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Payday Loan Industry Newsletter

NOTE: This is one of our earlier Newsletters. The "Bank Model" is NOT recommended due to modified FDIC regulations. Many of our subscribers have a desire to understand this model so we have elected to keep it in our archives

Due to the tremendous demand for payday loans (PDA's) by consumers in not only the USA, but also in Canada, Australia, New Zealand, England, So. Korea, West Indies, and more, payday loan operators are crying out for funding! More money to "put out on the street".

All the methods we discuss below, are EXPENSIVE! No way can you achieve the spectacular returns on loans you fund with "other people's money". You will pay dearly for "street money"!

Several approaches are being utilized to solve this problem. We will discuss one approach in this newsletter and provide a solution. In the next Newsletter we will discuss additional Models & resources.

Larger industry participants with multiple locations in multiple states have attempted to avoid state jurisdiction by ceasing their direct lending activities and instead acting as an agent for an out-of-state bank. Under such an arrangement, the payday lender and bank enter into a contract under which the payday lender acts as the bank’s agent for the marketing and servicing of loans. The bank becomes the formal lender in the payday loan transaction, and the loan contract and all related consumer disclosures are amended to reflect this fact. In essence, the payday loan stores become loan production offices of the bank. But the relationship does not end there. In addition to acting as the bank’s agent for the making and servicing of the loans, the payday lender reserves the right under the contract to buy the loans back from the bank shortly after they are made. This structure is an example of what federal regulators frequently refer to as a "rent-a-charter" arrangement.

Basically, you simply submit applications to the Lender. The Lender funds 100% of the loan (advance) and deals with any defaults. You perform no collection functions. Your cut? $14.00 per application meeting their underwriting criteria (very easy for your applicant to meet). All funds are transferred electronically into the checking account of your payday loan customer. On the due date, they are debited electronically. ( For details on how YOU can EFT payday funds into your customers checking accounts, reread the EFT Chapter in our Payday Loan Startup & Training Manual): Training

We Recommend! Do not enter this relationship until you ascertain what licensing and regs. exist, if any, in your state. Again: refer back to your copy of our Payday Loan Startup & Training Manual. Consult legal counsel. Your goal is not to circumvent state law but rather to use the funds provided by the Lender to service more customers, increase traffic, learn more about the payday loan industry, and avoid collection issues.

For those of you interested in further study of the "National Bank Model" we offer the following discussion.

First Place Bank is making money by offering payday loans in Texas through Check'n Go. First Place started making payday loans in August 2002. It had $1 million in payday loans on its books in September and $2 million now (Jan 2003). First Place's deal with Check'n Go has been criticized as rental of its banking charter to get around state laws.

Texas law limits payday lenders from charging more than an annual interest rate of 309 percent. Check'n Go can exceed that, however, because First Place has a national banking charter which supersedes state law.

The bank responds that it is not renting its charter. These loans go on First Place's financial records and are considered the bank's loans, although they don't have regulatory oversight because they are made at Check'n Go locations. The bank has employees working with Check'n Go to make sure ethical standards are upheld, according to Steven Lewis, bank president and chief executive.

The bank has an agreement to share loan proceeds with Check'n Go, which is a privately owned company that has been in business for about 10 years, but he wouldn't disclose the details.

So, how does the "split" break down. Rumor is 80%-20% after Check'n Go eats the defaults. Who knows! The real problem is the FTC, the OCC, consumer groups, and more, are attacking this model. We all know about Ace & Goleta. Although the stupidity of employees at ACE...(see more below)

The actions against ACE (ACE Cash Express Inc. is a national chain of 630-plus outlets that’s growing with backing from American Express) by the OCC were prompted by several factors, including ACE's failure to safeguard 641 customer loan files. The files, which represented payday loans carried on Goleta's books, were discarded in a trash dumpster in Portsmouth, Virginia in August 2002. The OCC was prepared to allege that the improper disposal of loan files resulted in violations of laws and regulations. The OCC also determined that ACE committed unsafe and unsound practices that included a pattern of excessive exceptions to Goleta policies and procedures and a pattern of mismanagement of Goleta loan files. "ACE's inability to safeguard the files of customers whose loans were booked at Goleta shows just how risky those relationships can be," Mr. Hawke added. "If those files had fallen into the wrong hands, the privacy of customers would have been seriously compromised and the bank would have faced significant reputation and legal risks."

The OCC found that ACE contributed to violations of the Equal Credit Opportunity Act, which requires that loan documents be retained for 25 months, and the Truth in Lending Act, which requires that evidence of TILA disclosures be preserved for 24 months.

In the case of Goleta, the OCC found that the bank failed to manage its relationship with ACE in a safe and sound manner. In addition to violating the Equal Credit Opportunity Act and the Truth in Lending Act, Goleta violated safety and soundness standards and also violated the privacy protections of the Gramm-Leach-Bliley Act, which sets standards for safeguarding and maintaining the confidentiality of customer information.

certainly played a role in the break-down of their relationship, the "National Bank Model" is tentative at best. When used to circumvent state law, we advise against it. But if appropriate enabling legislation exists in your state, affilliation with a bank willing to make payday advance "street money" available to your operation makes sense!

WASHINGTON -- The Office of the Comptroller of the Currency today filed a notice of charges against People's National Bank, Paris, Texas, alleging that the bank engaged in unsafe and unsound practices in connection with its high-risk, subprime payday lending operation.

