Federal Regulators Urged to Crack Down on Illegal Payday Loans

Federal Regulators Urged to Crack Down on Illegal Payday Loans
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October 24, 2013

Consumer and civil rights groups urged federal regulators on Thursday to stop banks and payment processors from helping internet and tribal payday lenders collect illegal payments.

In a letter sent to federal bank regulators, the U.S. Department of Justice, and the Federal Trade Commission (FTC), the National Consumer Law Center, Consumer Federation of America (CFA), the Center for Responsible Lending, and 26 other consumer and civil rights groups thanked the agencies for their efforts to date and pushed for stronger measures to stop illegal payments from being taken out of consumers' bank accounts.

Though the letter focused on internet payday loans, the groups also noted that heightened scrutiny is also important to stopping internet fraud, abusive debt settlement fees, and other practices illegal under federal and state law.

"Banks have an obligation to avoid processing payments for illegal activities, whether the activity is an illegal payday loan, gambling operation, internet fraud or debt settlement scheme," said Tom Feltner, director of financial services at Consumer Federation of America.

"Online payday loans are illegal if they do not comply with state laws," said Lauren Saunders, managing attorney at the National Consumer Law Center. Supporters of the online payday industry have criticized scrutiny of payments to lenders who claim that affiliation with a Native American tribe exempts them from state law. But "tribal immunity does not make an illegal loan legal; it just affects whether the lender can be sued," Saunders explained. "Banks and payment processors, which have no such immunity, must take swift action to address the legal and reputational risks associated with facilitating these illegal transactions."

The groups' letter emphasizes that scrutiny of banks and payment processors that enable illegal payments is an important and traditional role of federal banking and consumer protection agencies.