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US Federal Deposit Insurance Corporation Actions Indicate Less Tolerant Stance on Payday Lending Business

American Banker  Monday, March 6, 2006
By Ben Jackson <>

The Federal Deposit Insurance Corp. insists it is not forcing banks it regulates out of the payday lending business, but its recent actions suggest otherwise.

In the last two weeks First Bank of Delaware and Republic Bancorp Inc. of Louisville announced they were getting out of payday lending under pressure from the FDIC.

A third, the $328 million-asset County Bank of Delaware in Rehoboth, stopped making payday loans in December after the FDIC hit it with a cease-and-desist order in early 2005.

Martin Gruenberg, the agency's acting chairman, was traveling Friday and unavailable for comment. Industry observers, though, have said Mr. Gruenberg is no fan of payday lending and that they would not be surprised if he is behind the latest crackdown.

Banks do not make payday loans directly, but through lenders such as Ace Cash Express Inc. and Dollar Financial Corp., which have hundreds of outlets throughout the country.

Steven D. Fritts, the associate director for risk management policy in the FDIC's division of supervision, said in an interview Friday that the agency has always viewed payday lending as high-risk and that it expects banks it regulates to adhere to high standards of risk management and compliance with consumer protection laws.

But he said neither it nor any other banking regulator explicitly prohibits banks from partnering with payday lenders. "Any bank out of 8,500 commercial banks could start making payday loans if they chose to," Mr. Fritts said.

Less than a dozen do so, and all of them are state-chartered and regulated by the FDIC. The Federal Reserve, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision have made their rules so onerous in recent years that banks and thrifts they regulated have either dropped out of the business or switched to the FDIC.

Republic, a former Fed member, was one of them. It changed regulators three years ago after deciding earnings would suffer if it left payday lending.

Even after the FDIC tightened its restrictions on payday lending last year - limiting the number of loans a borrower could take out to six a year - the $2.7 billion-asset Republic vowed to stay in the business, which at times has brought in as much as 20% of its earnings.

But in a Feb. 24 Securities and Exchange Commission filing, Republic said it had received a letter from the FDIC asking it to consider stopping making payday loans through its lending partner, Ace, of Irving, Tex.

Republic said it has voluntarily agreed to stop its payday loan program, has stopped making the loans in Texas last week, and will stop making them in Arkansas and Pennsylvania on June 30. It had earned $299,000 on these loans in the fourth quarter, according to its filing.

The company also ended an Internet payday lending business it started in July.

Steve Trager, Republic's chairman and chief executive officer, was traveling and unavailable for comment.

Republic's decision came just days after the $82 million-asset First Bank, in Wilmington, said it was discontinuing its partnerships with three payday lenders after it was asked by the FDIC to consider the risks involved.

ID: 37122
Author(s): NCRC
Publication date: 06/03/06

Created: 29/03/06. Last changed: 30/03/06.
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