Unprofitable for years, in hock to the federal government and the subject of a Justice Department probe: Things looked bad for Brentwood lender National Bank of California.
Then things got worse.
The bank is now embroiled in a battle with payday loan borrowers over one of the bank’s business lines: processing electronic payments for the high-interest lenders. That seems to have held up a sale that would have given the bank new life.
The bank’s corporate parent, publicly traded NCAL Bancorp, announced plans in September to sell the institution to an unnamed investor in a deal that was supposed to have closed by the end of March and given the bank much needed capital. But just weeks later, borrowers who took out loans from online payday lenders accused NCAL and other banks of helping those lenders collect what they claim are illegal debts.
That’s likely spooked the investor who planned to take over the bank, holding up a deal that was already contingent on the struggling bank fixing its previous problems.
That deal would have required the bank to repay $10 million in money it owes to the U.S. Treasury under the Troubled Asset Relief Program and to put to rest a federal inquiry into its relationships with payday lenders.
The bank disclosed the federal probe last year, but executives and federal officials would not discuss the matter. Now, lawsuits filed against NCAL and other banks over payday loan processing offer a more detailed look at the potential problems with that line of business.
Trade publication American Banker reported last month that the lawsuits are moving forward after clearing legal hurdles.
In 11 class-action cases filed in federal courts around the country, payday loan borrowers say lenders – who operate online, not out of brick-and-mortar locations – are breaking state laws and that banks that process payments for those lenders are complicit in the alleged crime. National Bank of California is named in two of those cases, one filed in Georgia and one in Connecticut.
NCAL executives did not return calls for comment for this article.
Banks have asked judges to reject the actions, saying plaintiffs should go after the payday lenders instead.
One of the plaintiffs suing NCAL borrowed $1,500 from Western Sky Financial, a lender based on the Cheyenne River Indian Reservation in South Dakota. Most of the lenders mentioned in the class-action cases are based overseas or on tribal lands, putting them beyond the reach of state lending laws.
Small change
The Western Sky loan to Lafayette, Ga., resident Jessica Parm had an effective annual interest rate of more than 230 percent, according to the lawsuit. But in Georgia, lenders can’t legally charge more than 16 percent interest annually on loans of that size.
Online payday lenders collect on their loans through automatic bank transfers, and the transfers in Parm’s case were processed by National Bank of California, according to the suit.
Banks are a necessary part of the payday loan business because they initiate money transfers through the Automated Clearing House, or ACH, system. NCAL, with assets of $344 million, might be tiny by national standards, but it perennially ranks among the country’s biggest processors of ACH payments, according to industry group Nacha, formerly the National ACH Association.
Attorneys for Parm and other plaintiffs say that because high-interest payday loans are effectively illegal in 13 states and the District of Columbia, banks that process loan payments from borrowers in those states are collecting illegal debts.
What’s more, plaintiffs say that banks are knowingly breaking the law. Federal bank regulations require banks to know who their customers are and what they do, so banks should have known high-interest loans in Georgia and other states are illegal and should have refused to process payments for lenders, said Darren Kaplan, a partner at New York law firm Chitwood Harley Harnes who is the lead counsel in the payday lending cases.
“Banks are the people charged with not allowing illegal types of transactions onto the system,” Kaplan told the Business Journal. “Everyone looking at this has said this is our line of defense.”
But John Friedemann, a partner at Santa Rosa law firm Friedemann Goldberg who represents NCAL, said it doesn’t make sense to go after the banks instead of the lenders. He noted that lenders work with payment processing companies, who in turn work with banks.
“The plaintiffs have an issue with payday lenders,” he said. “But instead of going to the lenders, they’ve gone to the banks that work with the payment processors of payday lenders. They’re two steps away.”
