Bank of America is the first financial institution to agree to use a software database developed by regulators in New York to flag payday lenders that may be violating state laws. The bank also will identify payday lenders that may have made illegal loans to customers in New York and will use the data to notify other financial institutions that work with those lenders.
The database is the latest effort by Benjamin Lawsky, superintendent of the New York Department of Financial Services, to tighten control of short-term lenders that may be ignoring the state's ban on high-rate loans. Federal and state regulators have been focusing on the banks and payment processors that service payday lenders and other merchants suspected of fraud. Many payday lenders have moved online to try to skirt restrictions on interest rates and other limitations.
As part of a probe called "Operation Choke Point," federal officials have opened at least 15 civil and criminal investigations into whether banks and payment processors have aided fraudulent activity. Critics say the approach puts too much responsibility on the financial institutions, instead of on the merchants that engage in the allegedly fraudulent activity.