Five Banks Accused of Helping Banned Payday Lenders

A class action suit was filed Monday against five banks accused of helping online payday lenders conduct business in states where payday loans have been banned. The banks are allegedly sharing access to the Automated Clearing House network, a payment processing system, and thereby helping payday lenders collect payments from customers’ accounts in states where the practice has been outlawed.

Borrowers can reportedly get stuck in a dangerous cycle .

Originally, payday lenders were intended to help individuals by offering small amounts of money in the form of a loan, to be used until borrowers received their next paycheck. However, payday lenders have been banned in more than a dozen states, including Georgia, Connecticut, and New York, because the lenders apply high interest rates and fees to their loans. Within these programs, borrowers can reportedly get stuck in a dangerous cycle where they must borrow more money from the same lender to repay previous loans. The plaintiffs, Georgia residents Jessica Parm and Lisa Flagg, allegedly each took out a payday loan of nearly $1,000, but then paid thousands of dollars more while making payments.

Many payday lenders have moved their businesses online to avoid state regulations, and some banks are allegedly facilitating their transactions, according to the complaint. The plaintiffs have accused several banks including BMO Harris Bank NA, First Premier Bank, Four Oaks Bank & Trust Co., National Bank of California, and North American Banking Co. of aiding payday lenders.

Federal banking regulators reportedly do not approve of regulated institutions, such as payday lenders, processing transactions that violate state laws and more states are considering banning the practice altogether. Earlier this year in New York, a group of Native American tribal leaders were suspected of owning an online payday lending service that violated the state’s usury caps. In October, a federal judge denied the group’s motion for an appeal against the civil investigation into their services.