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| California Reinvestment Committee | National Community Reinvestment Coalition |
| Consumer Federation of America | National Consumer Law Center |
| Consumers Union | U.S. Public Interest Research Group |
| Greenlining Institute | Woodstock Institute |
July 27, 1999
The Honorable John D. Hawke, Jr.
Comptroller of the Currency
Washington, DC 20219-0001
Re: Eagle National Bank and "Payday" Loans
Dear Comptroller Hawke:
Our organizations write to express our serious concerns over the activities of Eagle National Bank, Charter Number 21118, Upper Darby, PA ("Eagle"). OCC issued a "Satisfactory" CRA rating for Eagle last year, even though Eagle makes short-term "payday" loans at interest rates ranging from about 400-450% APR. Eagle makes these loans in many states in an arrangement with Dollar Financial Group ("Dollar"), the nation’s second largest check cashing chain.
Congress did not intend the Community Reinvestment Act to bless lending at triple-digit rates. Loans at unconscionable interest rates do not "meet the credit needs" of low- and moderate-income communities. Such loans instead prey upon desperately indebted consumers and worsen their financial crises. We believe that Eagle should not have received a favorable CRA rating, given its activities as described below.
Eagle National Bank’s activities raise significant issues of concern for the public at large. Given the OCC’s role in chartering and regulating this national bank, we are bringing these grievances to you. They include: 1) national bank practices that are unfair, unconscionable, and would be usurious if state laws applied; 2) OCC’s apparent disregard of the intent of the Community Reinvestment Act by failing to consider the community harm caused by the payday lending practices of national banks; and 3) the definition of a bank’s assessment area.
Following review of our letter and a meeting with us to discuss these issues, we request that the OCC:
· Take the necessary steps to prohibit national banks from making payday loans at exorbitant rates;
· Conduct an investigation of Eagle National Bank and its relationship with Dollar Financial Group;
· Reexamine Eagle’s CRA performance and "Satisfactory" rating;
· Promulgate any necessary rules or regulations to address these problems so that other banks will conduct their business in a fair and conscionable manner.
These requests are further detailed at the end of this letter.
I. Payday Lending Described.
A payday loan transaction works like this: the consumer writes a personal check for $117.50 and leaves it with the lender. The parties know that the consumer’s checking account does not have sufficient funds to cover the check on the day it is written. The lender holds the check until the consumer’s next payday, usually two weeks. In return, the consumer gets $100 cash immediately (the amount of the check minus a $17.50 fee). This loan works out to 918% APR for a one week loan, 456% APR rate for a two-week loan. The amount of the fee/finance charge varies from lender to lender. Some charge $25 or more per $100. A $25 fee translates into an APR of 650% for a two-week loan. However, we also have seen payday loans with APRs of over 1000%!
Payday loans are designed to foster perpetual debt. Due to the astronomical interest rates, many borrowers fall into a debt "treadmill." Because they are borrowing against their next paycheck, they fall further and further behind financially. This can lead to a downward spiral where a consumer is forced to renew payday loans for another two weeks (paying another $17.50 per $100 loaned) or obtain another payday loan to pay off the first one. Some lenders allow extensions of the initial loan period in return for payment of another 15% fee. Other lenders accomplish the same result by permitting borrowers to "pay off" the first loan by tendering cash and then immediately having the customer write a new check and receive back the cash they just used to "pay off" the first loan (minus the $17.50 fee). Endless indebtedness is one of the major problems caused by payday lending. In effect, many consumers pay the fee over and over again to borrow the same funds, thus paying interest without ever paying down the principal.
A financial analyst covering the payday loan industry reports that the average user takes out 11 loans per year. The owner of a payday lender in Colorado stated that only two percent of customers take only one loan. He went on to say that "he expects all of PD Chex's customers to default eventually." A class action lawsuit in Tennessee alleges that borrowers were "rolled over" 20-29 times, paying fees of $19-$24 per $100 loaned. Another consumer in Kentucky originally borrowed $150 through a payday loan and ended up paying over $1,000 in fees in a six-month period without paying down any of the principal. In Wisconsin, one consumer borrowed more than $1,200 from all five payday lenders in her town and was paying $200 every two weeks to cover the fees without paying down the principal. Numerous other press accounts detail the experiences of consumers with similar stories. A number of news clips and editorials are included with this letter. These facts demonstrate that payday loans become a trap for desperate consumers, rather than a one-time or "occasional" transaction as the industry claims.
Another problem with payday loans occurs with collection practices. Consumers are often coerced or harassed by illegal threats of criminal prosecution for passing bad checks if they do not repay. Most, if not all, of the states have passed criminal bad check laws which, generally speaking, punish the intent to deceive by writing a check which, at the time, the consumer knew would not clear while the payee on the check does not. Even though these criminal laws do not cover the check written in the payday loan situation (because everyone knows at the outset the check is not cashable; that is the point of the loan), most consumers do not know the law and payday lenders take advantage of that ignorance. Such illegal threats often force consumers to put off paying other debts, thus making their financial problems worse, not better.
