From banks to payday lenders: quit the business or we’ll close your account
Al LePage has been issuing payday loans in 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 had was that since they don’t make payday advances anymore, they didn’t want clients offering 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 besieged by the Obama administration for flouting state laws, payday lenders now face a more subtle but potentially devastating attack from banks threatening to cut them off from the financial system unless they are ‘They stop offering high interest and low amount loans.
Republicans in Congress say the administration is abusing its regulatory powers to shut down legitimate businesses. In August, 31 GOP lawmakers accused the Justice Department and the Federal Deposit Insurance Corp. for “intimidating” banks and payment processors to “terminate business relationships with legitimate lenders”.
Last month, during a hearing before a Senate Banking Subcommittee on Consumer Protection, Senator 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, to [the Justice Department] to regulators. . . cut credit and use other tactics to force [payday lenders] out of business, ”Vitter said. “I find this deeply disturbing because it has no statutory basis, no statutory authority.”
Federal regulators deny waging a concerted campaign to force banks to sever ties with lenders.
“If you have a relationship with a [payday lending] as a company operating within the law and you properly manage these relationships and risks, we do not prohibit or discourage banks from providing services to this client, ”said Mark Pearce, FDIC Division Director for Protection depositors and consumers.
But the FDIC and the Office of the Comptroller of the Currency both recently warned banks against offering a payday loan known as a “direct deposit advance,” in which banks give customers money quickly in exchange for permission to withdraw the refund directly from their account. paychecks or disability benefits. The six major banks that offered the service, including Wells Fargo, withdrew from the business earlier this year.
Regulators have also told banks to expect further scrutiny from customers.who offer such loans, prompting some bankers to complain about being forced to monitor their clients.
“Banks are 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 Independent Community Bankers of America, a commercial group .
In an email to Vitter – written to conceal the identity of the bank and the borrower – a banker told a payday lender that, “based on your performance, there is no way we are not. not a credit provider ”.
The banker continues: “Our only problem is, and always has been, the space in which you operate. This is the scrutiny you, and now we, are undergoing. ”
Banking regulators have long cast a suspicious eye on alternative financial service providers like payday lenders, which typically charge triple-digit interest rates and lump-sum payments that consumer advocates say trap borrowers in a trap. debt cycle. Fifteen states and the District of Columbia outright ban loans, while nine others limit interest rates and usage.
But the $ 7.4 billion payday loan industry has come under increasing scrutiny as more companies move their operations online, allowing some to bypass state regulations.
Under President Obama, this vigilance extended to traditional banks that do business with payday lenders. Prosecutors are investigating whether banks have allowed online lenders to illegally withdraw money from borrowers’ checking accounts in an attempt to increase their own levy on payment processing fees and customer repayment requests.
Over the past year, the courts have issued dozens of subpoenas to banks and third-party processors in connection with “Operation Choke Point,” an effort to block fraudsters’ access to the Internet. financial system. Justice officials say the effort is aimed at tackling fraud, not hampering legitimate payday loans.
Rights groups – and many Democrats – have questioned whether banks should do business with short-term, high-cost lenders. Reinvestment Partners, a consumer group, discovered that traditional banks have provided nearly $ 5.5 billion in lines of credit and term loans in the past decade payday lenders, pawn shops and hire-purchase companies.
“It’s really frustrating that expensive lenders can exist thanks to nationally regulated banks,” said Adam Rust, group research director. “I don’t think banks should be allowed to sit in the shadows and allow predatory lending to continue to happen in our neighborhoods.”
Doing business with companies that inflict such damage could damage a bank’s reputation and make it vulnerable to litigation, regulators said.
But LePage, of Al ‘$ Check Cashing, said not all short-term lenders take advantage of people. He said his business was charging $ 26 at most for a $ 350 loan. And while many clients have turned one loan into another – a practice that can trap consumers in debt – LePage said he is monitoring this activity and explaining the risks.
“We have never received a complaint against us because we treat our customers fairly,” he said. “Closing our help line just means a lot of people won’t have access to the money they need or will go online, which is no better.”
After receiving 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 scrutiny and oversight to ensure these customers are doing business responsibly.”
In the end, LePage said he gave up and shut down his breakdown company.
“Because I’m licensed by the state of Minnesota, I have to post my rates on the wall, and any banker who came to visit me could see them and interrupt me,” LePage said. “I don’t want to take this chance.”