Should Regulators Approve Sale of Banco Popular Branches to Banc of California?

Editor’s note: On September 4, 2014, Banc of California announced a new, public Community Benefit Plan.  Read more details about the plan here: CRC Announces Support for Community Benefit Plan by Banc of California as Part of Banco Popular Branch Acquisition

Banc of California is proposing to buy 20 Banco Popular branches in Los Angeles and Orange counties.

However, Banc of California leadership has decided that their community reinvestment plan can’t be shared with the community. 

In HuffPost Politics today, Professor Peter Dreier questions where the former Mayor of Los Angeles, Antonio Villaragoisa has been during the controversy surrounding Banc of California’s proposed purchase of the branches.  The former mayor was hired last summer by Banc of California.

The OCC should deny Banc of California’s application to buy the Popular Community Bank’s branches — or to buy any other banks — until it sits down with the members of coalition to hammer out a transparent, community reinvestment agreement that spells out specific commitments.

Read the rest of the post here:

Can LA’s Communities Bank on Antonio Villaraigosa?

Seven Important Updates on Payday Lending in California and Nationally

Editor’s note: The CFPB, a federal agency, has proposed new rules for payday, car title, and high-cost installment lenders.

BUT, they need to hear from consumers- that means you! We have an easy-to-use page where you can weigh in- it only takes a minute and will help bring about important consumer protections with these loans. Please share a line or two in the comments box about why you care about this issue and want to see strong federal reforms.

PS: You do NOT have to be a payday, car title, or installment borrower to sign the petition.

This has been a busy summer for the payday loan industry!  We’re including seven important updates below.  While you’re here, consider signing our petition, calling on the CFPB to include STRONG consumer safeguards as it designs new rules for payday loans:  Petition to CFPB Director Richard Cordray

ACE Cash Express

How Ace Cash Express  staff were trained to encourage customers to continue renewing their payday loans. (From Ace Cash Express training manual)

1) On July 10, the CFPB announced a settlement with Ace Cash Express which has 1,600 locations nationwide and 200 in California. As part of the settlement for illegal debt collection tactics, the payday lender will pay $5 million to the CFPB, and will return $5 million to customers. One of the “smoking guns” from the settlement is a graphic from a 2011 training manual for the company. The picture spelled out how Ace Cash Express employees should encourage customers to renew their payday loans if they couldn’t afford to pay them back.(See graphic here). In other words, advocate concerns about the “payday loan debt trap” keeping people in a constant cycle of taking out new loans and paying high fees are well-founded.

Local momentum continues to build, with California cities moving policies to protect communities from the saturation of payday lenders.

2) In Fresno, the city council unanimously voted for a new ordinance that requires a new permit application and a “buffer zone” of at least a quarter mile between locations and limits areas where new stores can open.

3) Daly City adopted similar location restrictions.

4) In Victorville, the town council passed a 45 day moratorium on approving permits for money service businesses, including payday lenders, check cashers, and car title lenders.

5) Local leaders are also working on payday lending restrictions in San Mateo and Menlo Park.

6) At the federal level, House Republicans have recently attacked “Operation Choke Point” which is the DOJ’s initiative to prevent banks from enabling illegal online payday lending, among other things. Four Oaks Bank, the first settlement under Operation Choke Point, allegedly facilitated $2.4 billion in illegal transactions, and later settled with the DOJ.

7) The Protecting Consumers from Unreasonable Credit Rates Act was recently introduced in the House. The bill would extend existing protections for servicemembers, and caps interest rates at 36% for all consumers at 36% for products including payday and car title loans. The Senate version of this bill is co-sponsored by Senator Barbara Boxer.

Most promising is the Consumer Financial Protection Bureau’s upcoming rule-making process, which has the potential to instill significant industry reforms to end the payday loan debt trap for consumers. While the CFPB cannot impose an interest rate cap, CRC and our allies are calling for the Bureau to issue the strongest proposal feasible, including a limit on the payday loan cycle, a determination of the borrower’s ability to repay the loan and a prohibition of the lender’s direct access to consumers’ bank accounts.

This is a critical moment, now is the time to push for a strong rule as it is  developed over the next several months.

Please join CRC, advocates and consumers from across the country in sending a message to the CFPB urging them to craft a strong rule to end the debt trap. Sign our petition to Director Richard Cordray and make sure the new rules end abusive practices!

Sign petition here and please share with your networks: Payday Loan Petition to Richard Cordray

Thank you for your support!

Liana Molina

Payday Campaign Organizer

California Reinvestment Coalition

Community leaders protest sale of 20 local Banco Popular Branches in Los Angeles

Banc of California Press Conference Picture

Editor’s note: On September 4, 2014, Banc of California announced a new, public Community Benefit Plan.  Read more details about the plan here: CRC Announces Support for Community Benefit Plan by Banc of California as Part of Banco Popular Branch Acquisition

Earlier this week, prominent local Los Angeles leaders gathered at a downtown Banco Popular and held a press conference, urging a bank regulator to postpone the sale of the 20 branches until more information is given to the community about the acquisition. Banc of California, headquartered in Irvine, is trying to buy 20 Banco Popular branches which are located in Los Angeles and Orange counties.

In its application to buy the branches, Banc of California said that it would eliminate three checking account features at Banco Popular, including cash incentives for opening new accounts, interest rate bonuses on savings when customers maintain their checking accounts, and a debit card reward program.  Community advocates criticized the proposed cuts, saying that these features help people to open and maintain checking accounts, which can be the first step in building a financial history.

