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DOJ lawsuit sends warning to banks dealing with online payday lenders, third-party payment processors, other targeted companies

Posted in Electronic Payments, Payday Lending

Last month, the CFPB filed its first lawsuit against companies involved in online payday lending.  The lawsuit against CashCall and several related companies that funded, purchased, serviced and collected online payday loans broke new ground by asserting UDAAP violations based on the defendants’ efforts to collect loans that were purportedly void in whole or in part under state law.  

Now, in what we think is an earth-shattering development, the U.S. Department of Justice has filed a lengthy complaint and consent order in a lawsuit against a small North Carolina bank that processed ACH transactions for payday lenders through an arrangement with an unidentified third-party payment processor.  The DOJ action against Four Oaks Bank & Trust Company is the first lawsuit (and settlement) under “Operation Choke Point,” a coordinated multiagency enforcement initiative targeting banks serving online payday lenders and other companies that have raised regulatory concerns. 

Based on allegations of inadequate diligence and control over the payment processor and its customers, the DOJ obtained $1.2 million in monetary relief and elaborate injunctive relief addressing the bank’s dealings with third-party payment processors and with Internet short-term (payday) lenders, credit repair organizations, mortgage assistance relief companies, telemarketers and Internet-based businesses (collectively, Target Companies). 

Under Operation Choke Point, in addition to or in lieu of bringing actions against Target Companies believed to be in violation of the law, the DOJ and its fellow agencies are pursuing relief against banks that provide services to such companies.  The Four Oaks lawsuit will certainly make it more difficult for unlawful Target Companies to prey on consumers.  It will also have a substantial impact on lawful Target Companies and their bank partners. 

Banks can be expected to increase their charges for ACH services to Target Companies and to engage in extensive due diligence over such companies as a result of the DOJ lawsuit and other actions against them by enforcement agencies and private litigants.  Target Companies should act now to prepare for the pricing changes and diligence requests they will inevitably receive. 

Target Companies with high ACH return rates could also find themselves the subjects of increased CFPB scrutiny.  In remarks to The Clearing House in November 2013, Director Cordray indicated that the CFPB believes it will “be better able to identify and enforce the law against illegitimate firms” if it can identify companies with high ACH return rates. 

For a detailed discussion of the Four Oaks lawsuit, see our legal alert.  On Tuesday, February 18, at 12:00 p.m. ET, Ballard Spahr will conduct a webinar on the lawsuit.  The registration form is available here.