The Office of the Comptroller of the Currency has sent what sounds like its final message to payday lenders: "Stay the hell away from national banks."
Comptroller John D. Hawke Jr. used those words Friday in explaining the regulator's enforcement action against a Texas bank that challenged its order to quit the payday-lending business.
In its latest crackdown on national banks involved in the business, the agency said Friday that the $102 million-asset Peoples National Bank in Paris, Tex., has agreed to terminate its partnership with Advance America Cash Advance Centers Inc. of Spartanburg, S.C., by the end of the quarter.
The agreement leaves the door open for Advance to approach the OCC again, but Advance's chief executive said it is no longer interested in working with national banks, and Mr. Hawke said he doubts that it or any other payday lender will come calling.
"I don't think any of them are dumb enough to think we're inviting them to come back with a better-looking proposal," Mr. Hawke said.
Peoples was the last national bank to have a partnership agreement with a payday lender; three others have left the business in the past year under orders from the OCC. It is also the third bank or thrift to leave the business in the past two weeks.
First Place Bank in Warren, Ohio, said on Jan. 20 that it had been ordered by the Office of Thrift Supervision to cease its partnership with an Ohio payday lender. And on Jan. 21 the OCC told the $504 million-asset First National Bank in Brookings, S.D., to terminate its agreement with a Texas payday lender.
By partnering with banks, payday lenders can charge higher interest rates than they can on their own. State and national banks can export the interest rates of their home state to any other state, but payday lenders by themselves are subject to each state's rate cap.
Advance America makes loans on behalf of Peoples in North Carolina and Pennsylvania. After battling the OCC for nearly a year to retain the right to continue making payday loans - an important source of income for the small bank - Peoples agreed to wind down operations in North Carolina by the end of February and in Pennsylvania by the end of March. It has also agreed to pay $175,000 in civil penalties.
Payday lenders and bankers affected by the orders from the Comptroller's Office have argued that the agency is more interested in making a policy statement than regulating for safety and soundness.
Billy Webster, the chief executive officer of Advance America, said the OCC-Peoples battle distracted his company and that the only option was to discontinue the partnership.
"I think it is self-evident that the OCC has made a policy decision that none of its banks are going to be in an agency relationship, period," Mr. Webster said.
In its statement on the Comptroller's Office order, Peoples denies any wrongdoing. Bruce Heitz, an attorney representing Peoples, said it did not want to comment otherwise, but he added, "We're certainly not worried; we have other assets that earn for us beyond payday loans."
The South Dakota bank made a similar comment in its statement on its OCC order, saying it could focus more on its core business by being out of payday lending.
Mr. Hawke took issue with banks' claims that the payday lending was carefully run.
"When a third party comes in and says, Let us operate in your name and we'll pay you a fee, the banks have been more interested in the fee," he said. "The emergence of safety-and-soundness issues followed almost automatically."
Given the recent actions by the OCC and OTS, payday-lending companies say they will seek partnerships with state-chartered banks. They say that the Federal Deposit Insurance Corp., which regulates state-chartered banks, is more permissive of the partnerships than other regulators.
"We've had a number of FDIC-regulated banks interested in doing business with us and we'll pick one" and continue to lend with them, Mr. Webster said.
Mr. Webster added that he was encouraged by payday-lending guidelines issued last week by the FDIC because they recognize a place for third-party relationships. Though he expressed concern that the guidelines are vague in some areas - such as capital requirements for banks and limits on renewals of loans - he said the FDIC is the only agency that appreciates the demand for small, short-term loans.
"In contrast to the OCC, it recognizes there is a legitimate role for banks," Mr. Webster said.