Community leaders are deeply concerned that Banc of California has not provided much detail in its community reinvestment activities since its last CRA exam, which examined the bank’s activities from January 2010 to December 2011 and earned the bank a “satisfactory” rating.  Since that time, the bank has grown considerably, and given its larger size, the bank’s next Community Reinvestment Act will be more extensive. Despite the nearly 2 ½ years that have passed since that exam, the bank did not provide much information in its acquisition application.  The bank noted a recent investment in a Community Development Financial Institution as well as the fact that bank staff volunteer with local nonprofits.

The Office of the Comptroller of the Currency is the bank regulator that will decide whether or not to approve the bank’s acquisition application.

Paulina Gonzalez, executive director of the California Reinvestment Coalition, an umbrella organization with over 300 organizational members throughout the state, explains: “While other large banks develop their CRA plans with input from the community, Banc of California has not. While other large banks make their community reinvestment goals public, Banc of California has not. The FDIC and the Federal Reserve have both required this type of transparency in recent bank mergers and acquisitions, and we expect no less from the Office of the Comptroller of the Currency.”

The comment period for the public to weigh in on the bank’s acquisition was recently extended by the Office of the Comptroller of the Currency (bank regulator) to August 19th.  The comment period was extended because the bank originally published its announcement in the Orange County Register and New York Times.  The California Reinvestment Coalition pointed out to regulators that current Banco Popular customers may have missed the notice.  The new notice was published in La Opiniónand Los Angeles Times.

The California Reinvestment Coalition, an umbrella coalition of over 300 organizations throughout California, is urging the Office of the Comptroller of the Currency to postpone or deny Banc of California’s application until the Banc is more transparent with the community.

Picture from Press Conference: Banco Popular Protest

Picture of 20 branches to be acquired: 20 Branches.

Letter from California Reinvestment Coalition to Bank Regulator, opposing merger: CRC letter

The Banc of California Acquisition application can be downloaded here: Banc of California application

If you’re interested in learning more about the Community Reinvestment Act, read this article:

The Community Reinvestment Act: A Law That Works

If you’d like to learn more about this recent proposed acquisition, these articles give more context.  Please note, some of the American Banker articles require a subscription to view.

Communities Deserve Transparency in Bank M&A In this Op-Ed, Paulina Gonzalez, executive director of the California Reinvestment Coalition, explains why CRC is opposing Banc of California’s proposed acquisition of 20 Banco Popular branches. Gonzalez cites a lack of CRA transparency and questions how the  Office of the Comptroller of the Currency can review the proposed acquisition when Banc of California has provided few details on bank activities that would qualify for credit under the Community Reinvestment Act. BankThink.July 24, 2014.

East L.A.’s Pan American Bank gets $6-million bailout from other banks In this article about 16 community and regional banks investing in Pan American bank, opposition to Banc of California’s proposed acquisition of 20 Banco Popular branches is cited. E.Scott Reckard.Los Angeles Times. July 23, 2014.

Fusión bancaria podría eliminar programas para latinos Prominent Los Angeles community leaders gathered at a local Banco Popular branch to speak out about the lack of transparency in Banc of California’s community reinvestment plans. Araceli Martínez Ortega.La  La Opinión. July 22, 2014.

Banc of California expansion opposed by advocates for minorities, low-income CRC’s concerns about Banc of California’s lack of a public Community Reinvestment Act plan are cited in this article. Paulina Gonzalez, executive director at CRC, explains the importance of transparency in building trust with customers. Josie Huang. Southern California Public Radio. July 22, 2014.

Advocacy Group Secures Review of California Branch Deal When Banc of California announced its intention to acquire 20 Banco Popular branches, it published notice in theOrange County Register and the New York Times. In CRC’s letter to the OCC opposing the acquisition until Banc of California is more transparent in its plan for the branches and community, CRC members expressed concern that current Banco Popular customers may not have seen the notice. This article explains that the Office of the Comptroller of the Currency required Banc of California to re-publish the notice in local media, including the Los Angeles Times and La Opinión. The OCC also extended the comment period on the proposed acquisition 30 days, until August 19th. Chris Cumming. American Banker. July 18, 2014.

Banc of California, Advocacy Group Spar over CRA Plan CRC’s opposition to Banc of California purchasing 20 Banco Popular branchs is cited in this article. Paulina Gonzalez is quoted about the bank lacking a public community reinvestment plan. Chris Cumming.American Banker. July 17, 2014.

Banc of California Expects OK of Branch Purchases CRC’s support for Banc of California to release a public reinvestment plan prior to its acquisition of 20 Banco Popular branches is cited. Andrew Edwards. Los Angeles Business Journal. July 15, 2014.

Activists Oppose Banc of California Acquisitions CRC’s opposition to Banc of California’s acquisition of 20 Banco Popular branches is cited in this article. Andrew Edwards. Los Angeles Business Journal. July 14, 2014.

Overdraft fees are still hitting us hard, and hitting lower income, nonwhites the hardest

The solution is for banks to remove the overdraft feature. Period.

Back in 2010, federal regulators responded to public outrage over the “$35 cup of coffee” – the result of a debit card charge that went over by $5 and triggered a $30 fee – by requiring that banks give customers the choice to “opt in” for overdraft service or not. Some consumer advocates called for better disclosure, urging large, bold print in clear language and simple formats so that consumers would make a more informed choice.  Four years later, new research by the Pew Charitable Trusts shows that consumers are still paying overdraft fees- now averaging $35- while over half do not remember signing up for that option.

The communities that CRC advocates for are hit hardest.

Overdraft fees take a huge chunk out of people’s pockets. People who pay them usually pay 3 or more and most report that their last overdraft ended up costing them at least $30 , sometimes over $100 to over $200 in fees while their account was negative. Predictably, the communities that CRC advocates for are hit hardest: people who earn under $100,000 are more than twice as likely to pay these fees, and nonwhites are 85% more likely than whites to pay them.

