Consumer groups are claiming victory in an encounter with a bank they say evaded the law in collaborating with a payday lender.
The National Consumer Law Center (NCLC) and Center for Responsible Lending (CRL) fired off a letter to the U.S. Office of the Comptroller of the Currency (OCC) in May, claiming that Florida-based Urban Trust Bank (UTB), the issuer of the Insight prepaid cards used by the payday lender CheckSmart, was evading state payday and usury laws.
This week the OCC said it has found "violations of law and regulations and unsafe and unsound banking practices" by the institution.
The OCC said that the consumer groups' letter "raises several troubling concerns," including "that the prepaid cards are sold in cooperation with a major payday lender" and have "characteristics similar to predatory payday loans."
"Banks should not help payday lenders to evade state law," said Lauren Saunders, managing attorney of NCLC's office in Washington. "We applaud the OCC for scrutinizing the sordid relationship between Urban Trust Bank and the CheckSmart prepaid card payday loans, and urge the OCC to eliminate payday loans completely from the Insight prepaid cards."
The groups noted that UTB and CheckSmart have discontinued one version of the prepaid card payday loans but continue to offer payday loans presented as overdraft fees of $0.15 per $1 negative balance or $15 per $100 borrowed.
The OCC has entered into a Formal Agreement with UTB requiring the bank to correct legal violations, to submit an analysis of its prepaid card program that "fully assesses the risks and benefits of this line of business" and to submit for OCC review a business plan that addresses deficiencies in its oversight of CheckSmart.
"Prepaid card payday loans cannot be fixed, and Urban Trust Bank should get out of this business," said Saunders.
After Arizona and Ohio imposed 36 and 28 percent interest rate caps, respectively, the groups claim that CheckSmart, which is owned by Community Choice Financial, Inc. (CCFI), began disguising its payday loans as a line of credit or overdraft protection on prepaid cards managed by Insight Card Services, which is part owned by CCFI, and issued by Urban Trust Bank.
The loans cost $14 to $15 per $100 borrowed, or an annual rate of about 400 percent, but the groups maintain the costs were cloaked in various fees designed to evade state laws. After the consumer groups criticized the loans, CheckSmart dropped the line of credit and CCFI called off its planned initial public offering of stock.