The recent regulatory crackdown of bank involvement in payday lending has increased the impetus for their nonbank partners to pursue alternative models.
Two payday specialists that originate loans for First Bank of Delaware said the revenue they will lose when it stops funding such loans will be offset by their "credit services organization" businesses in Texas. These companies are also pinning their hopes on "enabling" legislation being considered in places like Pennsylvania (one of the states where the lenders worked with First Bank) that would let them fund payday loans themselves.
Last week First Bank said it was quitting the business under pressure from the Federal Deposit Insurance Corp. Nearly a year ago the agency had issued guidelines that made payday lending less profitable for banks and their partners by limiting the number of loans a borrower could take out each year.
Henry J. Coffey, an analyst with Ferris, Baker Watts Inc. in Baltimore, said that when compared with the "draconian and shocking" guidelines, the FDIC's pressure on First Bank "is not life-threatening by any means" for payday firms.
However, the pressure "reinforced the message that regulators on the federal level don't want their banks involved in subprime."
Last month Ace Cash Express Inc. of Irving, Tex., announced plans to broker payday loans from nonbanks as a credit services organization in its home state. Ace's president and chief executive, Jay Shipowitz, said in a conference call last week, "We fully expect the CSO fees ... to offset the loss of all fees" it gets in Texas, Arkansas, and Pennsylvania as an agent for First Bank and for Republic Bank and Trust of Louisville.
As a credit services organization, Ace will charge fees of $20 for every $100 borrowed, rather than the roughly $17 it gets as a bank agent.
"We're exploring our alternatives in Arkansas, but worst-case there, we would not have a loan product there," Mr. Shipowitz said. Ace has 18 stores in Arkansas, 43 in Pennsylvania, and 382 in Texas.
Don Gayhardt, the president of Dollar Financial Corp. of Berwyn, Pa., said its six stores in Texas will switch to the credit services organization model. Doing so will offset "a decent amount" of the revenue his company will lose when it has to stop payday lending in the state.
Also Dollar's 16 Pennsylvania stores offer a number of products and services, including money transfers and debit cards, and do not generate as many payday loans as its other stores, Mr. Gayhardt said.
The industry-backed enabling legislation has passed Pennsylvania's House and is now being discussed in the state's Senate, he said.
Only one payday lender's stock was downgraded last week, for reasons unrelated to the loss of First Bank as a partner.
Robert J. Dodd, an analyst at Regions Financial Corp.'s Morgan Keegan & Co., downgraded Ace's stock Feb. 22 to "market perform," from "outperform," because of the company's disclosure that its check-cashing business was softer than expected for the tax check season.
Mr. Dodd agreed with Ace that the "risk to revenue and earnings from loan product changes in Pennsylvania and Arkansas is more than offset by ... CSO pricing."
In addition, no lender has to leave the Pennsylvania and Arkansas payday markets immediately. First Bank said it would meet with the FDIC in the next 30 days to hash out plans for an alternative installment loan product, which Dollar sells in Pennsylvania.
Mr. Coffey said that last week, the FDIC effectively "killed the installment loan product" that bank-funded payday lenders hoped to offer in some states, particularly California.
However, Mr. Gayhardt said Dollar could fund its installment loans if it lost its agency relationships. The company offers such loans in half of its 190 stores nationwide and plans to start offering them in the rest, he said.
In a SEC filing Wednesday, CompuCredit Corp. said that the lender for whom it has marketed and serviced payday loans in four states - Arkansas, Florida, North Carolina, and West Virginia - has been asked by the FDIC "not to issue" certain payday loans.
CompuCredit said it "either will adapt its business model ... or withdraw from those markets."
