The state of New York's crackdown on illegal online payday loans is being ratcheted up, with Bank of America (BAC) taking unprecedented steps to help state officials ferret out misconduct.
Charlotte, N.C.-based B of A has agreed to use a state-created database that lists more than 50 online lenders accused of operating illegally in New York, state officials said Monday. Bank of America is the first bank to join the initiative, and New York officials hope that other banks will follow its lead.
The state's goal is to shut the blacklisted companies out of Bank of America, both as customers of the bank and as merchants that seek to make automatic withdrawals from the accounts of B of A's retail customers.
B of A agreed to use the database in a few specific ways. It will allow bank officials to check whether their merchant customers are making illegal loans in New York. Also, when Bank of America notices that a blacklisted online lender is trying to make a withdrawal from a retail customer's account, it will be able to notify the lender's bank. Moreover, Bank of America will report back to the New York Department of Financial Services about lenders that are engaging in potentially illegal activities, state officials said.
"We are pleased that Bank of America set a strong example and partnered with us on this issue," Financial Services Superintendent Benjamin Lawsky said in a news release. "In the coming days and weeks, we will be reaching out to additional banks asking that they join us in this effort."
"We expect a positive response," added Matthew Anderson, a spokesman for the New York Department of Financial Services. "Most banks typically do not want to be involved in this business."
New York has one of the strictest interest rate caps in the country, and over the last year state officials have taken a wide range of steps to crack down on online lenders that operate in violation of state law.
The moves have targeted the online lenders themselves, as well as companies that generate leads for them, firms that process payments for them and banks that they need to gain access to the payment system.
Last August, Lawsky's office instructed 117 banks, including B of A, JPMorgan Chase (JPM), Citigroup (NYSE: C) and Wells Fargo (WFC), to take certain steps to choke off the online lenders' access to the payment system.
But New York's latest move asking lenders to take action based on the contents of a state-created database envisions an even more proactive role for banks.
Bank of America described the New York database program as a consumer-protection tool.
"We are committed to safe, transparent products and services that help our customers build better money habits," Andrew Plepler, global corporate social responsibility and consumer policy executive at B of A, said in a news release. "This program provides us with another tool to help protect our customers from predatory lending practices throughout New York."
The New York crackdown on online payday lending comes as federal officials are mounting Operation Choke Point, a multi-agency initiative that has also sought to keep online payday lenders out of the banking system.
Companies included in the New York database have been the subject of public actions taken by the Department of Financial Services based on evidence of illegal payday lending, state officials said. That doesn't necessarily mean that the companies have admitted wrongdoing or been found liable by a court.
The list of blacklisted firms was not released Monday. State officials said they plan to continue to add companies to the database.