The fees cause a ripple effect: over a quarter of overdrafters go on to close their checking account because of overdrafts, thereby increasing the rate of unbanked and underbanked households who to turn to check cashers and prepaid cards for basic financial services. No wonder the members of our community with the least amount of money to spare- welfare recipients-  tend to have an attitude of “we don’t do banks.”

Clearly, requiring banks to give customers the choice to “opt-in” and to provide better disclosure did not reduce the harmful effects of overdraft, so what will?

Most overdrafters say they would rather be declined at the register than be allowed to overspend and charged a $35 overdraft fee.

The simplest answer is this: banks should remove overdraft from their accounts. This is not a pipe dream. Major banks are finally getting the idea that people don’t want bank accounts that will cause them to fall into fee traps. Bank of America, Citibank and Union Bank all have accounts now that either do not allow overdrafts for debit card purchases (the biggest source of these charges) or not at all.

With these options, customers do not have to turn to unregulated products like prepaid cards. Customers can use their debit cards in major ATM networks so they can avoid out of network fees that can also add up. And most importantly, customers can use their debit cards with the security that if they try to buy something without enough money in the account, they won’t get charged a fee because the bank will just decline the transaction.

Simple. Affordable. Safe.

CRC has developed a set of standards for bank accounts called “SafeMoney” that advocates, service providers and everyday people can use to evaluate potential bank accounts. We are using it with welfare administrators and financial education providers to help welfare recipients avoid ATM and overdraft fees all at once. Advocates working to reduce the rate of unbanked and underbanked households should also use it. After all, there is no point to helping someone open a bank account, only to watch them drown in overdraft fees and close their account. No overdraft accounts just make more sense.

 

Banc of California Acquisition of 20 Banco Popular Branches Opposed

Editor’s note: On September 4, 2014, Banc of California announced a new, public Community Benefit Plan.  Read more details about the plan here: CRC Announces Support for Community Benefit Plan by Banc of California as Part of Banco Popular Branch Acquisition

The California Reinvestment Coalition, a nonprofit coalition of over 300 membership organizations located throughout California, is urging the Office of the Comptroller of the Currency to not approve Banc of California’s acquisition of 20 Banco Popular branches located in Los Angeles and Orange County.   The full text of CRC’s letter to the OCC is included below.  If you would like to view Appendix A (a chart of related transactions) or B (a letter from Richard L. Lashley to Banc of California CEO Steve Sugarman), you can view them in the PDF of the complete letter here.

July 11, 2014

Office of the Comptroller of the Currency

Attn: Louis Gittleman

District Licensing

1225 17th St.  Suite 300

Denver, Colorado 80202

Re: Opposition to Banc of California’s proposed acquisition of Banco Popular branches, request for extension of the comment period, request for public hearings

Dear Mr. Gittleman:

The California Reinvestment Coalition (CRC) is a membership organization whose mission is to advocate for fair and equal access to banking and financial services for California’s low-income communities and communities of color.   CRC’s members consist of over 300 organizational members working in these communities across the state of California.  CRC files these comments in opposition to the proposed acquisition of 20 Banco Popular Branches by Banc of California (Banc). We believe there are significant concerns and unanswered questions with this proposed acquisition, and these questions raise doubts that this merger will create a sufficient and clear public benefit.  We call for the OCC to extend the comment period, hold hearings on Banc’s application, and deny its application until a strong CRA plan, which has been subject to meaningful public review,  is in place and financial and managerial concerns are addressed.

Banc of California Refuses to Provide Community Members with a CRA Plan: Low Income Communities and Immigrant Communities Worry About Loss of Services

Banc of California’s proposed acquisition is of particular concern to CRC and its members because Banc of California fails to provide details related to CRA qualifying activity in its application to acquire Banco Popular branches.  The bank’s application does not include plans for future CRA qualifying activity, and except for one recent investment, does not provide a history of the bank’s record of CRA qualifying activity.

Banco Popular’s business model has focused on meeting the banking needs of a largely Latino, Asian, and immigrant customer base.   Preserving this business model is especially important given that it serves communities that have been historically underserved by financial institutions. Latinos represent 37% of Banco Popular’s deposits in the 20 branches Banc seeks to acquire, and HMDA data for Banco Popular shows that 42% of its mortgage home loans were to Latino borrowers and 68% of these loans were made in neighborhoods of color.[1]   While 7% of Banco Popular deposits come from branches located in low income census tracts, 0% of Banc’s deposits come from branches in low income census tracts.   Even more strikingly, only 25% of Banc of California’s branches are located in majority minority zip codes, while 85% of Banco Popular branches are located in majority minority zip codes.[2]  Given that Banc of California’s business model has NOT historically focused on a minority or low income customer base, more specifics related to historical and planned CRA activity by Banc are especially important.

Banco Popular

Banc of California

Percent of branches located in majority minority zip codes

85%

25%

Percent of deposits from branches located in low income census tracts

7%

0%

Note:  Latinos represent 37% of Banco Popular’s deposits in the 20 branches that Banc of CA seeks to acquire[3]

For Banc of California to take over Banco Popular’s presence in these communities, it must be prepared to provide needed services in a fair and CRA-compliant manner.  In historically underserved communities, where trust of financial institutions is already low, a public CRA plan can provide the foundation for the building of trust, partnerships, and ultimately a successful business model.

