Online Lenders Go Bust Following New York Crackdown
Amid pressure from regulators, Western Sky Financial plans to close for business early next month.
New York state is asking more than 100 banks to choke off access to the automated payments system that unlicensed online lenders use to debit the checking accounts of consumers.
After years of futile attempts to drive high-cost online lenders out of business, at least one state's regulators appear to have hit on a successful strategy: cutting off their access to the payments system.
Since Aug. 5, when New York state regulators put a target on 35 specific lenders that it said were not licensed to make loans in the state, at least nine of the companies have halted operations. Key to the state's effort was a letter it sent to more than 100 banks in which it pressured them to prohibit online lenders from accessing customers' checking accounts.
The banking industry has largely been mum about how it's responded to the regulatory edict, but it appears banks are falling quickly into line.
Just three days after New York Financial Services Superintendent Benjamin Lawsky called on the industry to "choke off" the online lenders' access to the ACH payments network, the industry-run electronic payments group Nacha sent a letter to banks warning them that authorizing access to customer accounts could violate Nacha rules.
In the letter, Nacha stated that under its rules, "purported authorizations to pay illegal loans that are unenforceable under applicable state law" are not valid.
Many of the unlicensed online lenders claim ties to Indian tribes and say that tribal sovereignty immunity exempts them from state laws. In a federal lawsuit filed last week against New York officials, two tribes said that their businesses' access to the payments system has dwindled quickly this month.
The lawsuit describes Nacha's letter as "almost certainly" being a result of New York's "threats and coercion." It also states that banks have told tribal lenders that New York demanded that they stop processing payments for the companies.
"The number of entities available to the tribal businesses for necessary payment system access and day-to-day operations has dwindled to a dangerously low level," the lawsuit states.
"The erosion of those relationships is taking place now, and it's real," adds David Bernick, a lawyer who is representing the tribes. "This is not a hypothetical situation."
Bernick noted that banks face strong pressure to comply with edicts from their regulators.
"You're accountable to people who regulate you as a bank," he said. "And you're going to think about: Is it worth the risk? Or perhaps they would be better off not being involved in these relationships?"
Jan Estep, president and chief executive officer of Nacha, downplayed the importance of its letter to banks. "So primarily what we've been doing is reminding financial institutions of their existing responsibilities relative to due diligence in terms of their customers that they support," she said.
Two banking industry trade groups the American Bankers Association and the Consumer Bankers Association declined to comment.
Of the 35 lenders targeted by New York officials, five now have notices on their websites stating that they are either temporarily or permanently halting their lending operations. Those firms are: Western Sky Financial, Discount Advances, MyCashNow.com, PayDayMax, and Sure Advance.
Another four lenders no longer have working websites: Tribal Credit Line, Fast Cash Personal Loans, Bayside Loans, and SCS Processing.
Discount Advances, MyCashNow.com and PayDayMax are all connected to a Chattanooga, Tenn., businessman named Carey V. Brown, according to regulatory actions taken against the firms. Brown's businesses laid off 400 workers earlier this month, the Chattanooga Times Free Press reported Tuesday.
Efforts to contact Brown through his attorneys were unsuccessful.
Western Sky Financial, a South Dakota company owned by Martin "Butch" Webb, a member of the Cheyenne River Sioux tribe, is laying off almost its entire workforce, according to a report by a Sioux Falls, S.D., television station. Efforts to contact Webb through his attorney were also unsuccessful.
For years, regulators in numerous states have been trying to crack down on online lenders that operate within their state border without licenses. These companies often offer installment loans that are as expensive as, or even more expensive, than payday loans.
The regulators have sent cease-and-desist orders and filed lawsuits, but the lenders have used a variety of tactics, including the tribal sovereignty argument and claims that they are based overseas, to continue operating.
Uriah King, state director of the Center for Responsible Lending, says New York's crackdown was "a culmination of just dozens and dozens of state enforcement actions" over the last few years.
"New York was really the tipping point, and it was probably the most aggressive," King says.
Federal officials are reportedly also putting pressure online lenders that operate without state licenses, as well as banks that process transactions for them. The Department of Justice has issued subpoenas to banks, and the Federal Deposit Insurance Corp. has warned banks to stop processing payments for the companies, according to a Wall Street Journal story earlier this month.