Could big banks help rein in payday lenders?
Pedestrians pass by a Chase Bank branch office on February 20, 2013 in San Francisco, California. JPMorgan Chase has announced new policies to limit the ability of online payday lenders to access bank customers’ accounts in order to withdraw improper or unwanted automatic payments.
The bank -- the largest by assets in the U.S. -- says that by late spring, it will stop charging customers repeated overdraft fees in a single month, when one of these online payday lenders keeps trying to pull out automatic payments again and again -- from a checking account that’s already empty. And the bank will train staff to make it easier for customers to stop payments and close accounts that they’ve previously authorized an online payday lender to access for bi-weekly or monthly payments.
All that might have helped 33-year-old office assistant Sharmene Smith of Birmingham, Alabama -- if only her own credit union had put such policies in place a couple years ago. At that point, she had just recently started supporting herself for the first time.
"I guess you could say I was just trying to make it," says Smith. "And I was in a relationship where it was financially draining. I was pretty much the only one working."
Smith, who was then living in Virginia, borrowed $1,600 -- plus more than $500 in fees, plus interest to come out of each payment -- from two different lenders she found online. Both were based out-of-state.
Then, her salary couldn’t keep up.
"They wanted their money and they withdrew it no matter what," Smith says. "And even when I closed the account they kept trying. If it was on the 15th of the month, it was like, the 15th at 1 o’clock, the 15th at 3 o’clock. And I was getting all these overdraft fees."
There are two problems here, say consumer advocates who oppose this type of predatory lending.
First, there are the practices of the online payday lenders -- their outrageously high interest rates and add-on fees, their aggressive collection practices. According to experts at the Virginia Poverty Law Center, where Smith eventually turned for help, much of what she experienced is actually illegal in Virginia, and in more than fifteen other states that have imposed restrictions on high-interest lending or banned it outright. These lawyers say that even though lenders may be based in other states or overseas (many operate out of the Caribbean), state and federal consumer-protection laws where the borrower lives apply.
Second, there is Smith’s own bank -- acting as aider-and-abettor of the online lender. Public-interest attorney Susan Shin of the Neighborhood Economic Development Advocacy Project in New York says mainstream banking institutions are helping online lenders take borrowers’ money, while loading on their own exorbitant fees in the process.*
"What we’ve seen is that banks are really trying to profit from this practice of refusing to allow their customers to stop these payments," says Shin. "And they’re charging overdraft fees, $34 a pop, which can add up to hundreds or thousands of dollars, to their low-income customers, which is really harmful for them. They don’t have many resources to begin with."
Shin’s organization has filed a federal lawsuit against JPMorgan Chase on behalf of two such payday-loan borrowers who are former customers of the bank (Subrina Baptiste and Ivy Brodsky v. JPMorgan Chase). Shin says the federal Electronic Fund Transfer Act requires banks to let customers cancel recurring automatic withdrawals without getting permission from the payday lender. And she says the customers’ account agreements with the bank allowed them to close their accounts even if withdrawals were scheduled or pending.*
Shin and advocates at the Virginia Poverty Law Center cited multiple instances in which borrowers had cancelled automatic withdrawals, only to have the lender resubmit the withdrawal in a slightly different amount, or in two equal parts, and have the money transferred out of their account to the lender anyway. In some cases, banks reopened accounts that customers had closed, in order to facilitate online lenders’ withdrawals, even though the customer had rescinded the lender’s authorization to do so.
JPMorgan Chase’s announcement today indicates the bank is at least moving in the direction consumer advocates want.
Virginia-based banking analyst Bert Ely thinks other big banks will follow JPMorgan Chase’s lead as they too come under increased scrutiny and pressure over a variety of consumer banking practices and fees. But Ely doubts this is a major cash-cow for any of the big banks.
"Most people don’t deal with payday lenders, so I doubt how much additional revenue the banks are getting through these overdrafts that arise out of payday lender payments."
Ely believes these customers are actually costly for the banks to service -- as bank compliance officers try to sort out when to let the online payday lenders do their stuff, and when to slam the electronic door shut.
*CORRECTION: The original version of this story incorrectly characterized the basis for claims in a lawsuit against JPMorgan Chase. The lawsuit, brought by the Neighborhood Economic Development Advocacy Project on behalf of former JPMorgan Chase bank customers, claims that the customers’ account agreements with the bank gave the customers the right to close their accounts at any time, for any reason.