PHOENIX — If banks are allowing payday lenders to make withdrawals from their customers' accounts over the objections of those account holders, they are at risk of being penalized by their regulators, an industry lawyer warns.

Payday borrowers will often permit lenders to withdraw payments from their checking accounts, but disputes can arise when a borrower requests that the automatic withdrawals be stopped. In some instances banks have let withdrawals go through anyway and have told customers that they can only be canceled with the payday lender's blessing.

Lynne Barr, a partner at Goodwin Proctor, predicts that federal regulators will take enforcement actions against institutions that have allowed such withdrawals. 

"You don't have a right as a financial institution to tell the consumer that they have to go back to the payee to stop payment," Barr said in remarks at the Consumer Bankers Association's conference in Phoenix Monday.

The blunt legal advice follows a recent New York Times story that focused on automatic withdrawals at U.S. banks by payday lenders.

The article highlighted instances in which JPMorgan Chase (JPM) allowed such withdrawals over the objections of their customers. The depositors subsequently got hit with hefty overdraft charges and other fees. Since the article was published, JPMorgan chief executive officer Jamie Dimon condemned the practice and said the bank would make changes.

The first day of the annual conference highlighted the retail banking industry's present conundrum — while bankers are trying to focus on new opportunities, they are also finding it hard to forget about their past. This year's conference is titled "The Future of Money," and yet attendees are still jamming into sessions about the regulatory changes wrought by the financial crisis.

Richard Hunt, president of the Consumer Bankers Association, compared the industry's current state to a proverbial glass of water, which is either half-full or half-empty, depending on one's perspective. "I am happy that it is half-something now, because two years ago we wouldn't have been able to say that," Hunt told conference goers.

Much of the discussion Monday was devoted to getting inside the minds of officials at Consumer Financial Protection Bureau — an exercise made more awkward by the fact that CFPB employees were among those in the audience.

Jo Ann Barefoot, an industry consultant based in Washington, said that the fledgling agency is changing bank regulation in a fundamental way and that bankers need to take its actions seriously.

"Is it possible that the CFPB will fail and will fizzle away?" she asked. "I sure wouldn't run my bank assuming that's going to happen."

Barefoot, who was speaking to an audience of large bank employees, argued that most big banks now realize that compliance with consumer protection laws is a much more central part of their business than it once was.

If there is a new mentality inside executive suites, the CFPB's effort to impose hefty penalties on violators is likely playing a big part. "The size of the penalties has changed the game," Barefoot said. "I'm sure they were designed to get everyone's attention. It has worked."

She voiced hope that over time, regulators and banks will be able to strike what she described as a grand bargain. Under such a deal, financial institutions would gain the trust of their regulators and in return they would get some benefit, such as less onerous exams.

"You're going to need to gain the trust of the regulators on these fairness issues," said Barefoot, "if you're ever going to build your company."

Other speakers at the conference cast the relationship between banks and their newest regulator in more adversarial terms.

Barr, the industry lawyer, issued warnings about the risks associated with offering several retail banking products. She urged banks to tread carefully with respect to add-on products; add-on products sold to credit card holders have been the target of some of the CFPB's first enforcement actions

"I think everybody is nervous about add-on products. And why wouldn't you be? And not just add-on products related to credit cards," Barr said.

The CFPB is also closely scrutinizing so-called deposit advance loans, according to Barr. Only a small number of banks are making those short-term, high interest-rate loans, which have drawn comparisons to payday loans.

On Tuesday the CFPB will have a chance to speak for itself. The agency's deputy director, Steve Antonakes, is scheduled to address the conference during a lunchtime session.

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