Federal and state regulators are examining whether some of the largest U.S. banks are helping Internet-based lenders evade state laws that cap interest rates on payday loans, The New York Times said on Sunday.
Citing several people with direct knowledge of the matter, the newspaper said the FDIC and the Consumer Financial Protection Bureau in Washington, D.C. are examining the role of banks in online payday loans.
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It also said Benjamin Lawsky, who heads New York State's Department of Financial Services, is investigating how banks enable online lenders to make high-rate loans to residents of New York, where interest rates are capped at 25 percent.
Payday loans, typically a few hundred dollars in size, enable cash-strapped borrowers to obtain quick funds to tide them over until their next paychecks.
But the loans can carry effective annual interest rates that reach well into three digits. Some consumer advocates consider the loans a means to take advantage of financially desperate Americans, who nonetheless shell out $7.4 billion a year for them according to a February 20 study by the Pew Charitable Trusts.
The newspaper did not identify the banks being examined.
But it said that while large banks such as Bank of America Corp, JPMorgan Chase & Co and Wells Fargo & Co do not make the actual loans, they do let lenders that do to withdraw payments from customers' accounts, even if customers have already begged them to stop.
According to the newspaper, 15 U.S. states ban payday loans, but lenders are setting up online operations in places such as Belize, Malta and the West Indies to more easily evade the caps.
Representatives of JPMorgan, Bank of America, Citigroup Inc and Wells Fargo, the four largest U.S. banks, had no immediate comment or did not immediately respond to requests for comment.
The FDIC, the CFPB and Lawsky's office did not immediately respond to requests for comment.
The newspaper said a Bank of America spokeswoman said that bank has always honored requests to stop automatic withdrawals, a JPMorgan spokeswoman said that bank is working to resolve open cases, and Wells Fargo declined to comment.
"YOU NEVER CATCH UP"
According to the Pew study, Americans on average pay $520 in finance charges for payday loans that average just $375.
Many of these borrowers find the process a never-ending cycle that leaves them in the same financial binds where they started, according to the study.
Fifty-eight percent of borrowers reported persistent problems paying their bills, and 41 percent found they needed help to repay the loans - such as by borrowing from friends or family, selling personal possessions, or taking out other loans.
Moreover, 27 percent of payday loan borrowers said the loans caused them to overdraw their checking accounts - enabling banks to charge fees for those overdrafts.
"It seems like you never catch up, and it, it's just check-to-check, and something breaks down, and the house needs work, kids have school, just never catch up," a storefront borrower in Chicago was quoted in the report as saying.
The borrower was then asked how long this had gone on. The response: "Twenty years."
(Reporting by Jonathan Stempel in New York)