Industry News

County Bank cuts 'payday' ties; High-interest loans had long been under fire

By TED GRIFFITH The News Journal

County Bank is ending its controversial, eight-year involvement with high-interest "payday" lending companies, a move applauded by consumer activists.

Harold L. Slatcher, president of the Rehoboth Beach-based bank, said Tuesday that the bank will end all partnerships with payday lenders by the end of next month. Slatcher said new federal rules that limit the duration of payday loans mean it's no longer profitable for County Bank to be involved with the high-interest lending.

County Bank was among the most significant players in the payday lending field. At its height, the company had partnerships with 20 payday lending companies, according to a North Carolina consumer activist group.

Consumer activists have long decried payday lending because of the toll the high-interest debt takes on borrowers. Rashmi Rangan, executive director of the Delaware Community Reinvestment Action Council, an advocacy group focused on banking, said the loans can have an annual interest rate of as high as 900 percent.

They are known as payday loans because borrowers pledge to pay back the loans with their next paychecks. The loans are intended to be short term, but borrowers sometimes extend them for months, incurring more interest. Concern about the practice of extended payday loans led federal bank regulators earlier this year to limit the duration of the loans to no more than 90 days in a 12-month period.

In 2003, activists from North Carolina protested outside County Bank's Georgetown branch and called on the bank to end its involvement in payday lending. In March of this year, the Federal Deposit Insurance Corp. cited County Bank for "inadequate" supervision of its payday lending and ordered the bank to upgrade its oversight.

Slatcher said the bank's decision to get out of payday lending wasn't a response to pressure from activists or regulators.

"This is 100 percent our decision," said Slatcher, who helped found the bank in 1990. "At no time did the FDIC ask us to get out of this business, nor did we cave in to pressure from the activists."

The activists, nonetheless, praised the bank's decision.

"This is a great day for Delaware and definitely a great day for consumers," Rangan said.

"Hallelujah," added Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, a leading critic of payday lending. "This is great news."

Payday lending had been highly profitable for County Bank, with that business expected to generate about $3.6 million, or 45 percent, of the bank's projected $8 million 2005 profit, Slatcher said. The discontinuation of payday lending will hurt the bank's 2006 earnings, but Slatcher said he couldn't estimate by how much. He said he's hoping other lines of business, including lending to builders in Sussex County, will help limit the financial impact on the bank. He said the bank remains "well capitalized" and he said there will be no layoffs among the bank's 105 employees. Those involved with the payday lending business will be reassigned to other work within the bank, he said.

County Bank entered the national payday lending market in 1997 as a way of boosting profits. Fees generated by partnerships with payday lending companies allowed the bank to expand its traditional retail banking service in southern Delaware, Slatcher said. He said the bank grew from four branches in 1997 to nine now, eight in Sussex County and one in southern Kent County. Slatcher said the bank hopes to add a 10th branch in the Fenwick Island area in 2007.

Partnerships with County Bank allowed national payday lending companies, including Berwyn, Pa.-based Dollar Financial, to avoid state laws prohibiting high-interest loans, said Skillern of the Community Reinvestment Association of North Carolina. That's because banks can lend according to the laws in their home states even if the loan is made out of state. Delaware in 1981repealed its cap on interest rates lenders could charge as a way of enticing national credit card banks to establish operations here. By teaming up with County Bank, the payday lending companies could claim they weren't subject to a state's cap on interest because they were working with a Delaware bank, Skillern said. The payday lending companies operate the storefronts nationwide through which the loans are made, while County Bank provides the financing for the loans.

Another Delaware bank, First Bank of Delaware in Brandywine Hundred, also has partnerships with payday lending companies. Harry D. Madonna, president and chief executive officer of the First Bank of Delaware, did not return calls Tuesday seeking comment on the bank's payday lending business.

Contact Ted Griffith at 324-2880 or tgriffith@delawareonline.com.

What are payday loans?

They are short-term, high-interest loans, typically for small amounts, around $100. They are called "payday" loans because the borrowers pledge to pay them off with their next paychecks.

Why do consumer activists object to the loans?

Activists criticize the loans for their "sky-high" interest rates, which they say can approach 1,000 percent on an annualized basis. The lenders defend their offerings as "legitimate" loans that meet the short-term needs of customers.