WASHINGTON The
Office of the Comptroller of the Currency has concluded an enforcement action
against First National Bank in Brookings requiring the Brookings, S.D.
institution to pay restitution to credit card customers harmed by its marketing
practices, terminate its payday lending business and stop merchant processing
activities through one vendor. The bank
consented to the enforcement action that becomes effective today.
The enforcement
action requires the bank to establish a $6 million reserve to fund the
restitution payments to compensate those who were deceived by various credit
card marketing practices by the bank.
In requiring
Brookings to end, within 90 days, the payday lending business conducted in its
name by Cash America and First American Holdings, the OCC was prepared to
allege that the bank had failed to manage that program in a safe and sound
manner. The bank repeatedly violated the Truth in Lending Act, failed to
adequately underwrite or document payday loans, and failed to adequately review
or audit its payday loan vendors.
It is a matter of
great concern to us when a national bank essentially rents out its charter to a
third-party vendor who originates loans in the banks name and then
relinquishes responsibility for how these loans are made, said Comptroller of
the Currency John D. Hawke, Jr. We are particularly concerned where an
underlying purpose of the relationship is to afford the vendor an escape from
state and local laws that would otherwise apply to it.
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.
In its credit card
program, the bank, since June, 1998, has made statements in its marketing that
the OCC believes are false and misleading, in violation of the Federal Trade
Commission Act.
Trust is the
foundation of the relationship between national banks and their customers,
said Mr. Hawke. When a bank violates that sense of trust by engaging in unfair
or deceptive practices, we will take action not only to correct the abuses,
but to require compensation for customers harmed by those practices.
The banks
marketing led consumers to believe that they would receive a credit card with a
usable amount of available credit.
However, customers were required to pay $75 to $348 in application fees,
and were subject to security deposits or account holds ranging from $250 to
$500 to obtain the banks credit card.
Because of the high fees and required deposits, a high percentage of
applicants received cards with less than $50 of available credit when the cards
were issued. In some programs, consumers
paid substantial fees for cards with no available credit when the cards were
issued.
While the bank
disclosed various fees and deposits, the bank failed to advise customers that
they would receive little or no usable credit as a result. In particular, in some programs, the bank
failed to disclose, until after customers paid non-refundable application fees,
that they would receive a card with little or no available credit.
The OCC received
complaints from consumers who had not understood that the card they received
would have little or no available credit.
In one program, the
banks television commercials promised a guaranteed card with no up-front
security deposit and a credit limit of $500.
The bank then placed a $500 refundable account hold on the $500 credit
line. As a result, customers received a
credit card with no available credit when the card was first issued. Instead,
those consumers would then have to make additional payments to the bank to obtain
usable credit.
Television commercials
represented that the card could be used to shop on the Internet and for
emergencies. All of these benefits
require a usable amount of available credit, which the customers did not
receive.
Customers who
applied by telephone were asked for financial information for security
reasons and only later were informed that the information would be used to
debit their financial accounts for an $88 processing fee.
In another program,
customers were required to make a $100 security deposit before receiving a card
with a $300 credit limit. An additional
security deposit of $200 and a $75 processing fee were charged against the card
when it was first issued. As a result,
the customers who received the card had only $21 of available credit when the
card was first issued.
The bank also
engaged in a number of practices that the OCC believes may have confused
customers. For example, in a third
program, the bank advertised a card with no annual fee, but which carried
monthly fees. Although those fees were disclosed, the OCC believes that monthly
fees effectively function as annual fees.
The OCCs action
requires the bank to reimburse credit card customers for fees paid in
connection with four of the banks credit card programs and to change its
marketing practices and disclosures for credit cards.
The Consent Order
also requires the Bank to terminate, by March 31, merchant processing
activities conducted through First American Payment Systems (FAPS). The OCC
found that the bank had an unsafe volume of merchant processing activities and
that bank insiders with financial interests in the company impermissibly
participated in bank decisions that affected their personal financial
interests.
# # #
|
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.
|