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Payday Lending Practices Raise Ire

Loans: Lenders' pacts with banks exempt them from protection laws, study says.


Payday lenders are increasingly partnering with banks, and using the exemptions contained in bank charters to avoid complying with state and local consumer protection laws, two consumer groups say in a study released Tuesday.

In addition to attracting the ire of consumer groups, such as the U.S. Public Interest Research Group and the Consumer Federation of America, the so-called rent-a-bank practice has come under increased scrutiny by regulators including the federal Office of the Comptroller of the Currency.

Under a typical arrangement, a bank would allow a payday lender to issue loans or cash advances as a "marketer-servicer" for the bank, according to the report. The bank, which is compensated for the arrangement, is nominally involved and accepts little if any of the risk.

When a federally chartered bank is involved, the payday lender can claim that state and local consumer protection laws--including those governing the issuing of small loans--are preempted. Similar arguments are made by lenders who have relationships with state-chartered banks.

The number of banks involved has gone from two in a 2000 study by the consumer groups, to at least nine in the current study.

"Payday lending is a lucrative, moneymaking machine and the companies are using banks to avoid state laws that protect consumers from predatory practices," said Edmund Mierzwinski, of the research group and a coauthor of the report.

In response to concerns, the Community Financial Services Assn. of America, the Virginia-based trade group, last year adopted a "best practices" directive governing relationships with banks, according to Billy Webster, the group's president.

He said he believes that such loans represent a small portion of the estimated $2-billion payday loan business.

"The comptroller has been pretty emphatic that it is inappropriate for the national bank charter to in fact be rented out so third-party lenders can get around state and local laws," said Robert M. Garsson, a spokesman for the federal agency that regulates 2,200 national banks.

California is one of 25 states that allows payday lending. However, 18 states that prohibit payday loans and have seen an increase in the number of payday loan outlets opened via bank partnering.

With the payday loans, a consumer gives the lender a postdated personal check and receives a small cash loan.

The lender holds the check until the customer's next pay day, at which time the customer can allow the check to be cashed, pay cash to cover the loan plus a fee, or roll it over and pay a fee to extend it.

Consumer groups charge that the fees, which can range upward of $20 per $100 borrowed, amount to triple-digit interest rates on an annualized basis.

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