WASHINGTON — Federal regulators and community activists are zeroing in again on connections between banks and payday lenders, but their focus has shifted to commercial loans made to payday firms.
A major banking company that was already starting to feel the heat has decided to avoid controversy.
SunTrust Banks Inc. told the Federal Reserve Bank of Atlanta last week that it would stop making loans to payday and title lenders. Community groups had urged regulators to scrutinize SunTrust’s relationships with such lenders, pawn shops, and check cashers as part of its review of SunTrust’s application to buy National Commerce Financial Corp.
John Ehrensperger, SunTrust’s compliance manager, wrote to the Atlanta Fed July 12 that the company recognizes “growing public concern about the business practices of some of these companies that do not operate responsibly.”
“After considering the potential reputational risks and consumer harm that could result from lending to such a company,” he said, SunTrust “is revising its credit policies to prohibit future loans to all businesses that engage in payday or title lending.”
A SunTrust spokesman emphasized Wednesday that the decision was voluntary.
Whether other companies will follow SunTrust’s lead remains to be seen.
The Federal Reserve Board has been raising similar issues with other banking companies lately.
Though it has not used them as a reason to block a merger — such rejections are rare — the central bank has raised concerns about financing of payday and other controversial financial services in orders approving the combinations of Regions Financial Corp. and Union Planters Corp.; J.P. Morgan Chase & Co. and Bank One Corp.; and North Fork Bancorp Inc. and GreenPoint Financial Corp.
Matt Lee, the executive director of Inner City Press/Community on the Move of the Bronx, said it had submitted comments to the Fed on SunTrust’s relationship with payday and other lenders — and that it would continue to bring up the issue in other cases.
Mr. Lee argues that regulators should bar banks from financing such lenders because banks have a duty under the Community Reinvestment Act to treat poor neighborhoods fairly, and funding lenders who target low-income consumers with high-interest loans violates the obligation.
But banking industry lawyers said that such prohibitions would raise significant legal and policy questions.
“Is it appropriate to cut off funding to people who are engaged in activities that are not illegal?” asked Gilbert T. Schwartz, a partner at Schwartz & Ballen LLP.
The Fed’s discussions of banks’ relationships with nonbank financial services were made in the context of the CRA but do not hint whether it has any desire to use the act to ban such relationships.
Oliver Ireland, a partner with Morrison & Foerster LLP, said that it would be possible to take the financing of payday lenders into account under the convenience and needs evaluations of CRA exams. “You can always put pressure on somebody,” but whether a federal regulator would outright tell banks to not give loans to payday lenders is another issue, he said.
“If a regulator starts to allocate the credit, I don’t know where they’re going to stop, and I don’t know how they’re going to do that,” Mr. Ireland said. “Regulators don’t like the idea of telling banks what to do. They like to tell them what the ramifications are.”
Mr. Schwartz said it is possible that the delay and investigation during a merger that would accompany the Fed asking questions about a bank’s relationship with payday and other lenders could cause a bank to drop that business.
A payday industry association downplayed the significance of the SunTrust decision.
“One bank pulling out of our business is not a referendum on our business,” said Steven Schlein, a spokesman for the Consumer Financial Services Association. “Our business has been growing and growing and growing.”
The association members’ have 22,000 locations, up from 12,000 in 2000. Last year payday lenders made $40 billion of loans, generating $6 billion of revenue, Mr. Schlein said.
Dozens of other banks have been documented as making business loans to payday lenders and others, including Wells Fargo Bank, Huntington National Bank, and Wachovia.
Mr. Lee was especially critical of Wells’ financing of payday lenders that target military service members.
These businesses use armed services logos in their marketing and require active-duty service members to provide information about their orders and commanding officer.
Wells Fargo, according to Uniform Commercial Code filings in Nevada, finances Armed Forces Loans Inc.
Georgia recently made payday lenders subject to usury laws after military commanders testified to the state legislature that stress caused by payday lenders was hurting troop morale and combat readiness, according to local news reports. Soldiers can sometimes be discharged or court-martialed if they default on these loans.
Wells Fargo said that it carefully vets its borrowers. “We have lending relationships with many financial institutions including consumer finance companies,” a spokeswoman said. “In these relationships we require representations and warranties as well as loan covenants requiring that the company comply with applicable laws and regulations.”
Until banks can ensure that the fringe financial services they lend to are not harming a community, Mr. Lee says they should follow SunTrust’s example.
The SunTrust case shows how the debate over payday lending has broadened.
Community group had initially focused on arrangements under which payday lenders partnered with banks to get around state caps on interest rates. (Banks are allowed to the export the maximum interest rate allowed in their homes states.)
Federal regulatory agencies, except for the Federal Deposit Insurance Corp., have told banks to cease such relationships. Now, about a dozen small banks nationwide, all supervised by state regulators and the FDIC, allow payday lenders to use their charters to avoid state limits on interest rates.
At a news conference Wednesday, Sen. Chuck Schumer, D-N.Y., said it was more important for the FDIC to push banks out of the “rent-a-charter” arrangements that allow payday lenders to do business in states with strict usury laws than to press the industry to stop financing the short-term lending businesses.
“The easiest way to shut it down is to get the FDIC to shut all of these arrangements,” he said. “A large number of states have good usury laws, a large majority.”
Sen. Schumer said he would introduce a bill forcing banks out of the payday-lending business if the FDIC does not act on his request.
