Payday loans can be financial quicksand for borrowers, and authorities have labored for years to put a lid on deceptive short-term loans with interest rates such as 400 percent.
Quietly, the fight is shifting from the companies that hawk the loans to the mainstream financial institutions that help to process them.
In the latest jab, a potential class-action lawsuit filed last week by a New Jersey borrower aims to hold Minneapolis-based U.S. Bank liable for its behind-the-scenes role in processing allegedly illegal loans that she got last year from online payday lender National Opportunities Unlimited Inc.
The borrower, Angel L. Gordon, wound up spending $1,814 over 10 weeks to repay an $800 payday loan.
U.S. Bank didn’t make the payday loan, and Gordon didn’t have a bank account at U.S. Bank. But in the complicated world of the country’s electronic payment network, it was U.S. Bank that originated the transactions for National Opportunities Unlimited, allowing the company to zap money in and out of her checking account at Affinity Federal Credit Union, according to the complaint Gordon filed in federal court in Minnesota.
“Angel Gordon is a hardworking single mother that lives in a state that has banned payday loans and who paid over 600 percent APR on a loan,” said her lawyer, former Kansas Attorney General Steve Six, who now works at Stueve Siegel Hanson in Kansas City, Mo. “As alleged in the complaint, without U.S. Bank aiding these payday lenders in processing the illegal loans, they would not be able to prey on consumers like Angel.”
U.S. Bank would not discuss the lawsuit.
“We believe it is without merit and will be defending ourselves vigorously,” said bank spokeswoman Nicole Garrison-Sprenger.
U.S. Bank no longer processes transactions for National Opportunities Unlimited, she said. She also said that U.S. Bank added a feature this year that allows customers to block network transactions from a specified merchant or payday lender.
Gordon alleges that the bank knew the payday loans were illegal in at least 13 states and yet still gave the company access to the payments network for debiting and crediting accounts. A red flag, it says, is the high-return rate on payday transactions.
The lawsuit accuses U.S. Bank of racketeering and of violating New Jersey’s consumer fraud act, as well as aiding and abetting violations of New Jersey’s criminal usury law, among other things. It says there are thousands of victims.
Minnesota is not one of the states in the lawsuit because the state’s payday rules are less restrictive.
Gordon declined to be interviewed.
The suit is one of at least nine filed around the country since mid-September by different law firms accusing mainstream lenders of colluding with payday lenders by introducing their transactions to the electronic payments network called the Automated Clearing House network, or ACH network.
Among the targets: BMO Harris Bank, First Premier Bank, National Bank of California and Generations Federal Credit Union.
JPMorgan Chase & Co. settled a similar last suit earlier this year and changed how it processes payday transactions.
The string of private actions comes as state and federal authorities bear down on online payday lending.
NACHA, the industry group that manages and governs the electronic payments network, wouldn’t discuss the dispute.
Lauren Saunders, managing attorney at the Boston-based National Consumer Law Center, said she was shocked to hear that U.S. Bank would knowingly process illegal payments.
“Banks have a duty to know their customers and to avoid processing illegal payments,” she said.
She called the focus on banks facilitating payday transactions “an important new front on attacking illegal lending and can help choke off payments to unscrupulous players more effectively than fighting the lenders one consumer at a time.”
The National Consumer Law Center and more than two dozen other consumer groups sent a letter last month to federal banking regulators asking them to stop depository institutions and payment processors from playing middleman on illegal transactions.
New York officials also are pursuing banks. But it’s cooperation they’re after.
In August, New York’s superintendent of financial services sent letters to 117 banks asking for help creating safeguards to choke off the payday lending industry’s access to the ACH network. The letter names 35 illegal lenders that it had ordered to stop making loans in New York, including National Opportunities Unlimited.
“Banks have proved to be — even if unintentionally — an essential cog in the vicious machinery that these purveyors of predatory loans use to do an end-run around New York law,” the letter said.
National Opportunities Unlimited has been in the cross-hairs of consumer advocates and state regulators for years. The company’s websites — itsmypayday.com and thecash spot.com — don’t appear to be operating. Calls to the company’s management were not returned.
Payment processing isn’t U.S. Bank’s only finger in the payday marketplace. It’s one of a handful of major banks that make payday-like loans for customers called deposit advances — U.S. Bank’s product is called Checking Account Advance. They are pitched to existing account holders as Band-Aids for financial emergencies and a way to avoid overdrafts, but can ensnare vulnerable consumers in a churn of repeat borrowing, consumer advocates say.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued preliminary guidance in April seeking to rein in the products and ensure that banks assess whether borrowers are able to pay back the money. The rules haven’t been finalized.