Losing the ability to offer loans against tax refunds has caused tax preparation giant Jackson Hewitt to seek bankruptcy protection. Photo Credit: kenteegardin/Flickr/CC-BY-SA

Tax preparer Jackson Hewitt recently filed for Chapter 11 protection for a short bankruptcy. Hewitt and other tax preparation firms were dealt a heavy blow when changing regulations made it impossible for tax firms to secure funding for tax refund loans. Refund anticipation loans are often vilified alongside payday loans as preying on the poor.

Rule change sends tax preparation industry into tailspin

In 2010, a rule was changed that has severely hampered tax preparation firms, especially those that made much of their money from offering short term loans against tax refunds, or refund anticipation loans. The Internal Revenue Service informed preparers that they will no longer be able to see whether a person is receiving their entire refund, according to USA Today. That caused  funding partnerships to dry up. H&R Block dropped refund anticipation loans altogether before the 2011 tax season. Jackson-Hewitt became the largest entity offering them. Because of the IRS rule, bank regulators consider the loans too risky and therefore look dimly upon companies that still lend them, according to Reuters. Because of that, Hewitt has not been able to secure further financing on its debt and has filed for Chapter 11 protection.

Quick bankruptcy

Hewitt maintains it will be in bankruptcy protection only for a few months, in order to restructure itself and begin repaying its debts. The company got in trouble with its lenders because Hewitt relied heavily on refund loans and needed financial backing to fund the loans and got heavily in debt. However, the company intends to come out of bankruptcy and no longer rely on tax refund loans. The last major organization funding the refund loans, Republic Bank and Trust, is currently in the midst of a battle with the Federal Deposit Insurance Corporation. Republic, according to BusinessFirst, is being fined $2 million by the FDIC for continuing to fund the loans despite warnings to stop doing so. Republic maintains that because it made a record profit during the first quarter of the year while funding the loans, the loans can be lent responsibly.

Credit product disappearing

The refund anticipation loan, or RAL, is going extinct. Consumer groups liken them to payday loans; a person who has their tax returns prepared and is getting a refund is offered a portion of the funds immediately by the preparer. The refund is turned over to the preparer, with the difference being the “fee” for the lender. For instance, a person receiving a $600 refund is offered an RAL of $530 by a preparer, and the customer gets the cash within a few days rather than waiting weeks for a check from the IRS. If the return is accepted, the customer gets the RAL and the preparer gets the refund once the IRS disburses it. The FDIC objects to banks funding RALs because no credit check can effectively be performed before disbursing the loan to the customer.

Sources

USA Today

Reuters

BusinessFirst

The Government Accountability Office says banks can't effectively offer small-dollar loans. (Photo Credit: CC BY-ND/DRScoundrels)

There is a “tremendous demand” for unsecured personal loans in the U.S., says FDIC Chairwoman Sheila Bair. This means small-dollar loans are attractive to consumers and to mainstream financial institutions like banks and credit unions. Banks have tried to get in on the same day loans origination action – but not without complications, says a Government Accountability Office report.

Payday loan alternatives – and the banks that can’t deliver them

Due to more stringent terms and fee structures, payday loan alternatives offered by most banks and credit unions are a completely different animal than personal loans from a small lending outlet. The GAO suggest that the Dodd-Frank Act and other FDIC changes in recent months may increase traditional financial institutions’ willingness to offer same day loans, but the results may not be what banks expect:

“Recent statutory and regulatory changes and FDIC initiatives may encourage more institutions to offer small-dollar loan alternatives to payday loans or expand their availability, but many consumers may still chose to use payday loans for their wide availability and relative lack of eligibility,” says the GAO report.

A two-year FDIC pilot program illustrated that without the involvement of charitable organizations or government subsidies, banks and credit unions have been unable to popularize payday loan alternatives. Extensive underwriting requirements also tended to exclude the customer base that most wanted access to personal loans.

Same day loans will not exclude you from a government job

The notion that taking out same day loans is harmful to one’s financial reputation is disproved in the Government Accountability Office report. Federal agencies like the Department of Homeland Security, Transportation Security Administration and even the Federal Bureau of Investigations put applicants through an intense employment screening process that includes a thorough financial history. Credit reports are run and other financial evaluation tools are used.

