By Alan Zibel
WASHINGTON--A fraud-prevention company owned by five major U.S.
banks stopped providing bank account verification services to
payday lenders last year, according to people familiar with the
matter, as banks exit the business of working with riskier
clients.
Until last year, Early Warning Services LLC had been used by
payday lenders as a way to check whether borrowers' bank accounts
are valid and not overdrawn. Hundreds of financial institutions
around the country exchange information on a data clearinghouse run
by the Scottsdale, Ariz.-based Early Warning Services to prevent
fraud such as forgery and fraudulent loans and to validate whether
customers' accounts are in good standing.
But Early Warning stopped working with payday lenders last year
amid broad concerns in the banking industry about the risks of
working with payday lending clients, the people said.
Several payday lenders that operate online have been accused of
fraud by federal officials, and some lack state lending licenses,
instead operating through Indian tribes that claim sovereign
status.
Early Warning is owned by Bank of America Corp., J.P. Morgan
Chase & Co, Wells Fargo & Co. BB&T Corp. and Capital
One Financial Corp. The banks either declined to comment or
couldn't be reached for comment.
News of the cutoff was first reported by Bloomberg News. A
representative of Early Warning couldn't be reached for comment.
Representatives of the Office of the Comptroller of the Currency
and Federal Deposit Insurance Corp. and Federal Reserve didn't
immediately comment.
Bank regulators in recent years have been stepping up warnings
to banks to keep close watch over payment firms that work with
certain types of merchants, such as payday lenders, escort services
and gun dealers, over concerns about fraudulent or illicit
behavior.
Industry groups and congressional Republicans, however, say the
government is trying to force banks to sever ties to politically
unpopular industries.
Payday lenders say the move to cut off access to information
about borrowers runs contrary to the idea of well-underwritten
short-term loans.
Officials at the Consumer Financial Protection Bureau are
working on a proposal that would require payday lenders to make
sure customers can pay back their loans, The Wall Street Journal
reported earlier this month.
"At a time when the CFPB is considering underwriting standards
for small dollar loans, it is curious that this product is being
denied," said Lisa McGreevey, president of the Online Lenders
Alliance, which represents Internet-based lenders. "Consumers are
the ones who will suffer the consequences because they will now
potentially face additional bank overdraft fees" if they don't have
enough money in their accounts.
Federal officials have been ratcheting up scrutiny of online
lending industry. Last week, the Federal Trade Commission reached a
$21 million settlement with Overland Park, Kan.,-based AMG Services
Inc. and MNE Services Inc., a lending business owned by the Miami
Tribe of Oklahoma. Federal authorities say the companies were part
of an online loan operation that charged consumers undisclosed
fees.
Write to Alan Zibel at alan.zibel@wsj.com
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