Given the lack of information related to CRA activity provided in Banc’s application and given its ongoing refusal to provide the public with a plan for its CRA activity, we are concerned that the bank does not have a strong CRA program in place and that it will fail to meet the credit and CRA needs of these communities.    Although we applaud Banc of California’s recent investments in Clearinghouse CDFI and its financial literacy and marketing partnership with the University of Southern California, a strong and full CRA Plan with clear benchmarks is still warranted.  CRA plans provide a level of transparency to communities on a bank’s planned CRA activities and inform affected communities and regulators about how the Bank intends to meet community need in the future, and not just before a merger application.

CRC hopes to help Banc succeed at serving community needs.   If Banc of California has a strong plan to serve the community, it should be proud to share it.  We urge the OCC to hold public hearings to solicit input from underserved community members and to ensure that this input informs a meaningful CRA plan that identifies and addresses local community needs.   Currently the bank’s record is not sufficient for the OCC or the public to determine whether or not the bank will meet the community’s credit needs.

There is precedent for this type of regulator action, in recent mergers by Pac West Bank and Umpqua Bank, both the FDIC and the Federal Reserve urged CRA Plan transparency.  The FDIC facilitated a meeting between the applicant and community groups which resulted in the discussion and development by PacWest of a CRA Plan, with input from community groups. The Federal Reserve made the development of a CRA Plan a condition of merger approval for Umpqua, which did reach out to stakeholders for input in the development of, and comments on drafts of, its plan. We expect that the OCC will do no less than the FDIC and the Federal Reserve to ensure that banks applying for approval of mergers have public CRA plans in place to ensure that community credit needs will be addressed prior to any consideration of an acquisition or merger.  All banks have a responsibility to serve their communities and need to be held accountable through clear CRA benchmarks and timetables.

Latino and Immigrant Communities Did Not Receive Meaningful Notice of Proposed Acquisition

Publishing a notice of the proposed acquisition in the OC Register and New York Times, as Banc did, does not provide meaningful notice to the communities served by Banco Popular.   Both Los Angeles and Orange County, where many of Banco Popular Branches are located, have a rich diversity of ethnic press that serve the area.   The largest Spanish language newspaper in the nation, La Opinion, is distributed in all six southern California counties.  The Chinese Daily News, The Korea Times, and other Asian newspapers also have wide circulation in the communities served by Banco Popular.   In order to provide meaningful opportunity for input by the historically underserved population served by Banco Popular, we are requesting a 30 day extension to the comment period, and more targeted outreach by Banc.

Lack of transparency around Banc’s mortgage lending and CRA activities

As indicated, the application has little information about Banc’s CRA activities. In the past, CRC has raised questions about the Banc’s mortgage lending, with its use of nontraditional mortgage products, as well as the practices of Banc’s wholly owned subsidiary, the Palisades Group, which purchases distressed loans and is in a position to work with homeowners facing foreclosure. We believe the public should have the opportunity to review and comment on Banc’s mortgage lending performance, especially as no such information was provided to the OCC as part of the public portions of the application.  To this end, pursuant to 12 C.F.R. Part 203, Appendix A, CRC formally requests copies of 2013 Home Mortgage Disclosure Act (HMDA) data for Banc of California, and all of its lending subsidiaries and affiliates.  We are specifically asking for the LARs in California, to be given in data format, or other format that can easily be imported into the CRA Wiz program.  We are requesting that Banc provide this data without charge, and within 30 days mandated by the above-cited regulation. We also request, and urge the OCC to review, loan modification, re-default and foreclosure data for Banc of California and affiliates, including the Palisades Group.

Similarly, on April 19, 2014, CRC submitted to Banc a list of fourteen CRA-related questions, a list that we have posed to several banks in the past without controversy. We asked the Banc to respond by late May. The Bank has yet to respond and has given no indication that it will respond to these basic questions about its CRA performance that other institutions had no problem disclosing.  If the bank is serious about its plans to grow in California, then we believe it should take its community reinvestment plans seriously, as other large and small banks have done in California.

In contrast to the sparse public record of Banc’s CRA activities, Banco Popular’s most recent Performance Evaluation demonstrates a commitment to its communities. Specifically, BPNA received “High Satisfactory” for its lending; “High Satisfactory” for its investments, and “Outstanding” for its service activities in California. The evaluation notes a “relatively high level” of community development lending, including “excellent” multifamily lending in LMI tracts in its Los Angeles-Long Beach-Santa Ana MSA assessment area, and nearly 200 community development loans to support the development of over 1,000 units of housing affordable to LMI tenants and for other community purposes during the exam period.  Small business lending in LMI tracts in BPNA’s Los Angeles-Long Beach-Santa Ana assessment area was likewise deemed “excellent.” BPNA received a “High Satisfactory” under the investment test, with 78 qualified investments and $444,000 in charitable contributions made in its Los Angeles-Long Beach-Santa Ana assessment area during the exam period. Finally, BPNA’s regulator found that the Bank was “a leader” in providing community development services in its Los Angeles-Long Beach-Santa Ana MSA, earning the Bank an “Outstanding” rating under the service test.

The lack of transparency in this application, the emergence of Banc as a Large Bank for CRA purposes with enhanced expectations, and BPNA’s record of CRA activity serving its communities, all support the call for Banc to disclose a CRA Plan for how it will serve BPNA’s clients and constituents, as well as the call for an extension of the comment period so that the record can be augmented and so that the OCC has enough information upon which to base its decision.

Financial and Managerial Resource Concerns

Several areas related to Banc of California financial and managerial operations require further investigation by the OCC.  Key findings by the California Reinvestment Coalition, using the CAMELS rating system include:

  • Banc exceeds the regulatory requirements on capitalization and has demonstrated a current ability to access capital markets.
  • Banc’s asset quality as measured by reserves for loans is significantly different than that of Banco Popular’s U.S. Mainland operations.
  • Certain key ratios measuring management performance show underperformance compared to Banc’s peers.
  • Earnings have been volatile in the past five years.