According to the GAO, screening agencies stressed that whether or not applicants to high security clearance positions had used short term loans was not a determining factor in the hiring process. The presence of risky patterns of financial behavior is important, however, which underscores the important of financial responsibility – for government employees and consumers in general. If banks and credit unions could ever free themselves from the policy maze and judge same day loan applicants over a more broad range of financial responsibility, perhaps the institutions could sell personal loans directly to consumers.

Sources

Community Financial Services Association of America

Government Accountability Office

Don’t live beyond your means, even with payday loans

Tax preparation giant H&R Block has lost significant ground since the tax preparation service cannot offer a cash advance against tax refunds this year. Image from Wikimedia Commons.

The loss of the ability to offer a cash advance against tax refunds has caused revenues to fall for tax preparation giant H&R Block. The latest earnings reports for the company indicate that revenues so far are less than expected this tax season. Earlier this year, the company was forced to abandon refund anticipation loans when a key partner was sued by the FDIC.

Tax season off to a slower than normal start

A decline in people paying to have their tax returns prepared has led to a decline in revenues for tax preparation giant H&R Block, according to CNBC. Block expects  January earnings will come close to breaking even, but activity began to pick up in mid-February. From Jan. 1 to Feb. 15, online returns prepared through H&R Block increased by almost 28 percent, though total digital tax returns only registered a 7.3 percent increase since the start of the year. Preparation fees for H&R Block have declined by 7.6 percent since the start of the year, and part of the loss is because the company is no longer offering the popular refund anticipation loan, a cash advance against an income tax refund.

Blocked from lending by suit against key partner

Short term loans against tax refunds are similar to payday loans, in that a customer is advanced cash immediately instead of having to wait for their tax refund. The refund is signed over to Block, and borrowers receive less than the total refund because fees are deducted. In December of 2010, H&R Block announced that the company would not be offering refund anticipation loans, a very popular product among lower and mid-income customers. A key partner in the financing of the loans, HSBC, was enjoined by the Federal Deposit Insurance Corporation from lending refund loans. Nearly 17 percent of Block customers took out a refund anticipation loan in 2010.

FDIC countersued by refund loan lender

A prominent tax refund lender has sued the Federal Deposit Insurance Corporation for interfering in the tax refund loan business, according to Business Week. Republic Bank and Trust, a bank based in Kentucky, is suing the FDIC and claims the agency overstepped its boundaries by labeling the loan products “unsafe and unsound” when the FDIC ordered Republic to stop lending the loans last month. Republic lent more than $3 billion in refund loans last year to almost 836,000 people. The bank observed a default rate of only 2.13 percent. The suit alleges that the FDIC is trying to coerce loan lenders into dropping a product that government officials don’t like, even though the product is popular.

Sources

CNBC

Business Week

Large banks may soon pay more into the FDIC deposit insurance fund – and small banks may pay less. (Photo Credit: CC BY-SA/MBisanz/Wikipedia)

Big banks are going to have to wait before doling out annual bonuses, reports the Associated Press. In order to minimize risky transactions that could damage the United States’ ongoing economic recovery, the Federal Deposit Insurance Corp. voted Monday on a rule that would require half of bankers’ bonuses to be postponed by at least three years. The rule would apply to financial institutions with $50 billion or more in assets.

Big banks to pay bigger insurance fees

In addition to the proposed banker bonuses provision, a clause within the Dodd-Frank Act will require the same large U.S. financial institutions to contribute more in insurance costs to the FDIC in order to protect bank deposits nationwide. Those banks that hold the most in assets – rather than deposits – minus tangible equity will contribute more to the deposit insurance fund. In general, those institutions that pose the greatest risk to the U.S. financial system due to high-risk assets and less stable liquidity will be charged more.

Startlingly, the insurance fund has run in the red for some time, going as low as $15.2 billion in the hole during the height of bank closures and bailouts. On the bright side, by the end of the third quarter 2010, the deficit had been cut nearly in half to $8 billion.

