The Office of the Comptroller of the Currency has denied an application by CompuCredit Corp. to buy a bank, saying it is too risky and that its management lacks the proper experience.
The Atlanta subprime credit card marketer applied in February to buy Axsys National Bank from Federated Department Stores Inc. so that it could issue its own cards - this time in the prime sector. Since CompuCredit does not own a bank, it currently sells cards that are issued on its behalf by Synovus Financial Corp.
But the OCC has already taken its knocks for failing to foresee and avert the implosion of NextCard Inc., the online card lender that did own a bank and intended to sell prime cards, but wound up with a subprime portfolio that forced it to close. The regulator's skittish attitude toward the subprime card sector - and toward letting people run a bank who have never done so before - was apparent in the CompuCredit decision, observers said.
While a CompuCredit executive said it had expected that the OCC would turn down its request because of the subprime nature of its business, lawyers familiar with the regulator's practices said the move was unusual.
The OCC normally tells the applicant ahead of time when a request is not "approvable" and recommends that the application be withdrawn before it is denied, said Gary Lax, a partner in the law firm Jenken & Gilchrist, who previously worked for the OCC.
Rick Gilbert, CompuCredit's chief operating officer, said that it was not given the chance to withdraw the application but added that it had fully expected the thumbs-down.
Regulators "do not like any business that they deem to be subprime," he said. "It wasn't a surprise, and it doesn't adversely affect our business."
CompuCredit had proposed to issue prime cards through Axsys, and it had always intended to maintain its arrangement with Synovus' Columbus Bank and Trust, regardless of whether it had been allowed to buy the bank, Mr. Gilbert said.
The OCC's decision, dated Sept. 2 and posted on the regulator's Web site last week, cited three out of a possible six statutory reasons for denying the request. It was signed by Julie L. Williams, the first senior deputy comptroller and chief counsel.
CompuCredit "has not demonstrated that it has the financial capacity to provide the critical financial support for the bank's operating plan to succeed," the decision said. Its "erratic" earnings history "would allow for little error in the implementation of the proposed business plan."
The OCC also said that CompuCredit's delinquencies and chargeoff rates have increased significantly, and it said the company would have problems raising enough money to fund its own operations.
Axsys had been the private-label issuer for Fingerhut, and CompuCredit's founders have backgrounds in marketing and collections, not loan originations.
"The acquirer's proposed business plan for the bank to become an issuer of general-purpose credit cards represents not only a significant change to the bank's previous business, but also a shift to an intensely competitive segment of the credit card market, in which the bank and the acquirer have no discernable experience," the decision said.
Finally, the OCC said the deal could cause significant loses to the Bank Insurance Fund.
"The prohibitive cost of using bank lines of credit and the inability to generate a sufficient volume of receivables to effectively initiate a securitization transaction creates a high risk that the bank would be forced to resort to using brokered deposits to fund the outstanding receivables," the agency wrote. "If the bank decided to solicit brokered deposits as a means of funding the receivables, this would expose the BIF to significant potential losses."
Mr. Gilbert said he disagreed with the OCC's negative portrayal of CompuCredit. "Our financials are public information - I think they speak for themselves. We feel very good about our business."
Regarding its ability to take a bank that had previously issued proprietary cards and have it issue general-purpose ones in the prime market, he said the basic technology of determining creditworthiness for both types of products are "the same in my opinion."
On Feb. 14, CompuCredit published an announcement in the Argus Leader, a newspaper in Sioux Falls, S.D., where Axsys is headquartered, that it wanted to buy the bank. This initiated a 20-day public comment period, during which no comments were made.
One industry attorney, who asked not to be named, said:"It sounds like you had a combination of two factors" contributing to the CompuCredit denial: It is a subprime lender and "somebody who is new to the industry," the lawyer said. "What's happening is [the OCC] is raising the bar for owning a bank, particularly in the context of controversial products."
