U.S. Acts on Payday Loan Abuse

In their first enforcement action involving the controversial payday loan business, federal regulators said Thursday that they have ordered a Pennsylvania bank to sever its ties with Dollar Financial Group Inc. and cease making short-term loans against borrowers’ paychecks.

Eagle National Bank of Upper Darby, Pa., is one of four small national banks that have teamed with payday lenders such as Dollar to provide such cash advances in a number of states, including California.

These loans are typically for a few hundred dollars and two to four weeks, and carry fees that translate into annual interest rates averaging 470%, the Consumer Federation of America reported in a study in November.

The action by the Office of the Comptroller of the Currency drew applause from the Washington-based CFA, which teamed up with the U.S. Public Interest Research Group on the November report blasting the alliances between banks and payday lenders.

The OCC action “clearly ... recognizes the threat both to vulnerable consumers and to banks’ safety and soundness that these partnerships pose,” said Jean Ann Fox, consumer protection director for the CFA.

The OCC, which regulates national banks, began warning in late 2000 that the payday lenders, which are not subject to federal regulation, were using these alliances with national banks to skirt local and state consumer-protection laws.

The payday lenders contended the banks’ federal charters allowed them to disregard local and state laws when making their loans.

The OCC’s insistence that Eagle sever ties with Dollar could have far-reaching implications for the booming payday loan industry and for its lenders, who say they are needed because banks won’t make small unsecured loans to low-income customers.

Funding from banks, many of them state-chartered, “has become an important source for us,” said a spokeswoman for the Consumer Financial Services Assn., a trade group for payday lenders.

The spokeswoman said Berwyn, Pa.-based Dollar Financial, the nation’s second-largest payday lender, isn’t a member of CFSA, “but obviously anything the OCC does is of great importance to us” because it sets a precedent.

The payday loan industry estimates up to 10 million households paid $2.4 billion in fees for payday loans last year.

In announcing its action Thursday, OCC examiners said Eagle, which funded $400 million of these short-term loans last year in 40 states, had jeopardized its “financial viability” by focusing almost entirely on that one line of business. Regulators said Eagle failed to monitor how Dollar handled a long list of duties while handing out the bank’s funds, including quality assurance and audit programs.

“The bank essentially rented out its national bank charter to a payday lender in order to facilitate that non-bank entity’s evasion of the requirements of state law,” Comptroller of the Currency John D. Hawke Jr. said in a statement.

Eagle, which admitted no wrongdoing, agreed to adopt within 30 days a plan to discontinue its payday lending by June 15. The bank currently has about $8 million in payday loans on its books.

Hawke said the OCC has conducted examinations of the other three national banks affiliated with payday lenders, but wouldn’t disclose what was found or what actions were planned against the other banks.

The industry estimates there are 10,000 offices of check-cashing firms across the nation where payday loans are made, with the seven largest firms accounting for less than 20% of the stores.

The largest of these companies, Ace Cash Express Inc., had 1,163 stores as of June. Ace has a funding partnership with Goleta National Bank near Santa Barbara.

Executives of Goleta and its parent company, Community West Bancshares, didn’t return calls seeking comment Thursday afternoon.

Calls to Eagle and to Dollar Financial also went unreturned.