Major Banks Aid in Payday Loans Banned by States
By JESSICA SILVER-GREENBERG
Published: February 23, 2013
Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.
Michelle V. Agins/The New York Times
Subrina Baptiste of Brooklyn says JPMorgan Chase
allowed payday lenders to seize child-support funds in her account.
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 entirely. In some cases, the banks allow lenders to tap
checking accounts even after the customers have begged 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, co-director of the Neighborhood Economic Development Advocacy Project, which works with 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 Corporation 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 M. 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 many customers are already on shaky financial footing. The
withdrawals often set off a cascade of fees from problems like
overdrafts. Roughly 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. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.
Some state and federal authorities say the banks’ role in enabling the
lenders has frustrated government efforts to shield people from
predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.
Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, 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, would also
allow borrowers to cancel automatic withdrawals more easily. “Technology
has taken a lot of these scams online, and it’s time to crack down,”
Mr. Merkley said in a statement when the bill was introduced.
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 loan in full typically must contact
the online lender at least three days before the next withdrawal.
Otherwise, the lender automatically renews the loans at least monthly
and withdraws only the interest owed. Under federal law, customers are
allowed to stop authorized withdrawals from their account. Still, some
borrowers say their banks do not heed requests to stop the loans.
Ivy Brodsky, 37, thought she had figured out a way to stop six payday
lenders from taking money from her account when she visited her Chase
branch in Brighton Beach in Brooklyn in March to close it. But Chase
kept the account open and between April and May, the six Internet
lenders tried to withdraw money from Ms. Brodsky’s account 55 times,
according to bank records reviewed by The New York Times. Chase charged
her $1,523 in fees — a combination of 44 insufficient fund fees,
extended overdraft fees and service fees.
For Subrina Baptiste, 33, an educational assistant in Brooklyn, the
overdraft fees levied by Chase cannibalized her child support income.
She said she applied for a $400 loan from Loanshoponline.com and a $700 loan from Advancemetoday.com in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law.
Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in
October 2011, but was told that she had to ask the lenders instead. In
one month, her bank records show, the lenders tried to take money from
her account at least six times. Chase charged her $812 in fees and
deducted over $600 from her child-support payments to cover them.
“I don’t understand why my own bank just wouldn’t listen to me,” Ms.
Baptiste said, adding that Chase ultimately closed her account last
January, three months after she asked.
A spokeswoman for Bank of America said the bank always honored requests
to stop automatic withdrawals. Wells Fargo declined to comment. Kristin
Lemkau, a spokeswoman 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, roughly three million Americans obtained an Internet payday loan
in 2010, according to a July report
by the Pew Charitable Trusts. By 2016, Internet loans will make up
roughly 60 percent of the total payday loans, up from about 35 percent
in 2011, according to John Hecht, an analyst with the investment bank
Stephens Inc. As of 2011, he said, the volume of online payday loans was
$13 billion, up more than 120 percent from $5.8 billion in 2006.
Facing increasingly inhospitable states, the lenders have also set up
shop offshore. A former used-car dealership owner, who runs a series of
online lenders through a shell corporation in Grenada, outlined the
benefits of operating remotely in a 2005 deposition. Put simply, it was
“lawsuit protection and tax reduction,” he said. Other lenders are based
in Belize, Malta, the Isle of Man and the West Indies, according to
federal court records.
At an industry conference last year, payday lenders discussed the
benefits of heading offshore. Jer Ayler, president of the payday loan
consultant Trihouse Inc., pinpointed Cancún, the Bahamas and Costa Rica
as particularly fertile locales.
State prosecutors have been battling to keep online lenders from
illegally making loans to residents where the loans are restricted. In
December, Lori Swanson, Minnesota’s attorney general, settled with Sure Advance
L.L.C. 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’s attorney general, Dustin McDaniel, has been targeting lenders
illegally making loans in his state, and says the Internet firms are
tough to fight. “The Internet knows no borders,” he said. “There are
layer upon layer of cyber-entities and some are difficult to trace.”
Last January, he sued the operator of a number of online lenders,
claiming that the firms were breaking state law in Arkansas, 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.”