Smaller banks will pay less

According to small bank trade group the Independent Community Bankers of America, 98 percent of banks that possess less than $10 billion in assets will pay less money into the insurance fund, thanks to various rule changes. The ICBA says this will save smaller U.S. banks $4.5 billion over the next three years.

“ICBA led the charge throughout the Wall Street reform debate to create fairness within the deposit insurance system so that Main Street community banks can continue to serve their customers and keep money where it belongs — in the community,” said chairman James MacPhee.

The need to improve

With the assistance of greater deposit insurance contributions, Bair believes that the FDIC will be able to bring the fund back to a positive balance. Once that happens, banks should be able to depend upon more predictable rates for unsecured loans.

“The financial crisis provided ample evidence of the need to improve the assessment system,” said Bair. “The banking industry, the Deposit Insurance Fund and the financial system will benefit from this rule in both the short and long term.”

Sources

Associated Press

Housing Wire

Imagine all the bankers living for less pay

Higher down payments on mortgage loans are one of many reforms experts say the federal government continues to avoid. Image: Thinkstock

Weak lending standards created the housing bubble; that led to the the housing crisis, which in turn led to the foreclosure epidemic. But experts, including the chairman of the Federal Deposit Insurance Corporation (FDIC), are saying the federal government has yet to learn the lesson. An amendment calling for adequate down payments for mortgages was defeated during the financial reform debate. Federal housing agencies project a return to subprime lending. And the crisis is being perpetuated by the Federal Reserve, with policies that prevent a natural correction that is the ultimate solution to the problem.

Skin in the game vs. loan performance

Federal regulators should tighten lending rules for home mortgages in the U.S., according to Sheila Bair, chairman of the FDIC. Bair told CNBC that a new set of “common sense” rules need to be written ensuring the borrower has the capacity to repay a mortgage loan and makes a larger down payment than is currently required. She said there was a strong correlation between “skin in the game” and loan performance. The more money down a borrower is required to pay, the less likely they will be to walk away from the house. Going forward from the housing crisis, Bair said lending standards need to call for strict income documentation, higher ability to repay standards and more skin in the game.

Subprime lending redux

Weak lending standards brought down the economy, but the federal government still doesn’t get it, according to Edward Pinto at Bloomberg. Pinto writes that the Dodd-Frank bill signed into law last July makes it clear that Congress and the Obama administration don’t intend to fix broken underwriting. An amendment to the financial reform bill that would have added a minimum down-payment requirement as well as consideration of credit history, along with definition of a “prudent underwriting” standard, was defeated. Plus, in early September, the Federal Housing Finance Agency finalized affordable housing mandates that focus nearly exclusively on low income borrowers with low credit scores — subprime lending redux. Pinto said the new policies are riskier than those resulting in the Fannie Mae and Freddie Mac taxpayer bailout.

Ignoring problems won’t make them go away

The current government response to the housing crisis will extend today’s problems into the future, according to Bill Bonner at the Christian Science Monitor. Bonner writes that the government continues to extend credit and cash to those who don’t deserve it and pretends there is no more problem. The U.S. financial system is holding hundreds of billions in mortgage debt that won’t be repaid. So the Federal Reserve bought up the bad mortgage debt and called it an “asset.” Bonner said the real solution is the market correction the government is trying to avoid. The government finances more mistakes, keeps paying for the old mistakes and pretends that everything will be fine–until it finally runs out of money.

The FDIC small dollar loan program was conceived to determine if banks could make a profit competing with payday loan companies. Flickr photo.

A pilot program designed for banks to provide alternatives to payday loans has been developed by the Federal Deposit Insurance Corporation (FDIC). The FDIC issued a report June 24 about the final results of the small dollar loan pilot program launched in 2008. The program was deemed a success. However, the number of loans made in two years was relatively small and the parameters for lending were more restrictive than payday loan programs.

