At least six federal agencies including the Justice and Treasury departments are coordinating a broad probe of online payday lenders that charge enormous interest and fees to low-income borrowers who need quick cash. It was reported that last month the Justice Department and the Consumer Financial Protection Bureau (CFPB) sent civil subpoenas to dozens of financial companies, including the online lenders, many of which are located on Indian reservations to avoid complying with consumer protection laws. Also subpoenaed, according to reports, were banks and payment processors doing business with the companies.
The government is using a range of tools — anti-money-laundering laws, routine oversight of banks’ books, subpoenas and state laws — that could bring into the open an entire category of lenders that contend they are operating lawfully. The federal agencies involved include: Civil Division of the Justice Department; the CFPB; the Federal Deposit Insurance Corp.; the Office of the Comptroller of the Currency; and the Treasury’s Financial Crimes Enforcement Network. Attorneys general and financial regulators from several states are also involved. A number of banks, lenders, payments companies, marketers and others appear to be caught up in the multi-pronged investigation.
The investigation is being coordinated by the Financial Fraud Enforcement Task Force, a working group originally created by President Barack Obama, whose mission is to “investigate and prosecute significant financial crimes and other violations relating to the current financial crisis and economic recovery efforts.” The task force is led by the Justice Department and includes more than two dozen federal and state regulators and law enforcement entities. Michael Bresnick, a former federal prosecutor, is directing the task force. He said recently that “If we can stop the scammers from accessing consumers’ bank accounts — then we can protect the consumers and starve the scammers.”
The task force is no longer focused only on companies with a clear connection to the financial crisis. The group wants to protect consumers from “mass marketing fraud schemes — including deceptive payday loans.” I believe that’s a very good thing and something that is badly needed. Payday lenders prey on folks, who in most cases are already in a financial bind, and take unfair advantage of their circumstances.
Referring to online payday lenders repeatedly as “mass market fraudsters,” Bresnick has said that the working group is focused on banks and payment processors that make it possible for online lenders to operate in states where their loans would be illegal. Bresnick compared the online “deceptive payday loans” with more clear cut fraudulent conduct such as fake health care discount cards and phony government grants.
Payday lenders have a long and sordid history of taking advantage of folks, primarily the poor. Until about five years ago, the lenders operated mainly out of storefronts that offered a range of money services to folks who can’t or won’t use traditional banks. Consumer advocates have been calling for stricter limits on the pay-day lending industry for a long time. A number of states, including New York, have tried to eliminate the practice by capping interest rates. But the industry has proven resilient and has fought back with high-powered lobbyists. Storefront lenders exploit loopholes by tweaking the terms of their loans, reclassifying themselves as other types of companies and lobbying aggressively for friendly legislation. Payday lenders keep their borrowers in a vicious cycle of repeated loans with extremely high interest rates and fees, interest rates that exceed 1,000 percent.
State efforts to regulate the loans have pushed many consumers online, where state laws have so far carried little weight. The Internet allows payday lenders to reach folks living in cities or states where their products are illegal. Many companies in this growing market have evaded state and federal consumer protections by operating from Indian reservations. They contended that Tribal sovereignty puts them beyond the reach of U.S. regulators.
Some lenders that claim sanctuary on Native American land operate for the profit of outside businessmen who run them through a labyrinth of shell companies, according to an earlier investigation by the Center for Public Integrity. The Center found in 2011 that millionaire Scott Tucker operated and profited from payday businesses that were owned on paper by small Indian tribes — a practice known as “rent-a-tribe.” It was reported that Tucker’s businesses are not affiliated with the NAFSA, the trade group representing tribal lenders.
Earlier this year, the Justice Department subpoenaed more than 50 financial companies, mainly banks and the payment processors that connect consumers to online lenders and other companies that Justice thinks may be operating fraudulently. Banks that hold accounts for payment processors “aren’t always blind to the fraud,” according to Bresnick, the fraud task force chief. He said those banks are ignoring red flags like large numbers of transactions by the processors being rejected by other banks.
These banks may be violating laws requiring them to report incidents of possible fraud to the Treasury Department — laws designed originally to prevent money laundering and later updated to combat financing of terrorist organizations. Those laws require them to know what kinds of businesses their depositors are operating or affiliated with — a duty known as “know your customer.”
The approach has proven effective. In November, a Delaware bank paid a $15 million penalty to settle charges that it worked with payment companies to make fraudulent withdrawals from consumers’ accounts. More than half of the debits were rejected by consumers and their banks. The overall rate reported by the Federal Reserve is about one half of one percent. The bank lost its charter and was dissolved. Regulators also are using bank oversight examinations to drive a wedge between banks and the online payday lenders they serve. They are warning banks during routine examinations to avoid the “reputational risk” of being tied publicly to an unpopular industry, whether by financing loans or processing payments for lenders.
The tactics are similar to those the government used in its successful campaign in 2011 to quash the online poker business, whose revenues had mushroomed to billions of dollars a year. The effort culminated in raids of the three biggest gambling sites and the arrests of their owners. The government shut down about 76 bank accounts in 14 countries and eliminated five domain names. The companies were charged with bank fraud and money laundering.
Sources: Bob Wagner and The Huffington Post
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