Capital Adequacy

As of March 31, 2014, both Banc of California, Inc. and Banc of California, NA exceeded the regulatory requirements to be considered “well-capitalized.”[4]  In addition, Banc has demonstrated that it is capable of accessing capital markets.  However, earning fluctuations discussed later in this letter, if continued in future periods, could eventually erode capital.

Asset Quality: Loan Portfolio Performance

Banc of California’s reserves for loans as of the first quarter of 2014 was .59%[5], far below that of its peers.   Banc’s own stated peer group median had a reserve for loans of .89%.[6]  This may indicate that Banc considers its portfolio to be better performing and/or less risky than the portfolio of its peers.  This is especially interesting given the rapid growth rate of Banc’s loan portfolio (96.7% grown from 2012-2013; 59.1% from 2011-2012), much of it fueled by acquisitions.[7]  In the absence of tightened credit policies or the routine carving out of Non-Performing Loans (NPL), Other Real Estate Owned (OREO), etc. a rapidly growing loan portfolio would be expected to involve a proportional growth in loss reserves.   We urge the OCC to investigate whether Banc of California is holding adequate reserves to cover its current loan risk.

Possible Disparities between Banc of California and Banco Popular’s Credit Products and Account Services

Although the proposed Banco Popular acquisition carves out NPL, examining Banco Popular loan portfolio performance can provide some insights into possible trends in the markets and customer base which Banc is seeking to enter.  As of the first quarter of 2014, Banco Popular’s U.S. Mainland operations showed total reserves for loans of 1.91%.[8]  This is more than triple that of Banc’s first quarter reserves for loans of .59% and higher than Banc’s peer group median of .89%.  The differences in reserves held by these two institutions indicate that the two banks have very different business models given their customer base.   Disparities between existing underwriting, credit administration, and/or risk identification practices between Banco Popular and Banc of California could signal a significant challenge to implementing a successful acquisition.   In addition to the challenges this can pose to the acquisition, Banc needs to have a strong strategy in place to ensure that it will continue to meet the credit needs of the communities served by Banco Popular.   This has not been demonstrated to date.

In its application, Banc of California reports that it will discontinue the following services currently offered by Banco Popular:

  • New account cash incentives
  • Interest rate bonuses on savings when checking account is maintained
  • Debit card reward program

These services are important for low-income community members because they encourage saving and the opening and maintenance of bank accounts for a population that has been historically unbanked.

In its application, Banc notes that it will review other services provided by Banco Popular to evaluate whether to continue offering them.  Regulators should ensure that the discontinuation of services will not negatively impact the population served by Banco Popular.

Disparities in services and products offered to customers indicate different business models and corporate culture between these two banks exist.  Studies have shown that managing differences in corporate culture is important to successful mergers and acquisitions, and that the lack of synergy between two entities can be central to their failure.

Following comprehensive research performed in recent years and the accumulated experience in many mergers, it is known that, in essence, the main factor that influences

the managers and the workers, primarily in the acquired company, is the degree of the management/organizational culture differences between the two merging organizations.

When the difference of the management culture is considerable, the merger is fated for failure.[9]

Significant differences in corporate culture appear to exist here.  For example, as pointed out above, there is a large disparity in loan reserves between Banco Popular and Banc.  This raises the question of if and how Banc of California is planning on serving Banco Popular’s low income, Latino, Asian, and immigrant customer base that may not have the assets or creditworthiness to secure more traditional and less risky home loans.  The OCC should confirm that Banc of California has an array of mortgage products that are accessible to Banco Popular’s traditional customer base, and that these Banc mortgage products are affordable, safe, and sustainable for these same customers.   In order to serve the banking needs of the communities which it is proposing to enter, Banc will likely have to assess its current procedures, practices, and product offerings for possible changes that balance community needs with risk tolerance.    A public CRA plan provided by the bank, as well as adequate reserves to account for the needs of the market it seeks to enter could help assure the community that Banc has a viable plan to do so.

Management Performance

Management actions can and do affect the overall safety and soundness of a bank.  Assessing its capability and performance involves considering items such as:  The willingness to serve the community’s banking needs; the avoidance of self-dealing; and the effectiveness and appropriateness of management information and risk monitoring systems, in consideration of the institution’s size and complexity.  Understanding these factors will allow the analyst to understand whether management demonstrates the ability to identify, measure, monitor, and control significant risks.  As stated earlier in this letter, the bank’s repeated refusal to provide the community with a CRA plan raises concerns about Banc’s willingness to serve community banking needs.  In addition to requiring a strong CRA plan from Banc, we urge regulators to examine issues signaling underperformance and earning volatility, we also urge a thorough investigation of the Banc’s potential for self-dealing (discussed in more detail later in this letter).

Efficiency Ratios Underperforming Peers

The proposed Banco Popular branch acquisition will more than double Banc’s current network of 18 branches.  Although Banc’s current management team has overseen six acquisitions in three years, in some ways the benefits of these acquisitions have yet to be realized.  Banc’s efficiency ratio is significantly higher than its peers (a lower efficiency ratio is generally considered better, for comparable institutions): 92.14%[10] versus a peer group median of 67.75%[11].  Banc’s efficiency ratio has been above 85% since 2011[12].  The efficiency ratio is a measure of what a bank must spend in order to make one dollar.  So Banc’s peers by comparison, only have to spend 68 cents for every dollar in revenue, whereas Banc must spend 92 cents for every dollar it makes.    This high efficiency ratio may be explained in part by the significant “non-recurring” charges incurred by each acquisition.  However, Banc has indicated in press releases that it continues to explore more opportunities, for example in the San Fernando and San Gabriel Valleys, and Northern California (OC Register, 4/23/14).  Therefore, additional non-recurring charges, and the negative effects on the efficiency ratio, should be anticipated.