FDIC payday loan alternatives

In a press release, the FDIC called the payday loan alternative program a “Safe, affordable and feasible template for small dollar loans.” Participating banks made more than 34,400 small-dollar loans, with default rates in line with default rates for similar types of unsecured loans. Parameters included a loan amount of $2,500 or less for terms of 90 days or more. The annual percentage rate (APR) was 36 percent or less. Fees were “low.” Underwriting required proof of identity, address and income, plus a credit report that determined how much could be loaned. “Optional features” included mandatory savings or checking accounts and “financial education.” After these requirements were met, applicants would learn whether they could get their money in 24 hours.

FDIC payday loan Trojan Horse?

It could be argued that the FDIC small dollar loan pilot program’s main objective wasn’t to offer consumers more affordable alternatives to payday loans. Rather, the program was an experiment to find out how banks could make a profitable incursion into the payday loan market. According to the FDIC, banks in the pilot program saw it as a “strategy for developing or retaining long-term relationships with consumers.” This could explain the requirements to open accounts with the bank and financial education.

FDIC pilot vs. payday loans

There may have been some aspects of the FDIC’s small dollar loan pilot program not mentioned in the release. Bloggernews.net reports that some loans made by banks in the pilot required direct deposits, collateral or origination fees — none of which are required for a payday loan. While more than 30,000 loans were made by 28 banks in two years, pay day lenders make about 100 million loans annually with 93 percent of all loans paid back on time. The bloggernews.net article also said that the participating banks came on board to offer these loans because they’d receive “favorable consideration under the Community Reinvestment Act.”

(Image from Wikimedia.org)

Every citizen who pays taxes in the United States should be familiar with the letters F-D-I-C (Federal Deposit Insurance Corporation). It’s not uncommon to see these big bold letters on check stubs and various other types of documents, especially when you’re borrowing money.

What has the FDIC been up to lately

The FDIC is an independent agency of the federal government that oversees quite a few critical aspects in banking, including making certain that banks are in compliance with various consumer protection laws. The Fair Credit Billing Act, the Truth-in-Lending Act and the Fair Debt Collection Practices Act are just three Acts designed to oversee activities being conducted by banks.

A survey conducted by the FDIC back in December 2009 revealed that a staggering 17 million citizens of the United States are without bank accounts, while another 43 million are considered to be “under banked” citizens. Those considered under banked citizens have bank accounts, but they rely heavily upon the financial services of payday loan companies for borrowing money.

In February 2008, they initiated a pilot program called the Small-Dollar Loan Pilot Program that was designed to encourage financial institutions like banks to offer low interest rate loans (36% or less) in excess of $1,000. In the first year of the program there were 16,000 loans awarded to consumers from 31 banks that participated in the program for a total of over $18 million in loans.

How this helps you as a borrower

For beginners, you have one of the largest government agencies in the United States (FDIC) making it possible for low-income personnel to acquire loans. Many of these loans fall under the title of low income personal loans. These are loans that consumers may have no idea it’s made available to them. Borrowing money is a privilege, which consumers should take advantage, of but it’s of no help to you if you’re not familiar with the various types of loans out there for you.

Senator. Chris Dodd (Photo: Wikipedia.org)

The people of American are looking for debt relief any way they can find it these days, and it appears that the only way true gains in this area are going to be made is if major restructuring of America’s financial regulatory agencies occurs. Along those lines, controversial Connecticut Sen. Chris Dodd (who some consider to have turned a blind eye to the financial shenanigans that greased the way for the mortgage industry collapse) is hard at work. He wants to push through a new financial reform plan that would completely change the way the government would control banking oversight and debt relief.

Obama Praised Dodd’s Consumer Protection Agency Work

It appeared that Dodd was preparing to take banking regulation and debt relief in an exciting new direction much in tune with the president’s plans. However, recent signs indicate that Dodd’s plan will be significantly different that what was previously expected by the current administration. Specifically, Dodd wants nearly all bank-supervising powers to be removed from the Federal Reserve and FDIC (where they currently reside). An entirely new agency would pick up the reins. They would be responsible for all national finance institutions as sole regulator and guide toward debt relief on both the institutional and consumer level. It would replace the four federal regulatory agencies that exist.

