Payday Lenders: Regulators Are Forcing Banks to Cut Us Off


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Payday lenders claim they are on the brink of collapse, alleging federal regulators are pushing banks to stop doing business with the providers of short-term, high-interest loans.

The Community Financial Services Association of America, which represents the payday industry, and Advance America, Cash Advance Centers Inc.—one of the industry's largest firms—have filed an emergency motion that seeks a preliminary injunction against regulators. The two want the court to block what they allege is arm twisting of banks by the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp.

The filing alleged that "leading officials" at the three regulators for over three years have been "carrying out a backroom campaign" to convince banks to terminate their accounts with payday lenders. It said regulators "have made clear to regulated banks that refusal to cut off payday lenders will result in regulatory retaliation."

Whether spurred by regulators or not, banks appear to have been cutting ties. Advance America said in its legal filing that in recent weeks five banks, including U.S. Bancorp and BBVA Compass, have notified it they would end their relationships with the firm.

"It has brought us to a point where we are in an emergency situation," said Patrick O'Shaughnessy, Advance America's chief executive. "This is a threat that isn't direct—it's using a shadow campaign to cut off access to financial services." U.S. Bank and BBVA declined to comment.

Payday loans have been a financial-services flashpoint for some time. These are short-term loans, generally for $500 or less, that are typically due as often as people's next paycheck. The loans have high interest rates, usually in triple-digit territory, and are mostly used by borrowers who don't have access to regular bank loans because they have low credit scores.

Many say payday firms engage in abusive lending practices to low-income borrowers. Payday lenders counter that they are "a lawful and legitimate industry" that serves borrowers neglected by banks.

The court is expected to rule or hold a hearing on the motion—filed last week in the U.S. District Court for the District of Columbia—by mid-December, according to the industry association.

Difficulties on the banking front have occurred as the payday industry has struggled. Loan volume has been declining within the industry, totaling $39.5 billion in 2015, down 14% from 2013, according to John Hecht, an analyst with Jefferies LLC who covers the industry. There were 16,480 payday storefront locations in 2015, down 7% from a year prior, according to Mr. Hecht.

In June, the Consumer Financial Protection Bureau released proposed rules for payday lending that seek to rein in lending by making sure borrowers can afford the loans they are signing up for.

A pullback by banks is a graver threat. Without a banking relationship, it becomes harder for a payday lender to deposit cash it receives, extend loans to borrowers or pay employees. If payday lenders run out of banks, "then they don't exist," Mr. Hecht said.

The payday industry association has been fighting in court over bank access since 2014 when it first filed suit along with Advance America against regulators. That action came after a first wave of banks canceling relationships with lenders. As a result, some lenders went out of business, while others were forced to turn to smaller banks. The action is ongoing, and the emergency motion was part of the litigation.

To support their contention that regulators are behind a pullback, payday lenders point to a report released by the House of Representatives Committee on Oversight and Government Reform in late 2014. The committee report noted the FDIC's involvement in a Justice Department initiative aimed at forcing banks to end relationships with high-risk businesses, including the payday industry.

The House report said senior FDIC policy makers opposed payday lending "on personal grounds" and attempted to use the regulator's authority to bring an end to this type of lending. The report said FDIC examiners "effectively ordered banks to terminate all relationships with the industry."

An internal report at the FDIC said its involvement in the Justice Department initiative was "limited" and " inconsequential." But the report was critical of the "manner" in which some FDIC staff communicated with banks regarding payday lending. The FDIC in 2015 issued guidance urging banks to focus on risks of individual relationships, "rather than declining to provide banking services to entire categories of customers."

In recent years, Advance America lost some of its banking relationships, but the latest cutoffs are a larger blow, notably the loss of U.S. Bank. That is the last remaining large, national bank the payday lender had a relationship with, and it covered all the firm's payroll and payment-transfer processing. Advance America says it is now trying to piece together a network of smaller banks.

The day after informing Advance America it was terminating its relationship, U.S. Bank told a smaller lender, NCP Finance Ohio, that it was cutting a relationship with that firm, the court filing said. This happened even though U.S. Bank tried six weeks earlier to get NCP Finance Ohio to sign up for other services, the filing said. NCP didn't reply to requests for comment.

The filing added that U.S. Bank terminated relationships with at least two more payday lenders after that.

This summer, U.S. Bank terminated a more than 20-year relationship with QC Holdings, a large payday lender based in Overland Park, Ks., said Douglas Nickerson, the company's chief financial officer. He added that the bank didn't give a reason for its action.

A U.S. Bank spokesman declined to comment on the individual bank terminations.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Telis Demos at telis.demos@wsj.com


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