California banks, credit unions warned to be on lookout for illegal payday lenders

10/09/2013 12:00 AM

10/09/2013 8:04 AM

Continuing its push against illegal payday loans, the state is warning hundreds of California banks and credit unions to be on the lookout for fraudulent lenders.

“By accepting debit and credit transactions from unlicensed payday lenders ... financial institutions are, knowingly or unknowingly, enabling illegal payday loan transactions to occur in California,” the state Department of Business Oversight said Monday in issuing letters to more than 300 state-licensed banks and credit unions.

The letters are “part of the ongoing battle against unlicensed, illegal payday lenders,” said DBO spokesman Mark Leyes. “This is not the last of our arrows.”

DBO’s letter advises financial institutions to be vigilant as “gatekeepers” of the Automated Clearing House, the electronic clearinghouse for deposits and withdrawals.

Many payday loans are transacted through the ACH by illegal online lenders that aren’t licensed in California. That puts consumers at risk of paying excessive interest rates and having no recourse when something goes wrong.

Since January, the department has taken various actions against 16 unlicensed payday lenders, some of which are based in foreign countries like Belize and Costa Rica, as well as across the country. Three of the 16 operate on Indian tribal lands, which are considered outside the jurisdiction of state government regulations.

The department said banks and credit unions should ensure that payday lenders are licensed and report any suspicious activity. Leyes said that includes looking for patterns of small-dollar deposits to a customer’s bank account, followed shortly by withdrawals of $300 or more by the same company. That could indicate a consumer was taking out a typical $255 payday loan, then two weeks later – on payday – has $300 withdrawn by the lender, to cover the loan and fees.

Golden 1 Credit Union, the state’s largest network of credit unions, welcomes the state’s efforts “to protect consumers and help reduce or eliminate those transactions,” said spokesman Scott Ingram, who noted that Golden 1 does not deal directly with payday loan institutions. “We know we have members who use payday loans, but we don’t know if they’re using illegal online lenders. We encourage our members to monitor their accounts for unauthorized fees and let us know.”

The DBO also put banks and credit unions on notice that routine state audits will check to ensure that proper safeguards are in place to bar transactions by illegal payday lenders.

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