Enter the Watchdog

Watching out for potential risks to the country’s banking and finance industries would become the responsibility of a new kind of watchdog council that would be a chaired by a single White House official. What this would accomplish is to take the teeth out of the Fed’s ability to conceive of consumer protection and debt relief measures on its own. America’s 12 Federal Reserve Banks would also potentially be in jeopardy or closing, according to the Wall Street Journal.

And guess what? In a time when President Obama constantly extols the virtues of bipartisan support, Senator Dodd’s actions could be seen as somewhat extreme. That’s because Dodd is going after his version of the finance reform/debt relief bill on his own. Sheila Bair of the FDIC is against Dodd’s ideas, and the Journal predicts that Senate Republicans will be as well.

The Frank-Man Commeth

Rep. Barney Frank (Photo: Wikipedia.org)

Rep. Barney Frank and the House Financial Services Committee is currently working on its own debt relief and regulation program. According to the Washington Post, Frank’s bill would take a much more conservative approach to regulatory reform. It would get rid of just the Office of Thrift Supervision. At the same time, rather than stripping the Fed of power, it would give them even more power to step in and control the actions of America’s banks.

Consumer Debt Relief Appears to Be Covered

That’s where the Consumer Financial Protection Agency the House has already concocted comes in. Mortgages, credit cards and various consumer loans will fall under that agency’s jurisdiction. Dodd and Frank are battling for a solution to the problems in the banking industry as a whole. Frank estimates the House will vote on his plan by the end of 2009, but Dodd is attempting to push his plan through even sooner than that, perhaps as early as next week if the Washington Post‘s sources are accurate. Get ready for some major debt relief debate, America.

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Bank closings are slowing, despite the fact that more banks are in trouble than ever. The FDIC hopes to instill consumers with confidence. (Photo: flickr.com)

According to the FDIC and other sources, the number of bank failures now exceeds 100. The latest closures included four small- and medium-sized banks in Florida and Georgia: Partners Bank and Hillcrest Bank, both of Naples, FL; Flagship National Bank, Bradenton, FL; and American United Bank, Lawrenceville, GA. When banks fail, the federal government, in the form of the FDIC, steps in to protect the consumer. They do this usually on a Friday afternoon, seizing bank assets to pay for outstanding liabilities. The chief of these are the customers’ deposits. Whatever the assets can’t cover, FDIC insurance does.

When Trouble isn’t Trouble

The highest number of banks ever seized in one year was 120 in 1992. There are currently 416 banks “flagged” by the FDIC as being in trouble as of June 2009. This is up sharply from 305 on the list in March of this year. However, the pace of bank closings is actually slowing down. The FDIC seized 24 banks in July, 11 in September, and eight in October, which has only one week left as of this writing. This seems contradictory on the surface. The number of banks in trouble is going up, but the pace of closings is slowing. How can this be?

It’s All Relative

This is an excellent example and proof that money is really just a concept and not a concrete noun. Most of us think of money as the crisp dollar bills that we get in our paychecks and then put in the bank. But money is really a much more fluid and relative concept. To illustrate, look at the criteria for bank closings. You would think that there is an accounting formula or other federal regulation that determines what constitutes “trouble” in the banking industry. After all, the banking industry is one of the most regulated industries in existence. However, the banks that were recently closed are no more or less in trouble than the other 400 or so banks on the list. Further, if we were not in a serious recession, normal criteria would place the number of banks in “trouble” in the thousands. The definition of trouble changes with the times. What is trouble in normal times becomes acceptable in tough times. So if concrete numbers aren’t determining who survives and who closes, what is making the determination?

Just Act Like We’re All Okay

The key determining factor, according to the FDIC, is consumer confidence in the banking industry. In other words, how the American people think and feel about banks determines whether or not they stay open. Remember at the beginning of this article the number one concern when a bank was seized was protecting consumer deposits. That is true, but not for the reason that most of us would have assumed. Deposits are not protected for the actual dollars in the accounts, but for how secure the owners of the accounts feel about the industry as a whole and how likely they are to re-deposit their funds in another bank. The force keeping the banking industry afloat is not money, but the relative and fluid concept of confidence. How deep does that confidence need to be? Who really knows? Maybe, that is why the FDIC won’t say how deep their insurance reserves are.

