California Thrift's Woes Show Challenges Competing with Payday Lenders

One PacificCoast Bank in Oakland, Calif., is regrouping as it looks to battle payday lenders in the San Francisco Bay area.

The $282 million-asset thrift recently pulled the plug on its One Pac Pal loan, which it tailored to offer low-income clients short-term credit at reasonable rates and terms. The program, which began 18 months earlier, lost too much money, says Kat Taylor, One PacificCoast's chief executive.

"We have not yet found an economically sustainable product that's sufficient to save enough people" from payday lenders, she says.

Still, Taylor vows to revisit the issue. Payday lending is "a death trap that ruins individuals, households and whole communities," Taylor says. It is "the scourge of our time."

One PacificCoast's failed initiative highlights the difficulties that community banks face as they attempt to supplant payday lenders and online credit providers. While short-term lending has a lot of potential for smaller banks, it is a difficult business to enter, says Robert Giltner, chief executive of R.C. Giltner Services, a consulting firm in Simpsonville, Ky.

Loans must be profitable for the bank, but also "squeaky clean from a compliance perspective," Giltner says. Banks also need to end their reliance on credit scores for such loans, while also making credit available online. "It's hard for the community and regional banks to put these skills and capabilities together by themselves quickly," he says.

So the market for short-term liquidity is dominated by payday lenders, such as Advance America of Spartanburg, S.C., and big banks like Wells Fargo (WFC) and U.S. Bancorp (USB) that offer deposit-advance loans. Consumers who use these products often end up buried under mounting debt, says Liana Molina, a payday campaign organizer with San Francisco advocacy group California Reinvestment Coalition.

Several groups want to curtail the practice. On Thursday, Robert Johnson, the founder of Black Entertainment Television and Urban Trust Bank in Lake Mary, Fla., launched a campaign to convince minority groups, elected officials, and public interest groups to back a proposal to end payday lending.

Last fall, the Office of the Comptroller of the Currency flagged the $589 million-asset Urban Trust for offering prepaid debit cards that provided a platform for payday lenders. The bank agreed to analyze its program and adopt a business plan that covers the next three years.

The OCC, Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau have also indicated that they could place limits on deposit-advance loans.

One PacificCoast developed its One Pac Pal loan based on an FDIC short-term loan pilot project. The limits included a $1,000 lending cap, a 90-day term minimum and a 36% annual percentage rate cap. The thrift recruited companies to offer the loans to employees.

The FDIC ended its small-dollar loan pilot in 2009, issuing roughly 34,400 loans with a principal balance of $40.2 million. The FDIC would not make anyone available to discuss the program, though the agency issued a report at the project's conclusion.

"The FDIC found that, with their guidelines, it was feasible to provide the loans, but not as profitable as folks would like," Molina says.