The Majority Approach to Third-Party Payday Loan Vendor Agreements

In November 2000, the OCC and OTS issued advisories to the CEOs of their regulated institutions “to highlight and discourage any abusive practices associated with payday lending.” These advisories promised “close review” of payday lending activities “through direct examination of the bank, examination of any third party participating in the trans- action under an arrangement described above, and, where applicable, review of any licensing proposals . . .”

The advisories provided detailed guidelines regarding capital, credit concentrations, monitoring, reporting, consumer disclosures, rollovers, waiting periods, etc., specific to payday loans. Issuance of these advisories was followed by a number of aggressive enforcement actions brought by the OCC against nationally chartered banks affiliating with payday loan vendors. Numerous safety and soundness violations were cited in these enforcement actions, as well as findings that the affiliations in question were “rent-a-charter” arrangements designed to allow the payday lender to evade state consumer protection laws. In announcing one such enforcement action, the OCC stated that the bank “had effectively turned over the management of the bank’s main business to a third party, and then virtually ignored how that business was being conducted . . . The bank essentially rented out its national bank charter to a payday lender to facilitate that nonbank entity’s evasion of the requirements of state law that would otherwise be applicable to it.”

The Federal Reserve Board has not issued specific payday lending guidance for state- chartered member banks. In January 2, 2001, letter to Congressman Melvin L. Watt, FRB Chairman Alan Greenspan indicated that such guidance was not necessary “[g]iven the very limited number of instances of payday lending that we have seen in the institutions we supervise about this type of lending.” Chairman Greenspan also promised that “[s]ince state member banks could become more involved in payday lending and since activities such as ‘charter renting’ have potential to circumvent state law, the Board will continue to monitor these activities closely.” A few years later, a state-chartered member bank, First Bank of Delaware stated in a SEC filing that it was ending its affiliation with a payday lender because of “materially increased regulatory requirements.” In a subsequent SEC filing, the bank indicated that instead of giving up its payday loan affiliation, it would give up its membership in the Federal Reserve System and switch to the FDIC as its primary regulator.

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