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The Justice Department is taking aggressive action against banks for the practice that enables businesses to steal billions of dollars from consumer’s checking accounts. With this new initiative called “Operation Choke Point” federal prosecutors are reviewing possible civil and criminal actions against dozens of banks, sending out subpoenas to more than 50 payment processors as well as the banks that do business with them. See this recent article in The New York Times.

Federal authorities are putting a clamp down on these predatory lenders and online merchants. While the banks may not deal directly with the internet merchants, they allow payment processors who handle the payments for these customers.

The Governments first action under “operation choke point” occurred last month when the Justice Department brought a lawsuit against Four Oaks Bank of Four Oaks, N.C.  Prosecutors claim the bank allowed payday lenders and a Ponzi scheme to withdraw more than $2.4 billion from the checking accounts of customers across the country. Justice officials accuse the bank of being “deliberately ignorant” by enabling payment processors to operate on behalf of those who are fleecing their customers.

Victims of this illegal practice point the finger directly at the banks for aiding this practice.  Loans that were taken out came from lenders who would route the payments through Four Oaks Bank. These loans came with unconscionable high interest rates. Early on Four Oaks received complaints from banks across the country where the customer withdrawals were unauthorized by theses predatory merchants. Additionally, in December of 2012 Arkansas Attorney General Dustin McDaniel forwarded a letter to Four Oaks and a payday lender specifically stating they were making illegal loans to residents of his state.  

With regard to this practice many payments were returned due to lack of authorization or insufficiency of funds. In 2012, more than half of the payments that one Internet company was routing through Four Oaks were returned. This rate of return was more than 40 times the industry standard.

Since many states have capped rates that ban these loans, these merchants rely on the banks to carry on their predatory loan work. Even in states where these payday loans are illegal, with the bank’s help lenders can work with third-party payment processors to automatically deduct payments from a customers account.

This Federal initiative should prevent Internet payday lenders from offering short-term loans at interest rates exceeding 500 percent annually.

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