Is This the Next Major Loophole for Big Banks?

Currently, payday loans are banned in 15 states, but that has not stopped lenders from coming up with innovative ways to reach customers. Now, major banks are partnering up with these payday lenders, although they tend to stay behind the scenes.

Due to increasing restrictions on payday lending, more lenders are starting up operations overseas in locales more welcome to these businesses including Malta, Belize, and the West Indies. This helps these companies avoid caps on interest rates instituted in many states. The banks involved with these lenders, such as JP Morgan Chase (NYSE: JPM), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC), do not actually make these loans. Instead they act as sort of middlemen by make it easier for the lenders to take payments out of the borrowers’ accounts. This is permissible even in states where these loans are entirely banned, thus creating a loophole for these companies.

Josh Zinner, the co-director for the Neighborhood Economic Development Advocacy Project, said that the lenders would not be able to do business, “Without the assistance of the banks in processing and sending electronic funds.”

The banking industry says that it is just serving customers who have authorized payments to these lenders. These partnerships are not going unquestioned though. Both state and federal officials are looking to see what role banks are playing in these online loans and how they are working to get around state laws.