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New York Times: Big Banks Are Allies With Online Payday Lenders
NEW YORK (2/26/13)--With 15 states banning high-interest payday loans, big banks have become a critical link for online payday lenders who sometimes charge rates exceeding 500%, according to The New York Times.

Although the big banks don't make the loans, they allow automatic withdrawals for payments of the payday loans, which often trigger overdraft fee--even in states that have banned such loans.

The Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau are examining banks' roles in Internet payday loans, said the article (Feb. 23). The New York State's Department of Financial Institutions is investigating how banks enable online offshore payday lenders to make the loans in New York, which caps the interest rates at 35%.

Credit unions are often noted as lower-cost alternatives to payday loans for members needing to borrow funds short-term, the Credit Union National Association points out. They don't charge exorbitant interest rates, and some tie their programs to loans that put back funds into a savings account as a condition of the loan, helping the borrower build wealth, or they have a financial counseling component.

More payday lenders are setting up business offshore to evade statewide caps on interest rates, but they couldn't do business without giants like J.P. Morgan Chase, Bank of America and Wells Fargo, said the Times.

"In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals," said the Times.

About 27% of payday loan borrowers surveyed by Pew Charitable Trusts say that the loans caused them to overdraw their accounts, forcing fees.

The article points out that the loans are easy to obtain but hard to stop. One Chase customer told the Times she had six Internet loans. When she asked Chase to close the account in March, it kept the account open between April and May. In the meantime the lenders tried to withdraw funds from the account 55 times. Chase charged her $1,523 if fees--44 insufficient funds fees, extended overdraft fees and service fees.
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