A consumer coalition has written federal financial regulators attempting to prevent payday lenders from using the electronic check system to debit their customer's checking accounts for loan payments.
The coalition addressed its Oct. 24 letter to the Federal Reserve, CFPB, Comptroller of the Currency, FDIC, U.S. Justice Department, NCUA and FTC.
The coalition highlighted specifically what it called a heightened threat from online payday lenders which, it argued, can and do make loans across state lines at terms which might be legal in one state but illegal in the other.
“Higher-risk merchants that extract unauthorized, abusive or illegal payments raise numerous consumer protection concerns. As many of these high-risk merchants expand to the Internet, they increasingly rely on payment processors and originating depository financial institutions (ODFIs) to access consumers’ bank accounts,” the groups wrote. “The payment processor and the ODFI enable a payment to be debited from a consumer’s account through the automated clearinghouse (ACH) system, a remotely created check (RCCs) or remotely created payment order (RCPOs).
“Recognizing that fraudsters need help in accessing the payment system, over the last several years regulators have held that payment processors and ODFIs are responsible for managing legal and reputational risk by closely monitoring the activities of their clients,” the groups added. “In extreme cases, when the payment processor or ODFI is reckless or even complicit, they may themselves be subject to legal action.”
The coalition did not recommend specific regulatory or legislative steps to counter the phenomenon, but urged the regulators to remain wary and act swiftly when warranted.
“Where you find indications that the institution has insufficient safeguards to avoid processing illegal payments, or is exposed to excessive legal, compliance, reputation or other risks through arrangements with third parties, we urge you to take swift action,” the groups concluded.