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FOR IMMEDIATE RELEASE: August 3, 2004

SCHUMER WARNS CAPITAL REGION MILITARY FAMILIES TO BEWARE OF PAYDAY LOAN SCAMS THAT PREY ON SOLDIERS & RIP THEM OFF WITH 900% INTEREST

Capital Region military families are being targeted by unscrupulous operators who exploit FDIC loophole and partner with banks from other states to “rent” access to weaker regulations

The Federal Reserve, Office of the Comptroller of the Currency, and Office of Thrift Supervision have all acted to shut down these below-board partnerships – FDIC is only federal regulator to not use authority to protect at-risk borrowers

Standing with local military families that are targeted by the scam, Schumer urges FDIC to act now to close loophole

Capital Region military families should beware of unscrupulous loan schemes that could end up charging them 900 % interest for loans, US Senator Charles E. Schumer warned today in a news conference in Albany. To stop these operators from preying on vulnerable Capital Region military families who are undergoing traumatic transitions, Schumer today urged the Federal Deposit Insurance Corporation (FDIC) to close a loophole that some lending institutions exploit to market the illegal payday loans - even in states where they are illegal.

“The bottom line is that the same Federal regulators who are supposed to be protecting consumers are instead stand idly by while holes get poked in some of the best protection in the nation,” Schumer said. “It’s bad enough that people in Washington have opened up a loophole wide enough to drive a Mack Truck through, leaving Capital Region families at risk. It's tragic that these unscrupulous scammers are targeting unknowing military families as their victims.”

Payday loans couple short terms – often as short as two weeks – with interest rates that range from 400% to 900%. Borrowers typically make these loans against their anticipated paychecks. Borrowers promise to repay the loan out of their next paycheck or regular income payment. But borrowers have little chance to repay them and end up rolling the loans over every few weeks in an unending cycle. The high fees and short terms reduce the borrower’s ability to repay the loan without a renewal, and payday lenders generate a disproportionate amount of fees from repeat borrowers.

Studies have estimated that predatory payday lending is costing American families billions of dollars per year. Usury laws in many states, including New York, ban these high-interest rate, short term loans, but out-of-state banks partner with in-state payday lending operations to bypass usury and consumer protection laws in states where this practice is restricted.

In states where laws regulate and restrict payday lending, payday lenders hide behind their bank partnerships with FDIC-regulated banks. Schumer said today that the only reason for a payday lender to partner with a bank to make payday loans is to attempt to use the bank’s right to export home state interest rates and to preempt state consumer protections that regulate payday lending. The payday lender markets the loans, solicits borrowers, accepts applications, disburses loan proceeds, services and collects the loans.

The bank generally sells the majority of the participation of the loans – up to 95 percent – back to the payday lender on the same or next day. By allowing eleven state-chartered banks to “rent” their charters to payday lenders to get around usury laws and charge triple-digit interest rates, the FDIC is allowing federal preemption to harm consumers.

No other federal regulatory body other than the FDIC allows this activity. The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision have all acted to shut down partnerships between the banks they regulate and payday lenders. The OCC and OTS have found that payday lending exposes federally-insured banks to unacceptable safety and soundness risks, undermines consumer protections, and carries serious reputational risks. By comparison, the FDIC has allowed the same payday lenders to operate with state-chartered banks. In fact, the FDIC seems to have become the regulator of choice for payday lending companies who wish to misuse bank charters for the purpose of issuing payday loans in states with strict usury laws.

Schumer said today that in recent years, one group of borrowers of particular concern have been members of the military and their families. The number of payday loan stores throughout the country has tripled since the late 1990s. These stores have proliferated around military bases, targeting young military families with limited financial resources. The stories of trapped borrowers indicate that quantitative studies cannot capture the true financial and emotional toll on those families.

USAA, the military financial institution and insurance company issued a report this year on payday lending that concluded military families provide a big target for payday lenders. At Fort Bliss, Texas, for example, officials at the Army Emergency Relief office estimate nearly one-tenth of the 10,000 active duty troops stationed there have had to undergo credit counseling because of payday loans and other debt problems. Base commanders and relief offices across the country are increasingly aware of the threat payday lenders pose to military personnel.

Local military families have reported that they have been targeted by these lending operations who trade on the vulnerability of the military families who are undergoing traumatic transitions. Schumer said that this is particularly shameful. "To intentionally try to rip off the families of the men and women who wear the uniform to protect our liberties is a disgrace. We need to close these loopholes and we need to do it now," Schumer said.

Schumer today urged the Federal Deposit Insurance Corporation (FDIC) to close the loophole that unscrupulous lending institutions exploit to market illegal, high-interest payday loans, even in states where these loans are illegal. Pro-consumer states like New York ban payday loans because interest rates on them can skyrocket to as high as 900%, but unscrupulous operators still can still “rent-a-charter” – partner with institutions in states with weaker regulations – to take advantage of borrowers.

Schumer also released a letter he wrote to the FDIC also signed by Senators Sarbanes, Levin, Durbin, Corzine, and Clinton which points out that the FDIC’s supervision of state-chartered banks is guided by the same regulatory framework that the other bank regulators used to end bank-payday partnerships. Schumer and the other Senates encouraged the FDIC to use the informal and formal supervisory actions available to them in a similar manner and shut down illegal bank-payday arrangements. And the Senators noted that the FDIC’s tacit encouragement of banks engaged in payday lending is so strong that a bank formerly regulated by the Federal Reserve switched its charter to be regulated by the FDIC solely to allow it to continue its partnerships with payday lenders.

“The FDIC should immediately end the practice of allowing payday lenders to abuse bank powers and undermine states’ authority to uniformly regulate small loan companies and enforce usury laws. We believe that this is a blatant abuse of bank powers, which threatens the integrity of the dual banking system by upsetting the balance between federal and state responsibilities,” Schumer and the Senators wrote.

Ret. Col. Charlie Johnson, President of the NYS Council of Veterans Organizations, President of the Tri-County Council of VietNam Veterans, and father of a soldier currently fighting in Afghanistan; John Howe, 369th Veterans Association, VietNam veteran, and father of a solider en route to Iraq; and Mrs. Meagan Schiermayer who's husband is currently serving in Iraq joined Schumer.

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