On February 14, the Office of the Comptroller of the Currency (OCC) terminated a longstanding cease-and-desist order against payday lender ACE Cash Express, Inc. Under the terms of the order, which had been in effect since 2002, ACE Cash was prohibited from “entering into any kind of written or oral agreement to provide any services, including payday lending, to any national bank or its subsidiaries without the prior approval of the OCC.” The lifting the order was done without fanfare, and the OCC did not issue a press release or other public statements explaining the reasons for its action. However, we believe it may portend a favorable attitude at the federal level toward “bank model” lending relationships.

The OCC placed ACE Cash under the 2002 order in response to alleged unsafe and unsound practices that amounted to a “pattern of mismanagement” of the policies and procedures of Goleta National Bank, the national bank with which ACE maintained a lending relationship. The specific allegations included gross carelessness in the handling of loan files (e.g., 641 files were allegedly disposed of by throwing them into a dumpster) and systemic failures in recordkeeping that resulted in numerous violations of the Equal Credit Opportunity and the Truth In Lending Acts. In announcing the order on October 29, 2002, then-Comptroller of the Currency John D. Hawke, Jr. said, “We have expressed concern many times in the past about the risks national banks expose themselves to when they rent out their charters to third-party vendors and fail to exercise sound oversight.”

Under the terms of the parties’ master loan agency agreement, ACE Cash purchased a 90-95 percent participation interest in payday loans originated by Goleta National Bank, and performed marketing, servicing and collections activities under the direction of Goleta. The 2002 order did not address the parties’ bank partnership lending program, except for the ambiguous statement that “the Comptroller has substantial policy concerns regarding programs of this type,” which could be read as addressing the way the program was operated versus its nature.

ACE Cash remains subject to a related CFPB consent order that does not restrict the firm from contracting with national banks or other financial institutions to perform servicing activities related to lending.

Pepper Points

• The OCC’s lifting of the consent order against ACE Cash should be viewed in light of numerous articles quoting Comptroller of the Currency Joseph Otting as having a strong interest in seeing national banks increase small-dollar lending to consumers, including to borrowers who are economically disadvantaged.

• If prudently managed in a manner consistent with the safety and soundness principles outlined in OCC Bulletin 2013-29 (Risk Management – Third Party Relationships), lending relationships between national banks and nonbank lenders offer an efficient means for national banks to reach a wider pool of potential borrowers.

• The OCC’s action should not be interpreted as signaling a more permissive posture toward the type of safety and soundness failures that ACE Cash was alleged to have engaged in.