Other performance ratios also show underperformance when compared to Banc’s peers.  Return on Average Assets (ROAA) provides insight on how effectively management can generate income from the bank’s available assets.  Banc’s 0% ROAA compares to a peer median of 1.08%.[13]  Since banks tend to be highly leveraged, 1% is considered a benchmark for the banking industry.

Return on Average Equity (ROAE) is another way to assess profitability.  It is especially useful during periods where shareholder equity undergoes significant changes in value, as happened for Banc between 2012 and 2013.  An acceptable ROAE allows banks to attract capital from private investors.   Banc’s ROAE was slightly negative at -.3%[14], compared to a peer median of 9.17%[15].

Related Party Transactions

A diagram detailing the related party transactions by Banc of California has been included as Appendix A to this comment letter.

A letter by Banc of California’s largest shareholder, Richard J. Lashley, a principal at PL Capital LLC, to Banc CEO Steven Sugarman, filed as part of a June 9, 2014 SC 13D SEC filing, raised concerns about related party transactions stating:

I am also concerned about the significant amount of related party transactions engaged in by you, your family and other related parties (e.g. as outlined in the most recent 10-K and proxy including the purchase of CS Financial which was an entity controlled by Mr. Seabold and individuals related to you; the unusual transactions various Sugarman related parties relating to allocation of the CS Financial purchase consideration; the consulting payments to Jason Sugarman; Mr. Seabold’s previous management agreement while he was on the board; etc.).  (sic) [16]

In the same letter, Mr. Lashley goes on to say that Institutional Shareholder Services ranks Banc in the lowest decile for corporate governance and that ISS’s most recent analysis for the 2014 Annual Meeting cited concerns over the size of the 2013 Stock Option Plan.  CRC believes that this warrants further investigation by regulators.

We are also concerned about a host of other issues raised in the letter by Mr. Lashley, a copy of which is attached for your review as Appendix B.

History of Volatile Earnings

Several of the performance ratios analyzed in the management section also apply here.  In addition to those ratios, Net Interest Margin (NIM) is the spread between interest income from loans and investments, versus the interest paid on deposits or borrowed funds.  NIM is used to understand the result of the institution’s implementation of its lending, investing, and liquidity strategies.  Banc’s NIM as of the first quarter 2014 is in line with or slightly better than that of its average peer.  However, when taken as a whole with other performance ratios, there is still cause for concern as to whether future earnings can support operations, capital, and liquidity.

Non-Interest Income Grows Exponentially

In what indicates a significant change in Banc’s business model, Banc’s non-interest income has grown steadily, both as a percentage of income and in absolute numbers.  In 2009, Banc had $1,813,000 in non-interest income or 4% of its revenue; by 2013, non-interest income had grown to $96,743,000 or 45% of its revenue. [17]   Although non-interest income helps insulate banks from interest rate fluctuations (Banc’s greatest source of market risk), there is also research that shows that non-interest income has a larger effect on individual bank risk, and that fee-based activities are associated with earnings variability.[18]

We urge further investigation into the rapid growth of non-interest income and potential impact on bank risk, as well as analysis of this growth in relation to its potential impact on customers, especially low income customers currently served by Banco Popular.    Bank fees have historically impacted low income customers the most.

Banc’s History of Volatile Earnings

Net income has been volatile since 2009, fluctuating between profits and losses.  Between 2012 and 2013, profit declined by 98.77%.[19]  Although Banc currently exceeds regulatory minimums for capital adequacy, these earning fluctuations shown in the chart below, if continued in future periods, could eventually erode capital. [20]

Banc of CA 1

Liquidity

Banc’s loan to deposit ratio (LTD) has been declining for several years.  As of Q1 2014, Banc had an LTD ratio of 77.09%[21], compared to peer group median of 92.84%[22].  This might signal excess unused liquidity.  In other words, Banc may not be effectively using its assets to generate income.

Because liquidity is critical to the ongoing vitality of any bank, liquidity, management is among the most important activities that a bank conducts.[23]

This could negatively impact liquidity and capital in future years, as strong earnings contribute to capital maintenance and support operational strength.  Macroeconomic trends also affect the LTD ratio, e.g. demand for credit, prevailing interest rates, and regional variations.

Conclusion

As previously mentioned, CRC wants Banc of California to succeed.  However, our definition of success includes a robust ability to meet the needs of the underserved communities that is CRC’s mission to advocate for.  This letter is aimed at helping to ensure this critical outcome, no more and no less.

Given the concerns raised in this letter related to the financial and managerial resources of Banc of California and the bank’s continued refusal to provide a CRA Plan, we urge the OCC to conduct hearings, extend the comment period, engage in an in depth investigation of Banc’s safety and soundness, and finally that it require a strong CRA plan which has been subject to meaningful public review and a strategy for serving Banco Popular’s customer base.

If you have any questions about this letter, or wish to talk further, please feel free to contact me at 415-864-3980.

Sincerely,

Paulina Gonzalez

Executive Director

 

Cc:          Comptroller Thomas Curry

Barry Wides

 

 

[1] CRA Wiz

[2] http://www.city-data.com/

[3] Banc of California’s OCC application to purchase Banco Popular branches

[4] Banc of California SEC Filing 10Q for first quarter 2014

[5] Banc of California SEC filing 10Q for first quarter 2014

[6] http://www.snl.com/irweblinkx/peer.aspx?iid=4074352

[7] Banc of California SEC filing 10K 2013

[8] Banco Popular U.S. Mainland Operations SEC filing 10Q for first quarter 2014

[9] The Financial Times.   The M&A Paradox: Factors of Success and Failure in Mergers and Acquisitions.  January 16, 2014.