What's a government small dollar loan worth? Nothing more than eagle food, apparently… (Photo: wikipedia.org)

The payday loan industry continues to fulfill the needs of consumers, particularly during the tight times of the recession. On volume, payday lenders are able to make profits that allow them to continue to operate in the majority of states. Thus, the relationship between consumers and payday loan businesses is mutually beneficial.

Now the Government in On the Deal

Did you know the FDIC recently rolled out a Small-Dollar Loan Pilot Program? They’re currently in the middle of a two-year run where they’re studying how traditional banks can offer payday loans at a profit. They’re doing this ostensibly to create an alternative to what payday loan companies offer – and as an alternative to overdraft protection, they claim – but it doesn’t appear they have a strong concept of the difference between black and red ink.

But Profitability is not the “Primary Goal”

Yes, because FDIC and associated banks are such benevolent organizations. Their hearts bleed for consumers, so much so that they use their tax dollars to loan to others without the goal of profitability! According to the Payday Loan Industry Blog, the FDIC Small-Dollar Loan Pilot Program is designed to foster long-term relationships in the communities in which its affiliate banks operate. All because they want to get good marks from those in charge of the Community Reinvestment Act. That means ACORN will be involved, folks. Do we really want to give THEM more of our tax dollars? For all the good they do, their mismanagement and ties to the subprime mortgage mess make them a questionable recipient of our money.

Banks Look Out for Their Interests

Since the bank stands to make so much more with their overdraft programs and there’s no profit to be had with the FDIC’s small loan program as it’s currently configured (more on that in a moment), how long do you think this “community outreach” effort will continue. Not long, I’d wager.

Here are the program features the FDIC has instructed banks to trumpet:

• Consumers may borrow up to $1,000
• Consumers can repay beyond one paycheck cycle
• APRs below 36 percent (we know this isn’t profitable)
• Origination fees that are low or non-existent
• Efficient underwriting
• Applications are processed quickly
• Consumer must have a savings account at that bank (A-ha! But not all participating banks required this.)
• Customers will have access to financial education (Read: Sales pitch for overdraft protection)

Banks Claim They’ll Generate Profit by Volume

Oh really? Is the FDIC going to infuse you with Monopoly money? Because if the small dollar loans operate at a loss, how does that generate profit in the long term? The Payday Loan Industry Blog nails it on the head. By “reaching out” to the community, banks will be appeasing the Center for Responsible Lending (which can easily be traced back or connected to ACORN and the Community Reinvestment Act, by the way). They’ll also have plenty of time to sell consumers over to their more lucrative products like overdraft and NSF fees. Or, if this is a war of attrition, they’ll keep taking a loss until they’ve run their competition – payday loan companies – out of business. Perfectly underhanded capitalism we have there, correct?

What about Overdraft and NSF Fees?

I’m glad you asked. According to Bankrate.com, the national average for NSF penalty fees is $24.46 at banks. A recent study by Moebs Services found that these NSF fees are responsible for 18 percent of banks’ net operating income. That number shoots up to 60 percent for credit unions in Moebs’ study. Take a look at this study by George Mason University’s Executive Director of the Statistical Assessment Service, Donald Rieck. Banks should hate the payday lending industry a great deal.

Customers Prefer the Standard Payday Loan Market

And the FDIC already knows this. Apparently Citizens’ Trust Bank attempted to run a military loans program similar to Small-Dollar Loan Pilot Program in 2008, but they had few applicants and even fewer accepted customers. Reports indicate that the originators of the program felt it was “hampered” by competition (payday loan companies). Citizens’ Trust and their “Community Relief Loan” only drew 574 applications and funded 81 loans (14 percent approval) in the first two months of the program.

Why Only 574 People?

