Jane Daugherty: Lawmakers defend online lending industry

Monday, August 26, 2013  

The following article was written and reported by Jane Daugherty.

A harshly worded letter criticizing a federal crackdown on online lenders who serve “tens of millions of low-income Americans” likely will land on the desks of Attorney General Eric Holder and Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), on Monday.

Without mentioning the 16 online Indian-owned companies targeted as part of a cease and desist order to stop online loans by the state of New York earlier this month, the letter, dated Aug. 22 and signed by 31 members of Congress, demands that the government crackdown stop.

Citing harm to the poorest Americans – the usual customers of the online loans because banks and other financial institutions will not grant them loans or credit cards -- the letter sharply criticized recent federal actions.

The Congress members, all Republicans, called the shutdown efforts “intimidating” and harmful to low-income American households that live “paycheck to paycheck.” The letter said that most people who resort to the online loans have no other short-term lending sources in emergencies. The letter raised the specter of illegal loan sharks preying on the poor, saying shutting down online lenders “could force them (online borrowers) to unregulated and unsafe alternatives that are much more expensive.”

Friday Barry Brandon, executive director of the Native American Financial Services Association, said closing online lending businesses owned by Indian tribes also would have devastating consequences in tribal communities. NAFSA represents numerous tribal lenders. Brandon said that as much as a quarter of the some tribes’ operational budgets comes from online lending firms they operate legally.

The critical letter from Congress members to the Attorney General and head of the FDIC is the latest development in the month-long public relations disaster for federal regulators. The crisis appears to be one more glaring indication that there is no comprehension or compassion for how poor families struggle to get emergency loans in America either by large financial institutions or government regulators

“More than one in four American households conducts some or all of their financial transactions outside the mainstream banking system,” the letter noted, citing a 2011 national survey by the FDIC.

“Your actions to ‘choke off’ short-term lenders by changing the structure of the financial system are outside your federal mandate,” the letter noted.

The 31 members of Congress said the federal agencies should “promptly suspend any activities” that would shutdown legal online lenders.

One of the tactics used in New York earlier this month and in other efforts to shutdown online lending companies has been to issue cease and desist orders to banks and payment processors who legally handle online lenders money transfers to consumers.

After one such payment processor refused to handle online loan money transfers last week, 300 people who work for an online lending company in Tennessee were fired and the online lender shut down.

Brandon said that the income from Indian-owned online lending companies to the tribes, which function as sovereign nations within the U.S., can ill-afford to lose for schools, health care and housing on economically depressed Indian lands. Indian communities have already suffered losses of $552.7 million so far from sequestration of the federal budget, cuts which occurred despite assurances from the Obama Administration that guaranteed federal support for essential services to the tribes granted in treaties and agreements would be exempt from sequestration.

Other low-income Americans have also felt sequestration cuts in health care funding, support for public schools, public services, and civilian jobs in the military. Studies indicate that most people who resort to online loans use them for large medical expenses, emergency car repairs, and essentials like rent and food during periods of unemployment. Online lenders charge higher interest and penalties than conventional bank loans and credit cards for which most poor borrowers are ineligible. Online lenders are subject to state and federal regulation.

In recent years there have been prosecutions and convictions for fraudulent online lending practices, some involving companies that charged consumers what amounted to 300 to 1,000 percent interest when they did not pay back their short-term loans on time.

The letter from the 31 members of Congress notes that “as with any industry, there are bad actors in online and non-depository lending. We support efforts to protect consumers with disclosure rules… by giving them full information.”

Such disclosure by banks and other mortgage lenders surely would have saved millions of Americans from losing their over-mortgaged homes and spared them billions in losses of property and foreclosure costs. Why, in 2013, when almost no bankers and mortgage company officials, including federal directors of government lending companies, have been prosecuted or even penalized for their billions of dollars in mortgage frauds, are much smaller online lenders being attacked?

Agencies of federal government, despite their denials, and the former federal prosecutor Benjamin Lawsky, the new czar of NY’s Department of Financial Services, continue to ruthlessly attempt to shut down lenders of last resort to the poorest Americans.

Wednesday (Aug. 20), the Native American Financial Services Administration (NAFSA) sued the state of New York in federal district court demanding that the state stop trying to shut down tribe-owned online lending companies. New York’s attack on 35 online lenders, including at least 16 tribal lending companies, was filed Aug. 6 by Lawsky. The state has not filed a response to the lawsuit.

Also on Wednesday, Deputy Assistant Attorney General Maame Ewusi-Mensah Frimpong told eight tribal leaders that the Department of Justice’s Financial Fraud Task Force’s recent financial regulatory actions were “not directed at tribal entities short-term lending businesses.”

John Shotton, chairman of the Otoe-Missouria Tribe and chairman of NAFSA, said he hoped the feds were not targeting online lending operated by the tribes. The key legal precedent governing tribe-owned businesses, including online lenders, is sovereign immunity, which recognizes the tribes as sovereign nations within the U.S. with complete control over their lands, businesses, laws and governance. Sovereign immunity was guaranteed in numerous treaties with the U.S. government in exchange for the surrender of vast tracts of Indian land and natural resources and has repeatedly been upheld in the Supreme Court and in numerous states.

The letter from Congress members cited other legal constraints that prohibit unauthorized federal attacks on online lenders including the Dodd-Frank Act, which they noted “acknowledged the need for short-term credit products and did not try to limit online lenders or storefront operators’ ability to offer such products.”

They said neither Dodd-Frank, nor any other law has given the Department of Justice of any other federal agency the authority to “take away the very air” that online lenders “need to survive.”

Earlier Shotton disclosed that the DOJ has invited the tribal representatives to be part of the new DOJ Consumer Protection Working Group. Shotton added, “Tribal governments share your dedication to protecting consumers by offering responsible financial services products and services.”

It appears that at least the 31 members of Congress who sent the letter to Frimpong’s boss, Attorney General Holder, were not convinced that the matter is resolved. Their letter demanded that the crackdown on online lenders stop immediately. Signers of the letter to Holder and Gruenberg include: U.S. Reps. Blaine Luetkemeyer, R – Mo., Kevin Yoder, R – Kan., Pete Sessions, R – Texas, Patrick McHenry, R – N.C., Spencer Bachus, R – Ala., Steve Stivers, R – Ohio, Scott Garrett, R – N.J., Tom Cotton, R – Ark., David Schweikert, R – Az., Lynn Westmoreland, R – Ga., Michael Grimm, R – N.Y., James B. Renacci, R – Ohio, Kenny Marchant, R – Texas, Mick Mulvaney, R – S.C., Ann Wagner, R – Mo., Andy Barr, R – Ky., Tom Graves, R _ Ga., and Trey Radel, R- Fla.

Jane Daugherty, former associate professor of journalism at Florida International University, is a doctoral candidate at the University of Miami School of Communication. An investigative reporter and editor for 25 years, she is a four-time winner of the Robert F. Kennedy Journalism Award for coverage of the disadvantaged and was named a Pulitzer Prize finalist in commentary in 1994. Her great-great-grandmother was a member of the Creek nation who fled Indian removal.