In his recent remarks concerning consumer protection and privacy in financial services, President Clinton cited payday loans as another example of predatory lending that deserved greater scrutiny by the federal government. Congressman Bobby Rush (D-Illinois) recently introduced a bill to curb payday lending by banks. The concerns expressed by these officials demonstrate at the very least that national banks should not be involved in payday lending.
Eagle allegedly entered into a contractual arrangement with Dollar Financial Group to finance payday loans made through Dollar’s check cashing outlets nationwide. This product is known as "Cash ‘Til Payday." In theory, Dollar acts as Eagle’s loan agent. Dollar accepts applications for payday loans and allegedly faxes completed applications to Eagle. If Eagle approves the loan, it credits Dollar’s account and Dollar gives cash to the borrower. Dollar and Eagle maintain that Dollar's check cashing outlets act merely as Eagle National Bank's agent in arranging the loan and that Eagle is in fact the lender.
The nature of the relationship between Eagle and Dollar, however, has recently been called into question by a nationwide RICO class action alleging that Eagle has, in effect, "rented" out its national bank charter to Dollar to enable Dollar to make loans in violation of state consumer laws. The lawsuit alleges that Dollar is in fact the true lender.
In any event, Eagle charges up to $17.50 for every $100 loaned. The maximum loan amount is $500, with a fee of $87.50. As noted previously, these fees generate APRs of about 456% for a two-week loan.
III. The Goals of CRA Are Frustrated by the Payday Lending of Eagle
Pursuant to CRA, banks have an obligation to meet the "credit needs" of their local communities. Payday loans, however, do just the opposite: they lead to the financial ruin of people’s lives and drive many borrowers into endless debt and bankruptcy. Congress never contemplated national banks making loans at 400-900% APR and just as surely never intended that a bank making such loans would receive a "satisfactory" CRA rating. Payday lending, like predatory home equity lending targeted at seniors, constitutes one of the most insidious forms of community disinvestment. This kind of lending drains financial resources from low- and moderate-income communities and no national bank should have any connection whatsoever to payday loans.
Payday lenders respond to critics by arguing some consumers have no other alternative for small loans. Their customers have "maxed out" credit cards and have insufficient savings to pay their debts. Rather than taking on even more debt (at far higher interest rates), such consumers instead should deal directly with their creditors to work out a repayment plan. Consumers can negotiate such arrangements themselves, or turn to a local nonprofit Consumer Credit Counseling Service for help. Taking out a payday loan, however, is like throwing gasoline on a fire — it only inflames the problem. The OCC and other regulators should be working on trying to get banks and other financial institutions to meet the needs of consumers at more affordable rates, rather than condoning triple-digit interest rates.
According to the OCC’s Public Disclosure, 36% of Eagle’s total loans in 1997 were payday loans. This constituted a significant increase from 1996, when only 10% of Eagle’s total loans were payday loans. Obviously, payday loans represent Eagle’ fastest growing loan product. OCC seems to discount the impact of payday loans by noting that Eagle has only earmarked $2 million per month for payday loan origination. Yet, because of the small loan amount, the number of loans is very high — meaning that the number of consumers affected is high. The Public Disclosure even notes that the high number of loans is caused by renewals of the original loan, thus demonstrating that many consumers get trapped in a vicious cycle of debt.
The human suffering caused by payday loans, particularly where borrowers are renewed time and time again, is well-documented. OCC’s apparent indifference to this harm is unacceptable. The Public Disclosure’s silence regarding the outrageous interest rates and harm to consumers from payday loans demonstrates a substantial weakness in the small bank exam regulations which should be addressed by OCC and the other regulatory agencies. Furthermore, this silence makes it unclear what, if any, CRA credit OCC is giving Eagle for making payday loans. The criteria for CRA exams of small institutions may need amendment to allow OCC to more closely scrutinize payday loans. Those criteria include (1) loan to deposit ratio; (2) lending in assessment area; (3) lending to borrowers of different income; and (4) geographic distribution of loans. While these criteria make some sense for CRA purposes, the examiners in Eagle’s case apparently did not believe any of these criteria allowed for comment or inquiry into the impact of payday loans on the communities where they are offered.
Consumer Protection Laws of Several States.
