WASHINGTON -- The Office of the Comptroller of the
Currency announced today that Advance America, Cash Advance Centers, Inc. and
Peoples National Bank, Paris, Texas, have agreed to end their payday lending
arrangement and that the bank has agreed to pay $175,000 in civil money
penalties.
The consent orders
mark the fourth such set of enforcement actions the OCC has taken since January
2002, involving national banks that have entered into arrangements with payday
lenders. With these actions, no payday lenders are any longer carrying on
business through a relationship with a national bank.
We have been
greatly concerned with arrangements in which national banks essentially rent
out their charters to third parties who want to evade state and local consumer
protection laws, said Comptroller of the Currency John D. Hawke, Jr. The preemption privileges of national banks
derive from the Constitution and are not a commodity that can be transferred for
a fee to nonbank lenders.
In many of these
cases, we have also found that the bank failed to properly manage its
relationships with the payday lenders, leading to significant safety and
soundness problems and violations of federal laws and regulations, he added.
The OCC expects national banks to comply with federal consumer protection
laws, and we will take appropriate enforcement actions if they do not.
Under the consent
order, Advance America agreed it would not enter into any contract to become
either an agent or bank service provider for a national bank without first
applying to the OCC. In signing the consent order, Advance America agreed to
end its payday lending relationship with Peoples by February 28th for business
conducted in North Carolina and by March 31st for Pennsylvania activities.
In taking the
enforcement action against the bank, the OCC was prepared to allege that
Peoples failed to ensure that its payday lender, which held itself out as agent
for the bank, complied with federal consumer protection laws and
regulations. In particular, the bank,
through the payday lender, routinely failed to make disclosures required under
the Truth-in-Lending Act (TILA), and repeatedly violated the disclosure and
record-keeping requirements of the Equal Credit Opportunity Act (ECOA).
TILA requires that,
when lenders respond to inquiries about the cost of closed-end credit, they
must provide the annual percentage rate, or APR, a measure of the cost of
credit, expressed as an annual rate. The banks payday lender was not providing
the APR to potential customers who asked about the cost of the loan.
ECOA requires that
creditors notify applicants of the action taken on their application within 30
days following receipt of the application.
When an adverse action is taken, including a decision not to extend
credit, Regulation B requires the creditor to provide the applicant with a
written statement of the action taken. Regulation B also requires the lender to
maintain records for 25 months after an adverse action is taken.
The OCC also cited
a number of safety and soundness problems in Peoples payday lending
arrangement. Among other shortcomings, the bank did not have adequate controls
over the payday lender, and it lacked an audit system appropriate for an
institution of its size and the nature and scope of its activities. The bank
also lacked a strategic plan for the payday lending business.
Payday lending involves short-term loans that are usually
repaid within one or two weeks, often with a post-dated check that is deposited
after the borrower receives his or her paycheck. Payday loans originated by Advance America in Peoples name had
terms varying from five to 14 days, and a corresponding annual percentage rate
of more than 400 percent. The bank allowed customers to roll over their loans
for significant periods of time.
From the time
Peoples entered into the payday lending arrangement with Advance America in
February 2001, its loan volume grew very rapidly. After three months, payday
loans amounted to 120 percent of the banks capital. In the next six months,
the bank doubled its payday loan volume, to 240 percent of capital. Since January 2002, the banks volume of
payday loans consistently exceeded 100 percent of capital
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The OCC charters, regulates and examines
approximately 2,100 national banks and 52 federal branches of foreign banks
in the U.S., accounting for more than 55 percent of the nations banking
assets. Its mission is to ensure a safe and sound and competitive national
banking system that supports the citizens, communities and economy of the
United States.
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