#payday loan companies
Banks to payday lenders: Quit the business or we’ll close your account
By Danielle A. Douglas April 11, 2014
Al LePage has been issuing payday loans out of a suburban Minneapolis storefront for most of the past decade. But on Valentine’s Day, a Wells Fargo banker called and gave him 30 days to cease and desist — or risk losing his bank account.
“The only explanation I got was since they’re not doing payroll advances anymore, they didn’t want to have customers providing similar loans,” said LePage, owner of Al’$ Check Cashing. “But I run a legal business.”
LePage is part of a wave of payday lenders who say they are being persecuted by banks at the behest of federal regulators. Already under siege by the Obama administration for flouting state laws, payday lenders now face a more subtle but potentially devastating assault from banks threatening to cut off their access to the financial system unless they stop offering the high-interest, small-dollar loans.
Republicans in Congress say the administration is abusing its regulatory powers to shut down legitimate businesses. In August, 31 GOP lawmakers accused the Department of Justice and the Federal Deposit Insurance Corp. of “intimidating” banks and payment processors to “terminate business relationships with lawful lenders.”
Last month, in a hearing before a Senate Banking subcommittee on consumer protection, Sen. David Vitter (R-La.) complained that several payday lenders in his home state had been dumped by their banks in recent months.
“There is a determined effort, from [the Justice Department] to the regulators . . . to cut off credit and use other tactics to force [payday lenders] out of business,” Vitter said. “I find that deeply troubling because it has no statutory basis, no statutory authority.”
Federal regulators deny waging a concerted campaign to force banks to sever ties with the lenders.
“If you have relationships with a [payday lending] business operating in compliance with the law and you’re managing those relationships and risks properly, we neither prohibit nor discourage banks providing services to that customer,” said Mark Pearce, director of the FDIC’s Division of Depositor and Consumer Protection.
But the FDIC and the Office of the Comptroller of the Currency both recently warned banks against offering a payday-like loan known as a “direct-deposit advance,” in which banks give customers quick cash in exchange for authority to draw repayment directly from their paychecks or disability benefits. All six large banks that offered the service, including Wells Fargo, got out of the business earlier this year.
The regulators also told banks to expect greater scrutiny of clients who offer such loans, prompting some bankers to complain that they are being forced to police their customers.
“Banks are being told that the relationships expose the bank to a high degree of reputational, compliance and legal risk,” said Viveca Ware, executive vice president of regulatory policy at the Independent Community Bankers of America, a trade group.
In one e-mail sent to Vitter —redacted to conceal the identities of the bank and the borrower — a banker told one payday lender that, “based on your performance, there’s no way we shouldn’t be a credit provider.”
The banker continued: “Our only issue is, and it has always been, the space in which you operate. It is the scrutiny that you, and now that we, are under.”
Bank regulators have long cast a wary eye on alternative financial service providers like payday lenders, who typically charge triple-digit interest rates and balloon payments that consumer advocates say trap borrowers in a cycle of debt. Fifteen states and the District of Columbia ban the loans outright, while another nine limit interest rates and usage.
But the $7.4 billion payday lending industry has come under increasing scrutiny as more companies move their operations online, allowing some to skirt state regulations.
Under President Obama, that watchfulness has extended to traditional banks that do business with payday lenders. Prosecutors are investigating whether banks have enabled online lenders to withdraw money illegally from borrowers’ checking accounts in a bid to boost their own take from payment-processing fees and customer refund requests.
Over the past year, Justice has issued dozens of subpoenas to banks and third-party processors as part of “Operation Choke Point,” an effort to block scammers’ access to the financial system. Justice officials say the effort is aimed at addressing fraud, not hindering legitimate payday lending.
Advocacy groups — and many Democrats — have questioned whether banks should be doing business at all with short-term, high-cost lenders. Reinvestment Partners, a consumer group, found that traditional banks have provided nearly $5.5 billion in lines of credit and term loans in the past decade to payday lenders, pawn shops and rent-to-own companies.
“It’s really frustrating that high-cost lenders can exist because of nationally regulated banks,” said Adam Rust, the group’s director of research. “I don’t think banks should be allowed to sit back in the shadows and allow predatory lending to continue to occur in our neighborhoods.”
Doing business with companies that inflict such harm could damage a bank’s reputation and leave it vulnerable to litigation, regulators have said.
But LePage, of Al’$ Check Cashing, said not every short-term lender takes advantage of people. He said his company charged, at most, $26 for a $350 loan. And although many customers did roll one loan into another — a practice that can trap consumers in debt — LePage said he monitored such activity and made the risks clear.
“We’ve never had a complaint filed against us, because we treat our customers fairly,” he said. “Shutting down our payday line just means a lot of people will either have no access to money they need or they’ll go online, which isn’t any better.”
After he got the call from Wells Fargo, LePage said he complained to the state attorney general and the Commerce Department, as well as the bank’s chief regulator.
Wells Fargo declined to comment on LePage’s case. But spokesman Jim Seitz said bank officials “recognize the need for an extra level of review and monitoring to ensure these customers do business in a responsible way.”
In the end, LePage said he gave up and shut his payday business down.
“Because I’m licensed through the state of Minnesota, I have to have my rates posted on the wall, and any banker that came in to visit could see them and cut me off,” LePage said. “I don’t want to take that chance.”