Another bank is exiting the payday lending business under pressure from the Federal Deposit Insurance Corp.
First Bank of Delaware said late Tuesday that it would close its operation, which made payday loans in several states through third parties such as Dollar Financial Corp. of Berwyn, Pa., and Ace Cash Express Inc. of Irving, Tex.
Alonzo Primus, an executive vice president at First Bank, did not return a call for comment, but the bank said that changes to its payday-lending model "could have a material adverse effect" on its earnings. Roughly three-fourths of the $73 million-asset Wilmington bank's 2005 profits came from payday lending.
The FDIC advised First Bank to stop making the loans until it could correct problems with its business model. (Neither the bank nor the FDIC would specify those problems.) First Bank said it plans to wind down its payday lending over the next several weeks.
Three months ago County Bank of Delaware in Rehoboth Beach exited the business after the FDIC slapped it with a cease-and-desist order.
An FDIC spokesman would not provide any details about the action it took against First Bank, but he did say the agency views payday lending as a "high-risk business."
"Our standards for banks operating in this business are necessarily extremely high," the spokesman said.
The FDIC is the only federal regulator that permits its banks to partner with payday lenders. The Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve Board all clamped down on the practice after consumer advocates complained banks were "renting" their charters to payday lenders, thus allowing them to circumvent state limits on the interest they could charge.
In March, though, the FDIC tightened its regulations and implemented a rule that limited the number of payday loans a borrower could obtain annually to six.
About the same time, the FDIC issued a cease-and-desist order citing County Bank for a series of sloppy practices in its payday-lending operation.
Initially, the $328 million-asset County Bank said it hoped to reenter the business after fixing the problems the FDIC flagged, but in November president and chief executive officer Harold L. Slatcher announced that the bank was no longer making payday loans.
Its decision left only about eight banks, including First Bank, still making payday loans. Five of those are in South Dakota, according to Jean-Ann Fox, the director of consumer protection with the Consumer Federation of America in Washington.
First Bank is holding out hope that it could reenter the payday-lending business at some point. In its news release Tuesday, it said it plans to meet with regulators to discuss the issue and how the bank intends to address the concerns.
First Bank said the regulations the FDIC implemented in March had already started to affect its earnings. Last month it reported that its full-year net income fell 17% from a year earlier, to $2.8 million, because of a sharp decline in its payday loan volume.
Until it was spun off last year, First Bank was a subsidiary of Republic First Bancorp in Philadelphia. In 2003 Republic First pulled itself out of the Federal Reserve System so that it could continue making payday loans through First Bank.
Ultimately, the company chose to sell First Bank because its involvement in payday lending was affecting the value of Republic First's flagship subsidiary, the $851 million-asset Republic First Bank in Philadelphia.
Payday loans are short-term credits - usually for between $200 and $500 - that typically carry high rates of interest. Borrowers write a check postdated until after their next payday for the loan amount plus a fee, which can run anywhere from $15 to $100.
Because the money involved is so small and the durations so short, the interest on the loans can near 1,000% when calculated on an annual basis, according to Peter Skillern, the executive director of the Community Reinvestment Association of America in Durham, N.C.
Mr. Skillern, who led a group of picketers outside a First Bank branch last year, said the FDIC's attitude toward payday lending has evolved over time, moving closer and closer to the positions taken by other regulators.
"My feeling about that is, thank God," he said Wednesday. "I think the FDIC was slowly convinced that this is a model that cannot be done responsibly."
Mr. Skillern predicted that the few banks still involved in payday lending would leave the business over the next few years, but he also said that payday lenders are already experimenting with new products.
"We've won a battle, but we have not won the war," he said.
