In the latest salvo fired by the Department of Justice in a nationwide effort targeting online payday loans, a bank in North Carolina has agreed to pay $1.2 million to settle allegations of facilitating fraudulent transactions.
According to the complaint filed by the DOJ against Four Oaks Bank & Trust Company, the financial institution turned a blind eye to $2.4 billion in loans made by online lenders and other alleged fraudulent transactions that were processed by a third-party payment processor that had contracted with the bank in violation of antifraud laws over a five-year period. The bank received more than $850,000 in gross fees for the transactions, the complaint said.
Four Oaks violated the Anti-Fraud Injunction Act and the Financial Institutions Reform, Recovery, and Enforcement Act, the DOJ said. Instead of functioning as a clearinghouse, the defendants allowed the processor direct access to the automated payments system and only reviewed transactions after they occurred, the government alleged, leaving the third party with direct access to consumer accounts.
“The bank is required to acquire information sufficient to know the true identities of the entities to which it provides access to the national banking system, as well as the nature of their business activities,” according to the complaint. “Four Oaks Bank is failing to comply with these obligations and is ignoring red flags that signal unlawful practices by business account holders, including a third-party payment processor and its fraudulent merchant-clients.”
Examples of the red flags included loan agreements violating the Federal Trade Commission’s rule on limiting wage garnishments; some loans involving tribal, offshore, and other “choice of law” lenders that the DOJ asserted provided for interest at rates prohibited by the law of the states where the borrowers resided; and some entities that were subject to complaints of unauthorized transactions in excess of the threshold established by NACHA.
Under the terms of the consent order filed in North Carolina federal court, Four Oaks will pay $1.2 million and will no longer engage in certain practices. The bank agreed to restrict its dealings with third-party payment processors in the future, with limitations including not providing any banking services or bank accounts unless the third party is licensed as a money transmitter in the relevant states and registered as a money services business.
To conduct business with online payday lenders in the future, the bank must conduct due diligence and establish “in good faith and to the best of its ability” that the lender is not engaged in a false or deceptive business practice, or activity in violation of federal and state laws or NACHA Rules.
To read the complaint in U.S. v. Four Oaks Fincorp, click here.
To read the proposed consent order, click here.
Why it matters: The DOJ’s “Operation Choke Point” is a multiagency effort that is attacking the online payday industry by focusing on processors and banks that serve as the link between lenders and borrowers. The operation is raising significant issues, including whether it is forcing lenders that are in fact operating in compliance with applicable law to go out of business. Between the DOJ action and other financial regulators, such as the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, cautioning banks about the risks of processing such loans, however, financial institutions should use caution or face being the next target.