Payday Lending Structure Attacked

The Office of the Controller of Currency (OCC) has ordered the Eagle National Bank, Upper Darby, PA.to stop providing financing to Dollar Financial Group, one of the nation's largest providers of payday loans. As you may recall from earlier issues of Spotlight, a consumer who obtains a loan from a payday lender essentially borrows against his next paycheck by giving the lender a check for the amount of the loan plus interest. The check is post-dated to the date that his next paycheck will clear his bank.

In his article in the Wall Street Journal, Paul Beckett explains the economic forces that led to this rather unusual decision. On the one hand, Dollar Financial Group faced a variety of state laws designed to cap the interest rate that lenders could charge for making these small, short-term loans. If typical state usury laws were applied to short-term loans of a few hundred dollars, a private firm could not afford to make those loans. In most states, consumer groups have persuaded state legislators that consumers would be better off if they could not obtain such loans. Since Eagle's annual payday loan volume has grown to about $400 million last year from $3 million in 1995, a number of consumers evidently did not concur with this point of view. This striking growth occurred in spite of state usury laws, because banks with a federal charter are not subject to state usury laws. The payday loans in question were "technically offered" by Eagle National Bank and distributed to customers through the outlets of the Dollar Financial Group. Hence, the payday loans were not subject to the usury statute of Pennsylvania. Analysts estimate that about ten percent of payday loans nationwide are offered under such arrangements.

The OCC did not address the issue of whether payday lending was permissible under Eagle's national charter. Instead, the OCC focused on whether the bank was exercising proper oversight given the size of the payday loan business relative to the bank's assets. Eagle National has about $67 million in total assets. Its ratio of net chargeoffs to total loans through the first three quarters of 2001 was 17.21 percent, compared to the 0.27 percent average that the Federal Deposit Insurance Corp. reported for banks of similar size. Eagle was pricing for risk: its interest margin was 19.9 percent, compared to 4.24 percent for other banks in its peer group. This generated a return on equity for Eagle of 18.07 percent, compared to 8.49 percent for its peer group. Comptroller of the Currency, John D. Hawke said in a press release "Eagle simply did not have the capacity to manage the relationship," and further asserted that "the bank essentially rented out its national bank charter to a payday lender." Jean Ann Fox, consumer protection director of the Consumers Federation of America, asserted, "Eagle National Bank and Dollar Financial Group pioneered the rent-a-bank payday loan arrangement to get around state laws. The OCC's action is an important first step toward closing that loophole."