Ace Cash Express Inc.’s agreement to stop brokering loans in Colorado for a California bank is one of a string of setbacks for payday lenders that partner with national banks.
Last week the Colorado attorney general’s office announced that a settlement had been reached in its 10-month-old lawsuit against Ace. The Irving, Tex., payday lender agreed to stop using the charter of the $317 million-asset Goleta National Bank to make high-interest loans in the state.
While Ace officials insist that the agreement would have no impact on its partnership with Goleta in other states, regulators and consumer advocates say it is a damaging blow.
Jean Ann Fox, the director of consumer protection at the Consumer Federation of America, said the settlement reflected a growing hostility toward payday lenders that use national bank charters to get around state consumer protection laws.
“That’s part of the trend of things,” she said. “It all seems to be going in the same direction” against payday lenders.
Two states have passed laws recently that either restrict payday lending or – in Maryland’s case – ban it entirely. Meanwhile, the Office of the Comptroller of the Currency is cracking down on banks that partner with payday lenders. It has ordered Eagle National Bank of Upper Darby, Pa., to get out of the business and accused People’s National Bank of Paris, Tex., of expanding its payday business “beyond prudent limits.” Neither bank had a partnership with Ace.
The lender argued it did not need a license, because it was an agent for Goleta, and so exempt under the National Bank Act
“As the OCC has said before, we think these types of rent-a-charter arrangements represent a misappropriation of the national bank charter,” Comptroller of the Currency John D. Hawke Jr. said last week.
Partnerships between banks and payday lenders work like this: The payday lender makes a short-term loan on behalf of a bank, using the terms permitted in the bank’s home state, and pockets a fee for each loan it makes.
Payday lenders need the bank partnerships to circumvent laws in states that prohibit payday lending, as in North Carolina, or to charge higher rates and fees than allowed in those states. The National Bank Act says that when banks lend in other states, they can use the terms permitted in their headquarters state.
Foes of such partnerships say they allow payday lenders and banks to take advantage of borrowers by avoiding state consumer protection laws.
The Colorado attorney general’s suit alleged that Ace was violating state law by making or arranging payday loans without a state license and allowing more than one renewal of a payday loan at the permitted finance rate.
Under terms of the settlement, Ace will become licensed by the state and to stop making loans in Colorado on behalf of Goleta. Ace will also refund $1.3 million to borrowers who renewed their loans more than once between .
Laura Udis, the state’s first assistant attorney general for consumer credit, said regulators in other states had asked her whether the settlement meant that Ace was severing all ties to Goleta. She told them the agreement was valid only in Colorado.
His bank’s portfolio includes about $3 million of payday loans
Eric Norrington, a spokesman for Ace, said it will continue to partner with Goleta in more than two dozen other states. “I think it would be a mistake to over-interpret these results outside the state of Colorado.”
Ace will exit the payday loan business in Maryland next month, when the state’s ban on payday lending takes effect, and its bank relationships in Indiana, North Carolina, and Ohio may also be in doubt. Indiana passed a law in March that prohibits payday lenders from partnering with banks, and lawsuits are pending in both North Carolina and Ohio that could effectively do the same. (Payday lenders have been given a grace period to comply with the Indiana law.)
The Woodstock Institute, a Chicago-based nonprofit group, hopes the settlement will encourage regulators to scrutinize Brickyard Bank’s relationship with Check ‘n Go Inc., which originates payday loans in North Carolina and Texas for the Lincolnwood, Ill., bank. On April 11 the nonprofit group picketed in front of Brickyard’s headquarters to protest its involvement with the Check ‘n Go. s, a vice president of the Woodstock Institute, said the settlement sends the message that payday lenders cannot use banks to evade state consumer protection laws. “I think a lot of payday lenders will be reviewing their relationships with banks now.”
But David L. Keller, the president and chief executive officer of the $198 million-asset unit of Brickyard Bancorp Inc., disagreed with her assessment.
John Bason, the public information officer for car title loans completely online in Idaho the North Carolina Department of Justice, said regulators there plan to review the Colorado settlement to see whether it is relevant to their lawsuit.
And in Indiana, regulators said the settlement may give them leverage against Ace if it contests the newly passed law.
“While it doesn’t give us a ruling on the issue [of banks partnering with payday lenders] itself, it gives us a lot of confidence that apparently Ace doesn’t have a lot of confidence in its position,” said J. Philip Goddard, the chief counsel for the Indiana Department of Financial Institutions.