The war on payday lending has turned from the lenders themselves to the banks that service them. One of the latest battles in this war is being waged by Maryland's commissioner of financial regulation, Mark Kaufman.
These banks provide access to the network that allows online payday lenders to automatically withdraw loan payments from customers' accounts.
The institutions are all outside Maryland and the reach of the state regulator, but Kaufman said his office has turned over the names of eight banks to federal regulators in recent months. These banks know or should know that they are helping process loans that are illegal in Maryland, Kaufman said.
Maryland is not plowing this field alone.
New York's financial regulator, for instance, recently sent letters to 117 banks, asking them what they are doing to stop illegal payday loans from entering that state. Without banks providing access to the Automated Clearing House network, online payday lenders would not be able to debit consumers' accounts, the regulator said.
"This is a new tack that states are taking," said Alex Horowitz, research manager for the Pew Charitable Trusts.
Federal regulators also have been warning banks about online payday loans. The Federal Deposit Insurance Corp. told banks last year to monitor their relationships with third-party payment processors that may be requesting withdrawals from customer accounts on behalf of payday lenders. Ultimately, the FDIC said, the banks could be held liable for any fraudulent activity.
Even Stevie Wonder could see the handwriting on this wall.
Online payday loans typically involve two banks — the borrower's bank and the payday lender's institution.
Kaufman said borrowers' banks have been working with his office to address consumer complaints, closing accounts to stop withdrawals.
But these illegal loans wouldn't have been possible to make in the first place without the help of another bank debiting borrowers' accounts on behalf of the payday lender, Kaufman said.
"They are the entry point into the system," he said. "Without them, none of this works.
Nope, none of this works without them. Therefore, expect the Feds and the states to work together to make sure as much glue as possible is squirted into the cogs of the payday lending machine via making life difficult for the banks. After all, you don't want people borrowing at high rates from lenders that regulators can get at when there are plenty of made men who are happy to supply the cash sub rosa. Their collection practices make even the debt collectors that Commissioner Kaufman complains about in the linked article look like choir boys.
For some reason, Kathleen Murphy, CEO of the Maryland Bankers Association, insists on ending the article on the sour note of personal responsibility.
"At the end of the day, it comes down to the consumer making smart financial choices," she said. "To decide they need an advance on their paycheck at an interest rate of 500 to 600 or 700 percent annually is not a smart financial decision."
No, it's not a smart decision. And it's the job of government to save people from the consequences of their dumb decisions. Why? Because that's the way the Nanny State rolls.