In its ongoing crackdown against illegal payday loans, California is warning banks and credit unions to watch 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 (DBO) cautioned on Oct. 7 in letters to more than 300 state-licensed institutions.
The correspondence advises financial firms to be alert “gatekeepers” of the Automated Clearing House (ACH), the electronic clearinghouse for deposits and withdrawals. The DBO has taken actions against 16 unlicensed payday lenders so far this year. Some of these lenders are based in the United States, including on Indian tribal lands, while others are based in countries like Belize and Costa Rica.
The DBO indicated that banks and credit unions should make sure payday lenders using ACH are licensed. This includes looking for patterns of small-dollar deposits to a customer’s bank account, followed by withdrawals of $300 or more by the same company. This may indicate that a consumer took out a $255 payday loan, then was debited $300 two weeks later by the lender. The department also announced that routine state audits will check to ensure that protections are in place to block illegal activity.