Consumer groups challenge payday loan prepaid cards
Cleveland Plain Dealer - May 8, 2012
More than two dozen consumer groups want to block a bank’s partnership with CheckSmart, a payday lender based in the Columbus suburb of Dublin.
The request to a federal regulator comes as CheckSmart’s parent company, Community Choice Financial Inc., prepares to launch an initial public stock offering.
The consumer groups told the Office of the Comptroller of Currency that CheckSmart’s partnership with Urban Trust Bank of Florida allows the payday lender to skirt state payday lending caps.
“This is like payday lending on steroids,” said David Rothstein of Policy Matters Ohio, one of the consumer groups that signed onto the letter. “The prepaid card has its whole other fee schedule.”
The prepaid cards, issued by Urban Trust Bank and managed by Insight LLC, a company owned partly by CheckSmart, carry fees for transactions like checking card balances, purchases and ATM withdrawals.
In addition, some of CheckSmart’s cards provide overdraft protection for customers who direct-deposit their checks on the card. Lauren Saunders of the National Consumer Law Center said that gives the company yet another way to let consumers borrow against their next paycheck.
CheckSmart spokeswoman Bridgette Roman said the company’s critics are misinformed.
“Loan proceeds are never issued onto an Insight card unless a customer cashes their money order and, in a separate transaction, asks to have those funds loaded on to an Insight card,” Roman said in an email.
SEC filings by Consumer Choice Financial, however, say the CheckSmart card “allows qualifying customers to receive loan proceeds from a state-licensed third-party lender directly onto their cards, which we believe is an innovative feature of these cards. This feature is currently offered in Arizona and certain stores in Ohio.”
The letter, signed by groups including the National Consumer Law Center and Consumer Federation of America, contends the practice is a threat to Urban Trust’s safety and soundness and warns that if the OCC doesn’t block the practice, other banks and payday lenders will follow suit.
“Regulators have not smiled upon using a bank charter to circumvent state laws,” said Bob Ramsey, an analyst who covers the banking and payday lending industries for FBR Capital Markets.
Ramsey said payday lenders and banks that offer payday loans to their own customers are waiting to see what approach the Consumer Financial Protection Bureau takes on payday lending. The regulator is the first federal agency with supervisory authority over both banks and payday lenders.
The question of whether payday stores ignore Ohio law is academic.
Ohio law is so loophole-ridden that payday lenders routinely get around the state’s 28 percent payday loan cap by offering triple-digit-interest loans under other statutes.
CheckSmart, for example, issues the two-week loans under the state’s Mortgage Loan Act.
In its SEC filings, Consumer Choice Financial explained how this works: “In Ohio, one of our companies makes loans at the highest rate permitted by applicable law and disburses loan proceeds in the form of money orders. One of our other companies, sharing the same office, at the borrower’s election cashes these money orders for a fee.”
On Monday, CheckSmart’s parent company, which has asked to trade under the ticker symbol CCFI, cut its expected share price to between $10 and $12. Late last year, it had said it expected shares to cost between $13 an $15.