Eagle makes payday loans that ignore the laws of several states. Nineteen states and two territories require payday lenders to comply with their small loan or other laws, which typically cap annual interest rates at 36%. Even in states that have deregulated small loan lending, usually other consumer protection provisions of the states’ small loan laws apply. On the other hand, a number of states have enacted industry-sponsored legislation or regulations to legitimize high fees, few consumer protections, and to exempt such loans from the small loan act. Eagle’s activities cause problems in many states as follows:
Eagle’s affiliate, Dollar, claims that state laws applying to non-bank payday lenders or small loan laws cannot apply to payday loans made by a national bank. In California, for example, the payday loan law specifically exempts banks (Cal. Civ. Code § 1789.31). Yet national banks should comply voluntarily with the express public policy of state laws. Violating provisions that apply to check cashers making identical loans should be another factor for OCC to consider in its CRA exam of Eagle, particularly because consumers do not distinguish between the Dollar check cashing outlet and Eagle National Bank. In practice, the consumer deals directly with Dollar and thus believes Dollar, not Eagle, is the lender. Relationships such as Dollar-Eagle simply create a major loophole in state consumer laws. Allowing national banks to ignore state consumer laws simply destroys the ability of states to protect consumers.
The use of federally-chartered banks to make loans through state-regulated check cashers, as alleged in the Phanco case, facilitates usurious lending that would otherwise violate state consumer laws. If the allegations in Phanco are true, then Eagle has simply "rented" its national bank charter to allow Dollar to circumvent otherwise applicable state law restrictions. Such schemes will continue so long as national banks can trump state consumer laws under the exportation doctrine.
Finally, Eagle's activities appear to violate the intent of the Riegle-Neal Act. A central premise behind interstate banking as allowed by Riegle-Neal was that national banks would comply with state laws. In the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the Congress clarified and restated the balance between federal regulation and the states’ authority to protect the interests of their citizens. The Conference Report stated:
Applicable State Law
States have a strong interest in the activities and operations of depository institutions doing business within their jurisdictions, regardless of the type of charter an institution holds. In particular, States have a legitimate interest in protecting the rights of their consumers, businesses, and communities. Federal banking agencies, through their opinion letters and interpretive rules on preemption issues, play an important role in maintaining the balance of Federal and State law under the dual banking system. Congress does not intend that the Interstate Banking and Branching Efficiency Act of 1994 alter this balance and thereby weaken States’ authority to protect the interest of their consumers, businesses, or communities.
The Conference Report clearly reiterated that Congress favors the application of state law, except in cases where there is clear evidence of Congressional intent to override state law.
Congress articulated an intent to protect state laws particularly in the areas of community reinvestment, consumer protection, fair lending, and the establishment of intrastate branches. In fact, the Conference Report states:
It is of utmost concern to the Conferees that the agencies issue opinion letters and interpretive rules concluding that Federal law preempts state law regarding community reinvestment, consumer protection, fair lending, or establishment of intrastate branches only when the agency has determined that the Federal policy interest in preemption is clear.
This "utmost concern" for the ability of states to protect its citizens from this type of exorbitantly priced lending is undermined by Eagle’s use of its bank charter to export its activities without regard for state law.
V. The Narrow Definition of Eagle’s Assessment Area Makes CRA Scrutiny Meaningless.
Eagle’s assessment area consists of four counties surrounding its Upper Darby headquarters. There are two related but distinct problems with Eagle’s assessment area. First, a significant part of Eagle’s business takes place throughout the country in the form of payday loans, yet Eagle’s assessment area is only four counties in Pennsylvania. This issue of how to define assessment areas when a bank operates nationally through a non-traditional "branch" system will only intensify as financial modernization proceeds. For example, in its application for a charter from the Office of Thrift Supervision, State Farm stated its intent to sell its bank products through its national network of insurance agents. Yet, State Farm claimed its assessment area should be limited only to the area around its Bloomington, Illinois headquarters. We strongly believe the regulatory agencies should reject such "gerrymandering" of assessment areas. Assessment areas should coincide with the market for an institution’s products. This is particularly true for a predatory loan product such as payday loans.
Eagle’s payday loan business raises a second problem. Our research disclosed that Eagle apparently offers all of its loan products in its assessment area, except for one — payday loans. According to Dollar Financial Group’s website, it has several locations within Eagle’s assessment area, including in the city of Philadelphia. Yet, those locations do not offer the "Cash ‘Til Payday" product. As discussed above, payday loans make up over one-third of Eagle’s total loan volume. The only reason not to offer payday loans within its assessment area is to minimize CRA scrutiny to these loans. Thus, to the extent the CRA regulations emphasize an institution’s lending record within an assessment area, OCC should not allow Eagle to manipulate OCC review by not offering payday loans in its assessment area.
VI. Request for Corrective Action.
We request a meeting with you to discuss our concerns in greater detail. Thank you for your consideration of our views.
Sincerely,
Earl Lui, Consumers Union
Mary Griffin, Consumers Union
Rob Schneider, Consumers Union
Elizabeth Renuart, National Consumer Law Center
Jean Ann Fox, Consumer Protection Federation of America
John Taylor, National Community Reinvestment Coalition
Alan Fisher, California Reinvestment Committee
Malcom Bush, Woodstock Institute
Bob Gnaizda, Greenlining Institue