Major banks have quickly become behind-the-scenes allies of a raft of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.
With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.
While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned.In some cases, the banks allow lenders to tap checking accounts even after the customers have asked them to stop the withdrawals.
“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, codirector of the Neighborhood Economic Development Advocacy Project, which workswith community groups in New York.
The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,” said Virginia O’Neill, senior counsel with the American Bankers Association.
But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.The Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter. Benjamin Lawsky, who heads New York state’s Department of Financial Services, is investigating how banks enable the online lenders to skirt New York law and make loans to residents of the state, where interest rates are capped at 25 percent.
For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But manycustomers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. About 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts.
Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans.
Lawmakers, led by Sen. Jeff Merkley, D-Ore., introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives rather than where the lender is. The legislation, pending in Congress, also would allow borrowers to cancel automatic withdrawals more easily.
While the loans are simple to obtain - some online lenders promise approval in minutes with no credit check - they are tough to get rid of. Customers who want to repay their loans in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans atleast monthly and withdraws only the interest owed. Under federal law, customers are allowed to stop authorized withdrawals from their accounts. Still, some borrowers say their banks do not heed requests to stop the loans.
A spokesman for Bank of America said the bank always honored requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokesman for Chase, said: “We are working with the customers to resolve these cases.” Online lenders say they work to abide by state laws.
Payday lenders have been dogged by controversy almost from their inception two decades ago from storefront check-cashing stores. In 2007, federal lawmakers restricted the lenders from focusing on military members. Across the country, states have steadily imposed caps on interest rates and fees that effectively ban the high-rate loans.
While there are no exact measures of how many lenders have migrated online, about 3 million Americans obtained an Internet payday loan in 2010, according to a July report by the Pew Charitable Trusts.
State prosecutors have been battling to keep online lenders from illegally making loans toresidents where the loans are restricted. In December, Lori Swanson, Minnesota’s attorney general, settled with Sure Advance LLC over claims that the online lender was operating without a license to make loans with interest rates of up to 1,564 percent. In Illinois, Attorney General Lisa Madigan is investigating a number of online lenders.
Arkansas’ attorney general, Dustin McDaniel, has been targeting lenders illegally making loans in his state, and he says the Internet firms are tough to fight. “The Internet knows no borders,” he said in an interview. “There are layer upon layer of cyber-entities and some are difficult to trace.”
In January of last year, McDaniel sued the operator of a number of online lenders, claiming the firms were breaking state law, which caps annual interest rates on loans at 17 percent.
Now the Online Lenders Alliance, a trade group, is backing legislation that would grant a federal charter for payday lenders. In supporting the bill, Lisa McGreevy, the group’s chief executive, said: “A federal charter, as opposed to the current conflicting state regulatory schemes, will establish one clear set of rules for lenders to follow.”
Front Section, Pages 4 on 02/24/2013