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MONEY

Another Reason to Steer Clear of Payday Lending
 

The Department of Justice is investigating payday lenders and the banks they work with.

Committee Chairman Rep. Darrell Issa strikes the gavel at the beginning a House Oversight Committee hearing concerning the security of the Healthcare.gov website, in the Rayburn House Office Building on Capitol Hill, January 16, 2014 in Washington, DC.

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Payday lenders are an unsavory part of the loan industry, no matter how they may whitewash themselves.

And while increasing numbers of small businesses are toying with the idea of advancing short-term employee loans through such entities, the reasons you shouldn't get involved keep mounting.

Earlier this month, the Department of Justice launched an investigation into dozens of banks and the payment processors payday lenders use to siphon money from customer accounts. Called Operation Choke Point, the investigation has provoked the ire of critics, such as Representative Darrell Issa (R., Calif.) who say payday lenders and their multi-billion dollar industry are legitimate and should be allowed to operate. Issa announced this week he plans to investigate Choke Point.

Payday lenders often charge exorbitant interest of 500 percent or more, and usually trap their customers, who frequently live paycheck to paycheck, in an endless cycle of debt.

Eighteen states have rules that forbid payday lending, while others allow the practice with some limitations like caps on rates. The patchwork of state laws is complicated by the electronic age, which has allowed many of these lenders to bypass state rules by operating online. Banks, under the "know your customer" and anti-money laundering statutes, are required to keep watch on how money flows from their customer accounts. As it turns out, many financial institutions don't--flouting some states' laws forbidding or limiting payday loans.

Earlier this month, for example, the Justice Dept. won an action against Four Oaks Bank, of Four Oaks, North Carolina, which allowed a processor called TPPP-TX to pull money from the accounts of customers who'd taken out payday loans. North Carolina forbids payday lending.

Rather than continue with litigation, Fair Oaks settled and agreed to pay the DOJ $1 million, and also agreed not to work with such processors again. It will also allow investigators to examine its practices on a regular basis to make certain it does not violate the agreement going forward.

The DOJ investigation appears to have stemmed in part from an ongoing class action filed by a North Carolina resident named James Dillon against Four Oaks, BMO Harris Bank, Generations Federal Credit Union, and Bay Cities Bank. The complaint was filed in October, 2013 and seeks monetary reward, injunctive relief and a reward of damages for payday loan customers.

 

 

 

 

 

 

 

 

IMAGE: Getty Images
Last updated: Jan 28, 2014

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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