A year after entering the payday lending business, Brickyard Bank of Lincolnwood, Ill., says it is getting out because it cannot live with conditions imposed by regulators.
David L. Keller, Brickyard's chairman, president, and chief executive officer, said this week that a recent order - requiring that the $200 million-asset bank raise its capital by $1 for every $1 in payday loans outstanding - would make this lending too expensive for Brickyard.
The Sept. 3 order by the Federal Deposit Insurance Corp. and the Illinois Office of Banks and Real Estate was the latest regulator crackdown on bank partnerships with these lenders. Though regulators have never called for an industrywide ban on payday lending, recent actions against individual banks have clearly spooked bankers who now wonder if the business - despite its potential for profits - is more trouble than it is worth.
"The category of subprime appears to be an area of focus by the regulators," Mr. Keller said.
Community activists were delighted by Brickyard's decision and said they hoped other banks would follow suit and terminate relationships with payday lenders. Other industry observers said the regulators' latest moves will probably hurt Check 'n Go Financial Inc.'s chances of buying a state-chartered Illinois bank.
Brickyard would be at least the third bank to get out of the payday lending business voluntarily in the past 15 months.
Crusader Holding Corp. of Philadelphia was compelled to stop making payday loans when it was sold in June to Royal Bank of Pennsylvania in Narberth. The Office of Thrift Supervision had given Crusader a "needs to improve" rating on its Community Reinvestment Act examination because of its payday lending activities, and Royal set as a condition of the deal that Crusader break off its partnership with Advance America Cash Advance Centers Inc.
Eagle National Bank, of Upper Darby, Pa., ended its relationship with Dollar Financial Inc. earlier this year after the Office of the Comptroller of the Currency determined that payday loans made up too much of $62 million-asset Eagle's loan portfolio.
The Comptroller's Office is also seeking to issue an enforcement action against $103 million-asset People's National Bank of Paris, Tex., which it claims is operating an illegal payday lending business. People's is contesting the action in both administrative and federal court.
And $302 million-asset Goleta National Bank in Goleta, Calif., reported in August that it was in negotiations with the OCC to address several unspecified issues concerning its partnership with Ace Cash Express Inc. (Goleta and Ace have been named in lawsuits in several states.)
No one agency tracks the number of banks that work with payday lenders, but the Consumer Federation of America and the U.S. Public Interest Research Group, both of Washington, listed nine - including Brickyard and Eagle - in a report issued last year, "Rent-A-Bank Payday Lending."
In Brickyard's arrangement with Check 'n Go, the Mason, Ohio, company serves as a loan broker for Brickyard in North Carolina. Brickyard began making payday loans through Check 'n Go outlets in September; a law permitting payday lenders to operate there had expired in August. Payday lenders need banks to act as lenders for them in states where laws prohibit payday lending or set limits on rates or terms that payday lenders consider onerous.
The Sept. 3 cease-and-desist order said Brickyard was "operating with an inadequate level of capital protection for the kind and quality of assets held" and that it did not monitor Check 'n Go properly.
The FDIC said it was following supervisory guidelines for examining subprime lending activities, guidelines issued last year by the four federal banking agencies. "This guidance indicates that we'll ask banks to hold increased reserves, including dollar-for-dollar capital for riskier lending activities on a case-by-case basis," a spokesman said.
Mr. Keller said he still thinks there is a consumer need for payday lending and that it can be a profitable service for banks despite the risks. He had been staunch in the face of protests against his bank's involvement in the business, but the cease-and-desist order changed his position.
Brickyard is winding down operations and expects to be out of the business entirely by yearend, Mr. Keller said.
Check 'n Go officials seemed unfazed by Brickyard's decision. Spokesman John Rabenold said the company does not plan to abandon North Carolina and that it is not worried about finding a new partner.
"We've been contacted by a number of banks who want to get into the business," Mr. Rabenold said.
Marva Williams of the Woodstock Institute of Chicago said the action against Brickyard shows that regulators are finally recognizing the damage done by payday lending. She said many consumers have been trapped into paying large debts by the high fees charged on payday loans, which can amount to annual interest rates of more than 400%.
"I hope it's the death knell" of bank dealings with payday lenders, Ms. Williams said.
Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, said his organization would use the latest order as leverage to fight a bill in the North Carolina legislature that aims to reauthorize payday lending in that state. Mr. Skillern's group has been peppering Brickyard since March with protests, letter-writing campaigns to regulators, and by purchasing ads in Lincolnwood papers decrying Brickyard's involvement with payday lending.
"I pity the bank that picks up Check 'n Go, because they will become our next target," he said.
Mr. Skillern said he is also confident that, given its recent examination of Brickyard, the Illinois Office of Banks and Real Estate will reject a bid by Check 'n Go's owners to buy $5.9 million-asset Bank of Kenney in Kenney, Ill.
"It doesn't look very good," he said.
