More than a decade has passed since federal regulators cracked down on partnerships between payday lenders and banks that had been designed to circumvent state interest rate caps.
Now the Office of the Comptroller of the Currency, operating under newly installed leadership, has taken a notable step in the opposite direction.
The agency said Friday that it has terminated a 2002 consent order with Ace Cash Express. The decision, first reported by The Wall Street Journal, frees the Irving, Texas-based payday loan chain from a regulatory prohibition on partnerships with national banks.
While the action involves only one company, its implications could be substantial, according to observers on both sides of the debate over payday lending.
“It’s a sea change in terms of the atmosphere on small-dollar lending,” said Richard Eckman, a lawyer at Pepper Hamilton who structured numerous partnerships between banks and payday lenders in the early 2000s.
If banks are again allowed to partner with payday lenders, state laws that set strict caps on consumer interest rates could be rendered toothless.
South Dakota is an example of a state that could be impacted. Sixteen months ago, the state’s voters approved a 36% interest rate cap. Critics of payday lending worry that federal banking regulators may effectively overturn such laws, and that last week’s decision by the OCC is a step down that path.
Several other states, including Connecticut, Montana, New Hampshire and Oregon, have also set strict rate caps that have made it difficult for payday lenders to operate in those states.
“I think that it signals one more alarming data point in a trend that is posing a significant threat to consumer protection in states that care about it,” said Christopher Peterson, a law professor at the University of Utah and a vocal critic of the payday lending industry.
Back in the early 2000s, payday lenders had figured out how to take advantage of banks’ authority to apply the interest rate rules of their home states to consumer loans made in other states.
Such arrangements, which were often pursued by small banks with headquarters in states that had permissive rules, were derided by critics as rent-a-bank partnerships. The deals enabled payday lenders to operate in some states where they otherwise would have been barred.
The OCC’s crackdown was not subtle. In 2003, then-Comptroller of the Currency John D. Hawke Jr. told payday lenders, “Stay the hell away from national banks.”
The crackdown came in the name of preserving the safety and soundness of national banks. In October 2002, Ace Cash Express was penalized for failing to safeguard 641 customer loan files, which represented loans on the books of a partner bank in California, and had been discarded in a trash dumpster.
But some observers saw the OCC’s rationale as a pretext for purging from the banking system loans that government officials saw as excessively costly to consumers.
Ace Cash Express was not the only payday lender to be punished by the OCC in the early 2000s. In January 2003, Advance America, a large payday lending chain based in Spartanburg, S.C., agreed not to pursue partnerships with national banks unless it got permission to do so.
After the OCC made its position clear, payday lenders turned to state-chartered banks, since their regulator, the Federal Deposit Insurance Corp., was seen as more permissive.
But in 2005, the FDIC issued guidance designed to ensure that customers did not end up in a cycle of debt as a result of rollovers of high-cost payday loans.
Following the FDIC’s action, payday lenders largely abandoned their pursuit of bank partnerships as a way to skirt state-by-state lending rules. And in some states that still had strict interest rate caps, such as Pennsylvania, payday lenders were forced to cease their operations.
The hostility of bank regulators to payday lending continued during the Obama administration. In 2013, the OCC and the FDIC issued regulatory guidance that led to the demise of deposit advance loans, which bore a resemblance to high-cost payday loans even though they were made by banks.
But during the Trump administration, the regulatory pendulum for payday lending has swung in the opposite direction.
At his Senate nomination hearing last summer, Comptroller of the Currency Joseph Otting lamented the regulatory actions that led some big banks to stop offering the kind of small-dollar loans that are often a last resort for financially strapped consumers.
“I think they should be put back in the banking sector,” Otting said.
In October, the OCC rescinded its 4-year-old guidance on deposit advance loans. And since then, the Consumer Financial Protection Bureau’s acting director has expressed hostility toward payday lending rules that were developed during his predecessor’s tenure.
Peterson, who is a senior adviser at the Consumer Federation of America, says the OCC’s announcement last week should be viewed in the context of those other recent federal actions.
He said the regulators’ recent moves are reminiscent of steps taken by federal agencies before the early 2000s, which weakened the authority of states to regulate payday lending.
“We’ve been down this chipping-away path before,” Peterson said. “History is repeating itself.”
Jamie Fulmer, a spokesman for the payday loan chain Advance America, said that he is waiting to see whether the OCC’s action is a harbinger of broader changes. At least for now, Advance America’s consent order with the OCC remains in effect.
“I hope it’s a return to the principle that, if you’re going to benefit consumers in the marketplace, you really need to regulate products and services, and not specific providers,” Fulmer said.
Quote'We’ve been down this chipping-away path before,' said Christopher Peterson, a law professor and a vocal critic of the payday lending industry. 'History is repeating itself.'
For its own part, the OCC is downplaying the importance of its decision to terminate the 16-year-old consent order with Ace Cash Express.
OCC spokesman Bryan Hubbard noted that whatever partnerships that might be pursued would be subject to guidance on risks related to banks’ third-party business relationships. That guidance was published in 2013.
Hubbard also noted that the CFPB is the primary federal regulator for Ace Cash Express, and that a 2014 consent order between the CFPB and the company is still in effect.
Referring to the last week’s action, Hubbard said in an email: “I would not characterize this as a significant change. This was an enforcement action against one company.”
Lisa McGreevy, president and CEO of the Online Lenders Alliance, which represents companies that make high-cost consumer loans, also argued that the implications of the OCC’s decision are limited.
“I don’t expect that the lifting of this particular consent decree will have any effect on the diligence with which the OCC exercise its supervisory authority with respect to bank partnerships with third parties,” she said in an email.
A spokesperson for Ace Cash Express did not return a call seeking comment.