[10] Banc of California SEC filing 10Q first quarter 2014

[11] http://www.snl.com/irweblinkx/peer.aspx?iid=4074352

[12] Banc of California SEC filing 10K 2013

[13] http://www.snl.com/irweblinkx/peer.aspx?iid=4074352

[14] Banc of California SEC filing 10Q 1st quarter 2014

[15] http://www.snl.com/irweblinkx/peer.aspx?iid=4074352

[16] Banc of California Form SC 13D Filed 6.09.14 pg 10 exhibit 2

[17] Banc of California SEC filing 10k 2013

[18] The dark side of diversification: The case of US financial holding companies.  Kevin J. Stiroh , Adrienne Rumble.

Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA  Received 11 February 2004; accepted 15 April 2005

[19] Banc of California SEC filing 10k 2013

[20] Banc of California SEC filing 10k 2013

[21] Banc of California SEC filing 10Q first quarter 2014

[22] http://www.snl.com/irweblinkx/peer.aspx?iid=4074352

[23] DSC Risk Management Manual of Examination Policies 6.1-17 Liquidity and Funds Management (12-04) Federal Deposit Insurance Corporation

Why we need Operation Choke Point to stop Illegal Online Payday Lenders

Editor’s note: The CFPB, a federal agency, has proposed new rules for payday, car title, and high-cost installment lenders.

BUT, they need to hear from consumers- that means you! We have an easy-to-use page where you can weigh in- it only takes a minute and will help bring about important consumer protections with these loans. Please share a line or two in the comments box about why you care about this issue and want to see strong federal reforms.

PS: You do NOT have to be a payday, car title, or installment borrower to sign the petition.

Operation Choke Point is the name given to the Department of Justice’s increased focus on banks and other enablers of illegal online payday loans and other scams.

Wondering why this focus is necessary?  Take a look at a recent DOJ settlement with Four Oaks Bank.

According to the complaint against Four Oaks Bank, its business relationship with a payment processor essentially allowed illegal online lenders access to customer’s bank accounts to make illegal loans, charges, and withdrawals:

As of today, approximately 97 percent of TPPP-TX’s merchants for which Four Oaks Bank permits debits to consumers’ accounts are Internet payday lenders. A payday loan typically is a short-term, high interest loan that is not secured (made without collateral) and that has a repayment date coinciding with or close to the borrower’s next payday. Most payday loans are for $250 to $700. Annualized interest rates for Internet payday loans frequently range from 400 percent to 1,800 percent or more – far in excess of most states’ usury laws.

Wonder how these loans affect the consumer? Read more from the complaint:

The design, intent, and effect of these fraudulent Internet payday lenders’ conduct
creates a false pretext to withdraw money from borrowers’ bank accounts in amounts far exceeding the reasonable understanding and expectations of borrowers. Through this process of misleading and deceptive Internet payday lending, many of the borrowers are sucked into a vortex of debt and their bank accounts are debited until they are bled dry. Moreover, as a consequence of unanticipated loan extensions, rollovers, and unanticipated interest payments debited from their bank accounts, many of the borrowers incur further harm in the form of substantial overdraft or “insufficient funds” fees from their own banks.

If you want to see the personal impacts, read these stories from the complaint:

During the 20-month period from January 2011 until August 2012, Four Oaks Bank
received at least hundreds of Requests for Proof of Authorization from borrowers’ banks in connection with debits originated by TPPP-TX on behalf of some of its Internet payday lenders. In nearly all cases, the only evidence that a debit had been authorized is an Internet payday loan contract with the kind of facially misleading and deceptive loan repayment language described above.

The borrowers who have stated under penalty of perjury that their bank accounts have been debited without authority include:

a. A.H. is a resident of Arizona, which prohibits loans with an annualized
interest rate above 36 percent. Over the Internet, A.H. received a $400
loan from Payday Lender 2, purportedly of Montana, at an annualized
interest rate of 664.38 percent.

b. L.N. is a resident of Colorado, which effectively prohibits payday lending.
Over the Internet, L.N. received a $355 loan from Payday Lender 3,
purportedly of Montana, at an annualized interest rate of 664.38 percent.

c. C.D. is a resident of Georgia, which prohibits payday lending. Over the
Internet, C.D. received a $305 loan from Payday Lender 4, at an annualized
interest rate of 762.14 percent.

d. D.H. is a resident of Maryland, which prohibits loans with an annualized
interest rate above 33 percent. Over the Internet, D.H. received a $1,000 loan
from Payday Lender 1, purportedly located in Belize, Central America,
at an annualized interest rate of 995.45 percent.

e. I.C. is a resident of Massachusetts, which prohibits loans with annualized
interest rates above 23 percent. Over the Internet, I.C. received a $305
loan from Payday Lender 5, at an annualized interest rate of 644.12 percent.

f. A.H. is a resident of Missouri, which prohibits loans in which the interest
and fees exceed 75 percent of the loan amount, and loans of less than 14
days in duration. Over the Internet, A.H. received a $500 loan from
Payday Lender 6 (operating under a fictitious name), purportedly of San
Jose, Costa Rica, at an annualized interest rate of 1,825 percent for a term of
seven days.

g. D.A. is a resident of New Jersey, which prohibits loans with an annualized
interest rate above 30 percent. Over the Internet, D.A. received a $200
loan from Payday Lender 7, at an annualized interest rate of 612.13 percent.

