Consumer Lawsuits Claim Banks Helped Payday Lenders Break Law

Article excerpt

Byline: Andy Peters

Banks have started to rid themselves of ties to industries that regulators deem unsavory, from pornography to gun sales to payday loans. But it may not be enough to fully cleanse banks of legal liabilities.

A recent spate of judicial rulings suggests that banks' next worry may stem from a potentially costly group of related lawsuits filed on behalf of consumers. These plaintiffs make a core argument that should send a chill down many bank executives' spines: the banks should have known that their payday-lender customers were doing illegal things and thus were helping them break the law.

Consumers have sued 10 banks and a credit union for allegedly helping online payday lenders break usury and other laws by processing transactions for those companies. As banking lawyers have described the cases, they are "nearly identical" in their allegations and seek class-action status.

The lawsuits, all filed last year in federal court, recently survived critical hurdles in the judicial process, such as judges dismissing banks' motions to throw out the cases. Most of the suits name multiple banks as defendants.

Financial institutions on the hook range from Bank of Montreal's $91 billion-asset BMO Harris Bank to the $342 million-asset North American Banking Co. in Roseville, Minn. BMO Harris is named as a defendant in eight pending cases, the most among the 11 financial institutions.

Four Oaks Bank & Trust is also a named defendant in three pending cases filed by the consumer plaintiffs, who seek class-action status. A federal judge last month approved a settlement between the $820 million-asset company, in Four Oaks, N.C., which was sued by the Justice Department in a separate case as part of Operation Choke Point.

U.S. Bancorp (USB) had also been sued in federal court in Minnesota, but a judge dismissed the case on April 21 and ordered the $91 billion-asset company to enter arbitration with the plaintiffs.

Despite the ruling in the U.S. Bancorp case, one of the plaintiffs' lawyers says he expects his clients' arguments will prevail. The banks are playing an essential role in allowing payday lenders to charge egregiously high interest rates, Steve Six, a Kansas City, Mo.-based attorney for plaintiffs, said in an interview.

"Payday lenders know that if they had to collect their debts by check, debit card" or another method that allowed the customer to first approve the payment, "they would not be able to maintain their illegal activity," says Six, a former Kansas attorney general.

"These banks play a key link in the scheme," Six says.

The financial institutions, according to Six's court filings, have violated federal anti-racketeering laws; federal banking regulations; and industry standards and rules established by Nacha (formerly known as the National Automated Clearing House Association).

Nacha's rules "put the gatekeeper responsibilities on the banks to vet the originators they allow into the ACH network and to ensure ... that all the entries are in compliance," Six says.

Nacha has already suggested that banks should be more vigilant about customers that use the ACH network. The industry-owned group last year proposed new rules designed to prevent fraud.

The banks have denied the claims in legal briefings and in public statements. …