In filing the charges, the OCC found that the bank had been unwilling or unable to deal with a number of serious issues in the management of its payday lending program, including problems with underwriting, high concentrations, inadequate capital and a failure to ensure that critical third-party vendors had appropriate and prudent contingency plans.

The charges detail violations of laws and regulations, and unsafe and unsound practices that are likely to weaken the condition of the bank and prejudice the interests of the bank's depositors.

The OCC is asking an Administrative Law Judge to determine whether an order should be issued directing the bank to cease and desist from the unsafe and unsound practices, and violations of laws and regulations, detailed in the charges.

The OCC found that the bank had allowed its payday-lending program to grow too quickly and beyond prudent limits. Although the bank's board set a volume limit for payday loans of $2.5 million, or 25 percent of capital, the bank allowed the product to grow exponentially, to 120 percent of capital, in the first three months it was offered. In the next five months, the bank allowed its payday loan volume to double, to 240 percent of capital. The bank has continued to permit its payday loan volume to far exceed prudent limits.

In addition, the OCC found that the bank failed to supervise the program adequately. The program was implemented without a strategic plan to address the increased risks and resource needs of payday lending, and without adequate capital support or prudent underwriting standards.

The bank has failed to classify delinquent loans, even though they meet the criteria for substandard loans. The bank's methodology for setting the Allowance for Loans and Lease

Losses was also found to be significantly flawed and resulted in an underfunded ALLL account.

The OCC found that the bank continues to expose all of its capital to risk by relying upon two third-party vendors to market, underwrite, originate, disburse, service and collect the payday loans, while failing to assure itself that the vendors would be able to perform those services. In particular, the bank failed to assure itself that the vendors had contingency plans that would permit them to continue operations in the case of unforeseen events.

In addition, the bank obtained an indirect $3 million loan from the third party that originated all of its payday loans. The loan has a rapidly escalating interest rate and provides strong incentive for the bank to maintain its payday loan volume at an excessive level to generate earnings to repay the loan.

The bank also violated laws by filing call reports that contained material and significant errors. Specifically, the bank incorrectly and repeatedly overstated the assets and capital of the bank, resulting in errors equal to more than 9 percent of its capital.

The bank was given 20 days to respond to the Notice of Charges.

WASHINGTON -- The Office of the Comptroller of the Currency announced today that Eagle National Bank has signed a Consent Order directing it to cease all payday lending activities. Eagle has been engaged in payday lending through arrangements with Dollar Financial Group. The OCC acted after finding that Eagle was in material noncompliance with an earlier Memorandum of Understanding entered into with the OCC and was engaged in numerous unsafe and unsound activities.

The action follows a recent examination of Eagle in which the OCC determined that: The bank had risked its financial viability by concentrating in one line of business--payday lending; The bank relinquished supervision of the program to a single third-party originator of payday loans; and The payday lending program was conducted on an unsafe and unsound basis, in violation of a multitude of standards of safe and sound banking, compliance requirements, and OCC guidance.

"Eagle 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," said Comptroller of the Currency John D. Hawke, Jr. "The bank essentially rented out its national bank charter to a payday lender in order to facilitate that nonbank entity's evasion of the requirements of state law that would otherwise be applicable to it."

OCC examiners conducted an extensive review of the bank's payday lending activities, including on-site reviews of Dollar Financial Group loan stores in several states. The examiners found that bank management was not adequately monitoring or controlling its third party loan origination activities, compliance responsibilities, quality assurance, or internal audit programs. In addition, the examiners found that Dollar had opened stores in some states and begun originating payday loans without the bank's knowledge or approval.

Other practices criticized by the OCC included Eagle's lack of knowledge that Dollar had actively promoted rollovers of payday loans booked by the bank by providing an incentive to Dollar's employees, which resulted in a higher volume of rollovers than new loan originations and misuse of the loan product for long-term credit.

In addition, Eagle had also failed to comply with eight of ten requirements of a Memorandum of Understanding issued in 2000 that was intended to address safety and soundness problems at the bank.

Under the Consent Order, the bank must:
Adopt, within 30 days, an exit strategy establishing an orderly plan to discontinue its payday lending operations by June 15, 2002. As part of that written plan, the bank must execute an agreement with Dollar Financial under which Dollar will pay the bank $600,000, in installments, through June 15, 2002, and will reduce the payday loans booked at the bank by no less than $5 million by January 5, 2002.

Limit outstanding loans made under its "Cash 'til Payday" program to no more than 100 percent of capital.

Establish controls during the wind-down period to ensure that new payday loans originated during that period are extended in a safe and sound manner. Develop a strategic planning process that establishes objectives for the bank's risk profile, earnings performance, growth, balance sheet mix, off balance sheet activities, liability structure, capital adequacy, and reductions in the bank's non-performing loans.

Develop a comprehensive analysis of any new products or services and provide such to the OCC.

"This case demonstrates the dangers inherent in arrangements under which national banks rent out their charters to nonbank providers of financial services," said Mr. Hawke. "Not only did Eagle allow itself to become a mere appendage to Dollar, but it effectively collaborated in Dollar's scheme to evade state law requirements that would otherwise be applicable to it."

Funding our payday loan business is difficult for the majority of us. There are multiple solutions. Over the next several weeks, we will cover several novel approaches and solution providers.

The opportunities in the payday advance industry are boundless! However, as with everything, due diligence is always recommended.

If you have comments, questions, topics you would like covered...PLEASE contact:
The Payday Guys
paydayguys2@paydayandpaycheckloans.com
http://www.PaydayAndPaycheckLoans.com
1-702-889-9555 PST USA