest economic
resource: Our people. All our people.
Banks are chartered to be engines of economic growth.
To provide the financial power that builds communities, creates opportunity, expands
prosperity, and sustains development.
But I am here tonight to discuss how some banks may be engaging in an unbecoming
practice -- the practice of "renting out their charters," so to speak, to nonbank payday
lenders. For the moment, the number of banks renting out their charters is small – but
that could change – and that possibility triggers public policy concerns.
As many of you know, this organization – through Bob Gnaizda’s forceful and eloquent
words -- has criticized certain forms of payday lending for undercutting the efforts of
people to get ahead and for undermining communities by draining financial resources
from low- and moderate-income neighborhoods . . .
The very opposite of the economic development this summit seeks to encourage.
However, if a banker enters the payday market with appropriate controls to ensure safe
and sound operations, short-term small denomination consumer lending may help to
expand access to banking services and may help build long-term customer
relationships.
Payday loans are intended to be short-term small-dollar payments to be paid off on the
borrower's next payday.
By
Donna Tanoue
Chairman
Federal Deposit Insurance Corporation
Before
The
Seventh Annual Greenlining Economic Development Summit
Sacramento, California
June 13, 2000
Thank you.
It is late, so I will be brief.
This conference is about building communities. It is about creating opportunity. About
expanding prosperity. And about sustaining the development of our greatest economic
resource: Our people. All our people.
Banks are chartered to be engines of economic growth.
To provide the financial power that builds communities, creates opportunity, expands
prosperity, and sustains development.
But I am here tonight to discuss how some banks may be engaging in an unbecoming
practice -- the practice of "renting out their charters," so to speak, to nonbank payday
lenders. For the moment, the number of banks renting out their charters is small – but
that could change – and that possibility triggers public policy concerns.
As many of you know, this organization – through Bob Gnaizda’s forceful and eloquent
words -- has criticized certain forms of payday lending for undercutting the efforts of
people to get ahead and for undermining communities by draining financial resources
from low- and moderate-income neighborhoods . . .
The very opposite of the economic development this summit seeks to encourage.
However, if a banker enters the payday market with appropriate controls to ensure safe
and sound operations, short-term small denomination consumer lending may help to
expand access to banking services and may help build long-term customer
relationships.
Payday loans are intended to be short-term small-dollar payments to be paid off on the
borrower's next payday.
A few banks make payday loans, and a few others provide liquidity funding to nonbank
payday lenders.
Within this second group, we are concerned about so-called "charter renting" -- that is to
say, allowing a lender in another state to use the bank's authority to circumvent state
caps on interest rates in exchange for a fee. This is not what this "authority" was
intended to do. Without proper due diligence and involvement of the bank in the loan,
this is not banking.
Let's step back a moment and look at what's happening in this market.
Payday lending is a growing business. Nationally, according to a recent investment
advisory report, the payday loan industry has grown from a few hundred outlets in the
mid-1990s to approximately 10,000 nationwide. Another investment banking firm
forecasts a potential mature market by 2002 for 25,000 stores, producing 180 million
transactions and $45 billion in loan volume, that will generate $6.75 billion in fees
annually. At least three different publicly traded companies engaged in the payday
lending or cash advance business – and, at present, they appear to have strong
prospects.
Prospects appear positive for payday lenders right here in the state of California. My
fellow speaker tonight, State Treasurer Philip Angelides, recently noted that California
has the greatest gap between rich and poor of all but four states in the country.
Californians below the poverty line grew by 28 percent between 1989 and 1996,
increasing the number of potential payday borrowers. Since 1997, when legislation
favorable to the industry was passed in the state, more than 3,500 payday lending
outlets have opened – accounting for as much as one-third of all payday lending outlets
in the country as a whole. More are likely. Clearly the industry has tapped into a real
need for short-term, small dollar denomination credit.
In my remarks tonight, I will explore the basis for the explosive growth in payday
lending; the characteristics of the payday lending business; the issues that this growth
raises for me as a bank supervisor; and the steps we plan to take to address those
issues.
According to the United States Census Bureau, there are more than 100 million
households in the United States. Of those, approximately 30 percent earn between
$25,000 and $50,000 per year. One or two persons in most of those households have
steady jobs, banking accounts, and pay their rent, utilities, and other bills regularly and
on time. Many of those households, however, have difficulty meeting all of their financial
obligations all of the time. According to data from investment research analysts and a
leading financial publication, for example, 31 percent of consumers with incomes below
$45,000 per year and even 22 percent of individuals earning between $45,000 and
$65,000 per year have difficulty managing personal finances. This is a sizeable market
payday lenders.
Within this second group, we are concerned about so-called "charter renting" -- that is to
say, allowing a lender in another state to use the bank's authority to circumvent state
caps on interest rates in exchange for a fee. This is not what this "authority" was
intended to do. Without proper due diligence and involvement of the bank in the loan,
this is not banking.
Let's step back a moment and look at what's happening in this market.
Payday lending is a growing business. Nationally, according to a recent investment
advisory report, the payday loan industry has grown from a few hundred outlets in the
mid-1990s to approximately 10,000 nationwide. Another investment banking firm
forecasts a potential mature market by 2002 for 25,000 stores, producing 180 million
transactions and $45 billion in loan volume, that will generate $6.75 billion in fees
annually. At least three different publicly traded companies engaged in the payday
lending or cash advance business – and, at present, they appear to have strong
prospects.
Prospects appear positive for payday lenders right here in the state of California. My
fellow speaker tonight, State Treasurer Philip Angelides, recently noted that California
has the greatest gap between rich and poor of all but four states in the country.
Californians below the poverty line grew by 28 percent between 1989 and 1996,
increasing the number of potential payday borrowers. Since 1997, when legislation
favorable to the industry was passed in the state, more than 3,500 payday lending
outlets have opened – accounting for as much as one-third of all payday lending outlets
in the country as a whole. More are likely. Clearly the industry has tapped into a real
need for short-term, small dollar denomination credit.
In my remarks tonight, I will explore the basis for the explosive growth in payday
lending; the characteristics of the payday lending business; the issues that this growth
raises for me as a bank supervisor; and the steps we plan to take to address those
issues.
According to the United States Census Bureau, there are more than 100 million
households in the United States. Of those, approximately 30 percent earn between
$25,000 and $50,000 per year. One or two persons in most of those households have
steady jobs, banking accounts, and pay their rent, utilities, and other bills regularly and
on time. Many of those households, however, have difficulty meeting all of their financial
obligations all of the time. According to data from investment research analysts and a
leading financial publication, for example, 31 percent of consumers with incomes below
$45,000 per year and even 22 percent of individuals earning between $45,000 and
$65,000 per year have difficulty managing personal finances. This is a sizeable market