The Internet payday loan industry has grown exponentially with the increase in e-commerce, as more and more consumers go online for everything from purchasing products to paying their bills. In so doing, Internet payday lenders have been able to circumvent state-by-state regulations that govern storefront payday loan lenders in terms of interest rate caps. Internet lenders are not only unlicensed for the state in which their customers reside, they don’t adhere to the various interest rate caps that individual states maintain. Thus, it is not unheard of for Internet payday loan customers to pay an effective annual interest rate of well over 1000 percent.
Various states have been cracking down, by way of Internet payday loan lawsuits. Now, according to the New York Times (1/27/14), the feds are getting into the act. However, instead of targeting the lenders themselves, the US Justice Department is going after the banks who deal with third parties and various other middlemen that facilitate the transactions.
In January, the Justice Department brought a lawsuit against Four Oaks Bank of Four Oaks, North Carolina. The bank was accused by the feds of being “deliberately ignorant” in processing payments on behalf of various unscrupulous merchants - including Internet payday lenders and a Ponzi scheme.
In so doing, Four Oaks is accused of serving as an enabler for the illegal withdrawal of some $2.4 billion from checking accounts.
The New York Times noted that the Bank Secrecy Act requires banks to maintain a series of internal checks to counter any attempts at money laundering. However, financial services extended to such third-party payment processes have largely flown under the radar until now.
According to the New York Times, the Justice Department is not limiting its investigation to Four Oaks. The feds are weighing various civil and criminal actions against dozens of other banks, and have issued subpoenas to more than 50 payment processors and banks that provide services to the Internet payday loan industry.
The investigation is not without its detractors. Representative Darrell Issa (R-California) heads the House Oversight Committee and accuses the Justice Department of attempting to covertly quash the payday lending industry.
However, such criticism doesn’t fly with James Dillon of Trinity, North Carolina. Dillon, a plaintiff in an Internet payday loan lawsuit, took out various short-term loans in 2012 and 2013 in order to buy Christmas gifts for his children. Some of those loans charged him an effective annual interest rate of greater than 1000 percent. He had a checking account at Wells Fargo, which the New York Times describes as having been “ransacked” by Internet payday lenders. His bank statements reveal that lenders routed payments through Four Oaks.
According to the investigation, not only does the bank profit from fees charged by the banks to third-party payment processors, there is also money to be made when payments viewed to be unauthorized are returned. For example, according to the New York Times report, in 2012, more than half of the payments to one Internet payday loan merchant routed through Four Oaks were returned, representing a rate higher than 40 times the industry standard.
That means money for Four Oaks and any other bank involved in processing payments through third-party merchants and middlemen, according to the New York Times. As an illustration, when a consumer spots what appears to be an unauthorized withdrawal from a checking account and requests the funds to be returned, the action triggers a processing fee that can dwarf the original fees charged by the bank for processing the original withdrawal.
The “deliberate ignorance” accusation against Four Oaks by the US Justice Department is best illustrated by the bank’s relationship with Rex Ventures, an investment firm that has since been shuttered. The feds accused Four Oaks of continuing to enable Rex Ventures, even after determining that one of the top executives associated with Rex Ventures had used a false Social Security number, and that the address listed as the company’s headquarters turned out to be a “vacant lot,” according to court documents.
And yet, Four Oaks allegedly continued to allow Rex Ventures to process payments. At the point when the US Securities and Exchange Commission closed down Rex Ventures in August 2012, the company stood accused of duping investors out of $600 million.
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It should be noted that Four Oaks reached a tentative $1.2 million settlement with federal prosecutors, although it was not mentioned if the bank was required to admit to any wrongdoing. Meanwhile, the New York Times noted that the problem extends well beyond Four Oaks.
Additionally, on the heels of the Justice Department investigation, four major US banks recently announced that they are quitting the payday loan--also known as cash advance or direct deposit advance--business. Wells Fargo, U.S. Bank, Fifth Third and Regions announced in January that they would discontinue their deposit advance products .