h. A.W. is a resident of New York, which prohibits loans with an annualized
interest rate above 25 percent. Over the Internet, A.W. received a $305
loan from Payday Lender 4, at an annualized interest rate of 1,095 percent.

i. D.M. is a resident of New York, which prohibits loans with an annualized
interest rate above 25 percent. Over the Internet, D.M. received a $500
loan from Payday Lender 8, at an annualized interest rate of 1,161.36
percent.

j. D.H. is a resident of New York, which prohibits loans with an annualized
interest rate above 25 percent. Over the Internet, D.H. received a $200
loan from Payday Lender 7, purportedly of Utah, at an annualized interest
rate of 1,804.72 percent.

k. D.G. is a resident of New York, which prohibits loans with an annualized
interest rate above 25 percent. Over the Internet, D.G. received a $500
loan from Payday Lender 6, at an annualized interest rate of 1,825 percent.

l. D.R. is a resident of New York, which prohibits loans with an annualized
interest rate above 25 percent. Over the Internet, D.R. received a $200
loan from Payday Lender 7, at an annualized interest of 1,804.72 percent.

m. A.F. is a resident of North Carolina, which prohibits loans with an
annualized interest rate above 36 percent. Over the Internet, A.F. received
a $600 loan from Payday Lender 1, purportedly of Belize, Central America,
at an annualized interest rate of 608.33 percent.

The California Reinvestment Coalition recently signed onto a letter with 26 other state and national consumer protection organizations, calling on the US Senate to support the efforts of Operation Choke Point, you can read the letter here.

UPDATE: If you’re angry about the damage caused by payday loans, consider signing our new petition to the Consumer Financial Protection Bureau, calling on Richard Cordray to implement strong consumer safeguards in the new rules they’re designing for payday loans.  You can sign it here: CFPB Petition

To stay up to date on financial justice issues in California, especially as they relate to low income communities, and communities of color, you can follow the California Reinvestment Coalition on our Facebook page, via TwitterGoogle+, watch our movies on our YouTube Channelsign up to receive our newsletter and action alerts, and of course, visit our website.

Careful! Alternatives to Payday Loans can also be Predatory

Editor’s note: The CFPB, a federal agency, has proposed new rules for payday, car title, and high-cost installment lenders.

 

BUT, they need to hear from consumers- that means you! We have an easy-to-use page where you can weigh in- it only takes a minute and will help bring about important consumer protections with these loans. Please share a line or two in the comments box about why you care about this issue and want to see strong federal reforms.

PS: You do NOT have to be a payday, car title, or installment borrower to sign the petition.

 

The dangers of payday lending has captured the national spotlight, thanks to initiatives like Operation ChokePoint that are cutting off the enablers of illegal online payday loans, research from the Consumer Financial Protection Bureau that demonstrates the “debt trap” faced by the great majority of payday loan customers, and investigations and enforcement actions against payday lenders by the CFPB and other regulators.

While the CFPB is expected to start the rule-making process to regulate payday lenders this year, it’s important that consumers know that other lenders can be just as dangerous to your financial health- including car title loans, pawn shops, and rent-to-own stores.

We’ll be updating this post with stories about loans that are similar to payday loans, with high interest charges, short payback terms, and other loan features that hurt, rather than help consumers.

Alternatives to Payday Loans can also be Predatory

4. “I look at title lending as legalized car thievery,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento advocacy group. “What they want to do is get you into a loan where you just keep paying, paying, paying, and at the end of the day, they take your car.” LA Times: “More auto title lenders are snagging unwary borrowers in cycle of debt”

3. An examination of consumer complaints to state regulators about TMX and its InstaLoan stores shows that the customers are often teetering on the edge. One Floridian appears to have renewed her loan 17 times in 1 1/2 years. Another woman borrowed $3,100 and made $2,600 in payments, but after rolling her loan over seven times she still owed $3,900. Rather than keep paying, she surrendered her car to InstaLoan. A third customer had $886 in monthly income, according to her loan application. Just to renew her $3,000 loan would have required more than a third of her income. Rather than pay it, she, too, surrendered her car.

“I am 59 years old and disabled, and on a fixed income. I am unable to make such payments and they are threatening to repo my vehicle next week,” wrote a Pensacola woman.  Insta-Loophole: In Florida, High-Cost Lender Skirts the Law (Paul Kiel, Propublica, July 25, 2014)

2. In Mesa, the city’s older, heavily Hispanic west side has seen a swarm of auto-title lenders. Moving east toward traditionally higher-income areas, the number of title-lending locations drops off sharply.  “They look for cheap real estate or cheap rental space,” Mesa Councilman Dennis Kavanaugh said. “From a development perspective, I am unaware of any beneficial impact in any location they operate in. … They suck money out of a community and rarely, if ever, give back to the community in any way.”   Quick loans, or quicksand? Title lenders spread across SEV (Maria Polletta, The Republic, June 29, 2014)

1.  According to a 2011 investigation by the magazine Consumer Reports, rent-to-own stores generally charge customers the equivalent of a 100 percent to 300 percent annual interest rate.  For instance, it said, leading chain Rent-A-Center was offering an LCD television for $39.99 a week over a period of 104 weeks. That’s a total of $4,159, more than twice the television’s $1,890 retail price, Consumer Reports said. “Even a high-interest-rate credit card is a better option than rent-to-own,” it said. Alternative credit draws Mainers in, at heavy cost (J. Craig Anderson, The Portland Herald, June 22, 2014)

To stay up to date on financial justice issues in California, especially as they relate to low income communities, and communities of color, you can follow the California Reinvestment Coalition on our Facebook page, via TwitterGoogle+, watch our movies on our YouTube Channelsign up to receive our newsletter and action alerts, and of course, visit our website.