Considering that Citizens’ Trust utilized multiple advertising avenues to promote the program, why were there so few applicants? According to the Payday Loan Industry Blog, it’s because the list of hoops customers had to jump through to actually receive money was prohibitive. From a $48 origination fee, FICO and residency duration requirements to a convoluted system of approval and a requirement (at some branches) that customers have a savings account at that bank, customers had to clear too many hurdles before they could receive funds. With payday loan companies, screening through Teletrack and similar systems is much quicker, while maintaining risk management for the lender.

Payday Lenders Don’t Need Government Subsidies

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While the FDIC is convinced that funneling taxpayer dollars into banks so they can offer small-dollar loans is a good idea, it seems clear that their pricing model is completely out of left field. If banks are looking to eliminate competition via a war of attrition – if what’s best for the consumer has nothing to do with it – then taxpayers should protest what the FDIC is doing with their money.  All the FDIC would truly have to do is interview customers at participating banks to see that payday loans from outside sources are quick and convenient, which is why people come back for more. The more bureaucracy that’s added to the process, the fewer consumers will be willing to get involved. A payday loan is simple; government subsidies (with our money, mind you) and convoluted approvals processes are not.

FDIC borrowing back from banks – coming soon! (Photo: Ryan McFarland)

It would appear that the FDIC is in need of payday loan lenders these days. Maybe they’ll need something even stronger. But here’s a possible scenario that could be in store for the federal organization that has helped insure customer deposits in failed banks: banks will bail out the FDIC.

Scrounging for cash

When you or I need money, payday loan lenders can help. For the FDIC, billions of dollars are necessary to continue to hold the safety net. This recession has been tough, and according to a New York Times story at http://www.msnbc.msn.com/id/32963393/ns/business-the_new_york_times/, senior regulators are considering asking healthy banks for billions. Bankers and their lobbyists are strongly behind the potential deal. It should go without saying that most taxpayers support a plan that doesn’t involve them giving up more money.

Remember when there were people who viewed the bank bailout with clear eyes?

Why do banks like this idea?

They don’t want to have to undergo more Treasury stress tests (they’re very stressful). They also don’t want to have to continue to operate on lines of credit from the Treasury. That’s no way to dig out of financial quicksand.

Why does the FDIC like the idea?

FDIC Chairwoman Sheila Bair doesn’t want to have to ask the Treasury for another line of credit. Apparently, Bair and Treasury Secretary Timothy Geithner aren’t on great terms, so you can imagine how such a thing would go over as well as a meeting between a polecat and a gerbil farm.

Sure, the FDIC does have the right to tap into a credit line of up to $100 billion from the Treasury without permission. That’s guaranteed by current law. But Bair finds the prospect “unpalatable.” Not only is it unpalatable, but Camden Fine of the Independent Community Bankers organization said that “Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help.” Not needing permission wouldn’t mean she wouldn’t have to deal with Geithner.

For the record, the law allowing the FDIC to borrow from the Treasury without permission was put on the books in 1991 during the savings and loan crisis. Banks received government bonds at an interest rate set by the Treasury secretary, and they would be paid by other businesses in the industry.

Why should the American people like this idea?

It keeps the money “in the family,” so to speak. More money from the Treasury would be construed as more taxpayer money going toward bailing out irresponsible institutions. Independent Community Bankers of America Executive VP of Government Relations Karen Thomas agrees that “It is much better for perceptions than having the fund borrow from somewhere else.”

Policy officials see this as a two-step process

By borrowing from healthy banks, the FDIC could very well take care of its short-term liquidity issues and preventing the need for payday loan lenders. For long-term needs, an increased fee imposed on banks to help keep the FDIC stocked with cash is under consideration. Considering that the FDIC has seized 94 failed banks since the beginning of 2009, they have to increase their cash stores considerably. They currently have about $10 billion in a general store and $32 billion set aside for the failures that are predicted over the next few months. However, if one large bank goes down, the FDIC is in trouble.

That means bank customers would be in trouble

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While no consensus has been reached yet on what direction the FDIC will go, expect a decision soon. Calling for banks to prepay their 2010 premiums is another idea, but let’s hope the country is out of the recession spiral by then. If it isn’t, we’ll need more than payday loan lenders to fix our financial problems. We’ll need body armor.