A Dumpster-diving excursion in Virginia has led to the breakup of a controversial partnership between a national bank and a payday lender.
The Office of the Comptroller of the Currency said Tuesday that Goleta National Bank in California had agreed to terminate by Dec. 31 its 2-year-old partnership with Ace Cash Express Inc., an Irving, Tex., payday lender. The agreement spared Goleta the danger of disciplinary action; the OCC has made no secret of its displeasure with national banks' "renting" their charters to payday lenders. [See OCC
The pact came about two months after a passerby looking for boxes found 641 customer loan files in a trash bin behind an Ace office in Portsmouth, Va. Comptroller John D. Hawke Jr. said the discarded files, which represented loans carried on Goleta's books, exemplified the dangers banks face when partnering with third-party payday-lenders.
"Ace's inability to safeguard the files of customers whose loans were brokered at Goleta show just how risky those relationships can be," Mr. Hawke said. "If those files had fallen into the wrong hands, the privacy of customers would have been seriously compromised and the bank would have faced significant reputation and legal risks."
Though the OCC insists it is not opposed to banks making payday loans, it has repeatedly moved to quash partnerships between national banks and payday lenders.
OCC spokesman Robert Garsson said the agency objects to letting payday lenders use the national bank charter to make payday loans nationwide. "We've never said payday lending itself is wrong," Mr. Garsson said. "But we do have a major concern with the way a few national banks have essentially rented out their charters to third-party providers who have no interest in the charter except as a way to evade state and local consumer protection laws."
Goleta is not the first bank to get out of payday lending under pressure from the OCC.
- In January the agency ordered Eagle National Bank of Upper Darby, Pa., to do so, saying too much of its portfolio was payday loans.
- In March the OCC filed a notice of charges accusing Peoples National Bank of Paris, Tex., of operating its payday loan business in an unsafe and unsound manner, letting it grow too fast and skimping on oversight. The case is being contested in an administrative law court.
Payday loans are small, short-term loans that borrowers promise to repay from the next paycheck or deposit of funds. The borrower typically writes a check for the principal plus any fees; the payday lender holds the check until the borrower's next payday.The high fees have led consumer activists to call the loans predatory. Frequent renewals often lead the borrowers into repaying more in fees than they owe in principal.
Goleta, a subsidiary of $303 million-asset Community West Bancshares, agreed to leave the business by Dec. 31 and pay a $75,000 fine for engaging in what the OCC said are "unsafe and unsound practices."
In the same pact with the OCC, Ace agreed to indemnify Goleta for any legal action and pay a $250,000 fine. It also said that it would not partner with another national bank without the OCC's permission.
Jeremy T. Rosenblum, a partner at Ballard, Spahr, Andrews, & Ingersoll LLP in Philadelphia, said Ace chose not to contest the matter so that it could move on with its business. That includes defending itself in lawsuits in several states alleging that Ace is using the Goleta name to get around consumer protection laws, including state usury laws. Ballard Spahr is representing Ace in those cases.
Ace operates 1,190 stores in 35 states and the District of Columbia. It has offered short-term loans made by Goleta since May 2000. By partnering with Goleta, Ace could lend all over the country at rates allowed in California, which has no interest rate cap. Without a national bank partner the company would have had to abide by the laws of the individual states.
Last year Community West said its payday loans had annual interest rates averaging 338%. It also reported that its interest income increased by $4 million in the year, mostly because of short-term consumer loans.
Lynda Nahra, Goleta's president and chief executive officer, said it had considered winding down its relationship with Ace for about a year but needed time to get all the pieces in place. In particular, she said, protection from legal liability in outstanding lawsuits was important. "The regulatory and legal overhang on this product were just too high a risk for us," she said.
Though getting out of the business will have some effect on earnings, Goleta has worked to hedge the effect, Ms. Nahra said.
