New York’s Department of Financial Services (DFS) is expanding its efforts to combat illegal payday lending to New York consumers by taking a series of steps to prevent payday lenders from collecting payments through the MasterCard and Visa networks.

As regulatory pressure mounts to prevent online payday lenders’ abuse of the Automated Clearing House (ACH) network, some lenders have turned to debit card transactions, the DFS said, as “an end run around … to illegally deduct funds from New Yorkers’ bank accounts.”

MasterCard and Visa agreed to investigate and take “appropriate action” when provided with evidence by the DFS that online payday lenders are using debit card transactions to collect illegal payday loans from New York residents. Appropriate action may include requiring the payday lender’s acquiring financial institution to cease dealings with that lender. The networks will also notify banks about potentially illegal transactions by sending alerts to all the acquiring financial institutions in their debit networks about illegal payday lending and applicable New York law.

“Whenever online payday lenders try new schemes to flout our laws and exploit New York customers, we will take strong action to head them off at the pass,” DFS Superintendent Benjamin Lawsky said about the deal with MasterCard and Visa.

In addition, the DFS also sent cease and desist letters to 20 companies it says are “illegally promoting, making, or collecting on payday loans to New York consumers.” As part of its investigation, the DFS concluded that 12 of these payday lenders are using the new debit card tactic to collect payments on their loans.

To read the DFS press release about its latest efforts, click here.

Why it matters: New York’s DFS has been aggressive in its efforts to crack down on payday lenders. Last summer, the regulator sent 35 cease and desist letters to various lenders demanding a halt to their allegedly illegal payday loans to New York borrowers; DFS concurrently asked banks to limit the lenders’ access to the payment system. However, as payday lending options have decreased, consumers in need of access to short-term, small-dollar loans are turning to intentional overdrafts. Some banks are seeing a rise in overdraft fees as consumers are willing to pay the fee, often less than the interest on a payday loan, for access to cash.