FDIC weighing in on Pentagon loan rules

WASHINGTON (Reuters) - Federal Deposit Insurance Corp. Chairman Sheila Bair was expected to submit recommendations to the Pentagon on Wednesday, the latest step in efforts to draft regulations that will protect military personnel from sky-high loan rates.

"We're working toward that goal," Bair said at the Reuters Regulation Summit in Washington. "There's been a lot of discussion. It's a very collaborative process. I think there's a good chance we bring everyone to the table and get at the problem Congress wanted us to."

An FDIC spokesman confirmed later that a letter to the Pentagon was to be signed by Bair and sent later Wednesday.

Federal lawmakers, concerned that U.S. military personnel were being ripped off by some lenders, last year passed legislation to cap the rates and fees that can be charged for "payday loans": small, short-duration loans that often impose loan-shark rates.

The Pentagon, which must draft the actual regulations, asked the FDIC, the U.S. Treasury Department and other bank regulatory agencies for their input by Wednesday. The public comment period for the proposed rules extends until February 5, the FDIC spokesman said.

Bank lobbyists are worried the law will turn the Department of Defense into another regulator and have scrambled to find ways to limit the scope of the cap.

Bair said its likely that the Pentagon will start by focusing just on payday loans before expanding its purview to other products. The new rules are to be implemented by October 2007.

"There has been a lot of angst in the banking industry. I think the DOD understands those issues, and wants to address it in a way that it is not going to impact mainstream products," said Bair, who was sworn in as chairman in June of last year.

Bair said it may be prudent for the new rules to start on a small scale and with a product that doesn't need to be so expensive.

"In these types of loans, the repayment period so small," Bair said. "The credit risk for this segment of the market is low, so it's a good place to start. We can get banks to initiate pilots for the military, and hopefully we can build it up from there."