|
The Federal Deposit Insurance Corporation (FDIC) has ordered County Bank, headquartered in Rehoboth Beach, to improve oversight, auditing and training procedures related to its controversial Short Term Loan Program, known as payday lending.
According to a press release posted on the FDIC website, County Bank agreed to comply with an order to cease and desist a number of criticized actions, but the bank neither admitted nor denied using unsound banking practices.
“We plan to fully comply with the stipulations of the order in the time frame specified,” said County Bank President Harold Slatcher this week. “This doesn’t mean that we have to get out of the payday lending business, nor does it mean that County Bank is weakened in any sense.”
But consumer advocates say the FDIC ruling represents a limited victory for borrowers. “It is a small victory. At least consumers of County Bank’s payday loans will receive greater protection than they did before,” said Rashmi Rangan, executive director of Delaware Community Reinvestment Action Council.
“The real victory for consumers will be when County Bank offers affordable banking and small loan products that do not put the consumer in a cycle of debt,” she said.
Payday lending involves short-term loans to individuals who expect to repay the loan with their next paycheck. Slatcher admits the fees for a payday loan are high.
“The fee we charge is $15 to $25 for a $100 loan. We think that’s reasonable given the amount of risk and administration involved. Consumer advocate groups don’t like it because that fee amounts to about a 390 percent annual interest rate, but it’s not a long-term loan,” he said.
A press release from the FDIC indicates County Bank must stop operating with a board and a management that fails to adequately supervise the payday lending program and the third-party merchants that issue and collect the loans. The bank must correct inadequate internal controls on payday lending and must implement adequate information systems to monitor the program, the FDIC ordered.
The bank was also ordered to cease hazardous lending practices, including allowing someone other than the named borrower to execute loan documents. The bank was also ordered to require third-party merchants to adhere to the bank’s loan policies, such as cooling off periods, which allow a borrower to cancel a loan.
While agreeing to comply with the order, County Bank officials also defend their lending fees.
“When they criticize us,” said Slatcher, “they always point to the high interest rate as opposed to the $15 fee. Fees like that are the same, and often less than what people pay to banks or other businesses for returned checks or the fee they pay to get utilities turned back on.”
Dave Gillan, County Bank vice president in charge of the payday lending program, said payday loans go most frequently to pay for emergency auto repairs, a utility bill, for bounced check fees and for overdue rent.
There’s a demand for payday loans, Gillan said. “We’re fulfilling that demand, and we’re doing it in a responsible manner. We’re subject to all of the truth in lending laws, all of our terms are fully disclosed and borrowers know what to expect. Plus, if someone defaults, we make no report to any credit bureau. We take no one to court, and we don’t initiate bankruptcy proceedings.”
Gillan said if County Bank does not offer the loans, people will look for them elsewhere, from unregulated sources. “We think this is a better option,” he said.
But consumer advocates such as Rangan say the bank is insured by the FDIC, which guarantees its deposits, and federal law requires FDIC banks to “affirmatively” serve their community’s credit needs. “The FDIC recognizes that payday loans to individuals who do not have the ability to repay, or that may result in repeated renewals or extensions, … do not help to meet credit needs in a responsive manner,” Rangan said. She called banks that don’t meet consumer needs in an affirmative manner a “disgrace to the community” or at worst, “bottom feeders.”
County Bank’s payday lending program takes advantage of Delaware’s banking laws which – unlike most states – place no limits on the amount of interest that can be charged for loans of money, known as usury.
“Delaware banking laws are very favorable,” said Slatcher. “They’re the same reason why so many credit card companies operate here.” Essentially, Delaware law allows regulated banks to charge what the market will bear.
“We’ve been operating now for eight years, meeting all of the regulations. Now there have been some changes. FDIC is essentially raising the bar and we are complying,” said Gillan.
Other states, however, outlaw the high interest rates charged in payday lending plans. County Bank has been sued by New York Attorney General Spitzer, who charged the bank and two Pennsylvania financial institutions with operating a payday lending scheme in violation of New York’s lending laws.
While that suit is ongoing, County Bank officials say the loans meet a need and can be made very quickly. “They literally can be processed through automatic machines within one second after all of the necessary information has been input,” said Gillan. “But the people we are lending to all have jobs and all have checking accounts. These aren’t unbanked people.”
Gillan and Slatcher say they have demographic profiles of their borrowers. “They are typically people with an income in the $20,000 to $25,000 range who have been caught short for some reason.”
“This is a good, well-run business by a solid community bank,” Slatcher said. “There’s intense scrutiny and regulation and we accept that. These types of things come with the territory. We were one of the first banks in this business and we may end up being the last guy standing – but we intend to stay in it for the long haul.”
Slatcher said FDIC looks at three main areas of interest in assessing the strength of banks and their operations. “The first is financial risk. In the payday lending program, we maintain specific reserves to cover 100 percent of the loans we make. We also require our servicers around the country to maintain deposits covering 120 percent of their outstanding loans. The second area of interest is litigation exposure. Because this is a national program, there is natural exposure to lots of suits. I think we’ve been sued 12 times, but we have never lost – never even come close to losing.”
Slatcher said most of the suits are filed by groups that say the bank is charging too much interest. “But the law always backs us up,” he said.
“The third area is reputational risk. We’ve had articles about our program in newspapers, we’ve been on the radio and television, we’ve had pickets at our branches – what else could happen?” said Slatcher. “There’s never been as much as a hiccup as a result. We’ve lost no depositors, and no one has sold a single share of stock. On the contrary, our deposits continue to grow and there’s a waiting line for our stock shares. Our earnings this year are running 40 percent ahead of last year. The strength of County Bank as a community bank is one of the reasons why we can run the payday lending program so well. Others would and have buckled, under the scrutiny and regulation.”
Slatcher said County Bank is first among the nation’s banks, between $250 million and $500 million in assets, for return on assets, and seventh in the nation in that category for return on equity.
“FDIC in this instance has leveled no criticism of our main bank. We meet every definition of a well-capitalized bank - our earnings are extremely strong,” Slatcher said.
He noted that 70 percent of the money that County Bank lends is in commercial loans for community businesses, 25 percent is in residential loans, 4 percent is in installment loans and less than 1 percent is involved in the short-term lending program. “Less than 1 percent of our assets is involved in payday lending and less than 8 percent of our capital. But 43 percent of our total interest income comes from short term loans. It’s very profitable and we have no intention of getting out.”
Slatcher makes no apologies for the power of that profitability. “We have nine branches which is outstanding given our size and the years we’ve been in operation. We’ve been able to take advantage of our capital to open them.”
County Bank will be celebrating its 15th anniversary this year.
|
