How Bank of America Corp is Leading the Charge Against Predatory Lending

Bank of America is the first to agree to use the NY Department of Financial Service’s new database to identify illegal lenders

Jun 17, 2014 at 11:31AM

New York's Department of Financial Services is on a mission to stamp out illegal payday lending in the state, and has signed up the first big bank to help in that battle: Bank of America (NYSE:BAC).

A database of possible fraudsters
The DFS has composed a software database of Internet-based companies that have been involved in predatory lending activities in the state of New York over the past year.

The stockpile of information can be used to help Bank of America identify whether it is currently dealing with any companies under suspicion. In addition, the bank can use the tool to tip off other banks – and DFS – in the event that it detects any funny business involving these lenders and B of A's own account holders.

Government crackdown
Over the past year or more, there has been a push to put an end to payday lending, loan products which often entail annual interest rates of over 500%. DFS, for example, claims to have tagged lenders operating in New York that charged rates in excess of 1000%.

After being warned last fall by federal regulators about their own predatory lending offerings, several banks, including Wells Fargo and Fifth Third Bank, ended the practice. The short-term loans in question were offered to online customers with direct deposit – and could impose annual rates of up to 300% for a 12-day loan

The Department of Justice has been coming down hard on those suspected of predatory lending. Operation Choke Point endeavors to stop online payday lenders by scrutinizing financial institutions that allow these lenders to withdraw funds from customers' accounts without their permission. The DOJ is currently considering bringing charges against scores of payments processors and banks suspected of dealing with these Internet fraudsters.

Meantime, a payday-lender trade group has sued a slew of federal banking regulators, however, alleging that Operation Choke Point has been illegally driving member companies out of business by disrupting their relationships with financial institutions.

Other banks will be brought on board, too
New York DFS Superintendent Benjamin Lawsky says that his department will be asking other banks to use the software tool, as well. New York has been quite successful with its campaign to stop usurious lenders from operating in the state, and expects that involving banks directly with the program will be more effective still.

Now that Bank of America has stepped up, no doubt other banks will, too. Being the first to accept the extra work that will likely go along with increasing protections for its customers is a great public relations move for the bank, and worthy of kudos.

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Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Fifth Third Bancorp, and Wells Fargo and has the following options: short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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