The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

Two Scoops of Chocolate and a Checking Account Please!

On September 17th, 2012, posted in: Uncategorized by 1 Comment

So this dude in Pittsburgh decides to open a bank inside his ice cream parlor.  He did not engage a bank to come in and fill some space.  Nope!  With his entrepreneurial spirit, he decided to do it himself.

And now Pennsylvania state banking officials are actively investigating.  (You should be laughing right now.)  It appears as though this ice cream man gone crazy has collected $550 in deposits over the past seven months of operation, chipped in some of his own money and loaned out $1700 in addition to his day job of dipping cones.  State officials are concerned that he is advertising as a bank, and doesn’t have deposit insurance.  (You should be doubled over with side-splitting laughter right now).  This is just another shining example of state government dollars being used to achieve the best possible result for the good people of Pennsylvania.  After all, $550 collected in seven months surely points to a potential problem of epidemic proportions.

In an interesting twist, the proprietor doesn’t pay interest on the deposits.  He gives depositors interest in the form of “exclamation dollars.”  A $100 deposit earns $5.50 a month in ice cream, waffles and coffee.  This works out to be 5.5% interest per month or $55 per year (no compounding).  So $100 invested with the ice-cream bank earns the consumer $55.00 per year in free ice cream.  Buyer beware!!!  This owner gains a return on the money at maybe $1.50 per year if he invests in a savings/money market-type account. He, in turn, gives you $55.00 in free ice cream.  Exactly how much is this guy marking up his ice cream?  Otherwise, he is losing money.

I’m not sure the Pennsylvania banking regulators should spend too much money on this guy.  The real crime here is the cost of the ice cream (please get the “sweets police” to investigate).

Now, I will say that this guy’s spirit for capitalism is refreshing.  He was tired of paying fees to his bank for returned checks (hint: don’t give your money to people who can’t manage their own money), so he started his own bank. True up – he would show “the man.”  Unfortunately, on his way to altruism and his attempt to buck the establishment, he got the banking regulators involved.  Trust me, they’re serious.

See, he loaned a guy $510 to be repaid at $60 per month.  He charged the guy $25 for the money.  $510 repaid at $60 per month equals an 8.5 month repayment term. If he had used the money for one year, the charge would have been about 5%.  The $25 charge for 8.5 months equates to a charge of $35.30 annualized or an APR (annual percentage rate) of about 7%.

7% APR is a pretty good rate.  That part is noble.  However, this guy didn’t properly disclose the APR accounting for the fee in the TIL Fed Box in accordance with Regulation Z.  As a result, he’s in serious trouble with the state.

“I’ll take two scoops of chocolate in a waffle cone” is a much simpler proposition.

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