Thirty groups have written to the CFPB, FTC, Department of Justice and federal banking regulators urging them “to closely monitor the payment processing procedures and compliance safeguards in place” at the payment processors and banks they supervise and “to take swift action” when they find insufficient safeguards and excessive legal, reputational or other risks.  The consumer groups named on the October 24, 2013 letter included the National Consumer Law Center, Consumer Federation of America, Consumers Union and Center for Responsible Lending. 

In the letter, the groups challenge critics of “financial regulators scrutinizing the role of financial institutions in facilitating illegal transactions,” asserting that such actions “are consistent with
long-standing supervisory expectations.”  More specifically, they focus on the role of banks in originating ACH debits and assert that scrutiny of “bank relationships with online payday lenders and their payment processors is consistent with longstanding scrutiny of other higher risk third party relationships.” 

In addition to closer monitoring of electronic payment processing, the groups want the regulators to take actions to prevent merchants engaged in illegal transactions from turning to remotely created checks to evade restrictions on their use of the ACH system.  Asserting that the check system “is subject to far fewer systemic controls” than the ACH system, the groups expressed their support for a total ban on remotely created checks (RCCs) and remotely created payment orders (RCPOs) in consumer transactions.  (As they note in the letter, the FTC recently proposed to ban merchants from accepting or requesting payment through such methods in inbound and outbound telemarketing transactions.) 

Observing that “a complete prohibition is a long term goal and cannot be accomplished immediately,” the groups urge the regulators to consider other measures “in the interim.”  They suggest stronger monitoring of merchants who use such payment methods by banks and payment processors and that operators who have been banned from the ACH system also be banned from using RCCs or RCPOs.  They further suggest that merchants be banned from using RCCs or RCPOs after a consumer stops payment or revokes authorization for an ACH payment.  

Banks are already feeling considerable pressure from regulators to carefully monitor their relationships with payment processors.  Over the last few years, the FDIC and OCC have brought several civil enforcement actions against banks for engaging in allegedly unfair practices or unsafe and unsound practices through the handling of such relationships with payment processors and several of those banks were also the subject of criminal enforcement actions brought by the DOJ.  The FTC has also taken enforcement action against companies processing payments for illegal operators.  

Most recently, regulators have focused on the role of banks in processing ACH debits on behalf of online payday lenders.  This past summer, the New York State Department of Financial Services (DFS) announced aggressive enforcement-related activities to stop supposedly unlawful online payday lending to New York consumers.  Those activities included sending letters to 117 banks, asking them to work with the DFS “to create a new set of model safeguards and procedures to choke off ACH access” to 35 payday lenders targeted by the DFS. 

Last month, the FDIC issued guidance which restated the FDIC’s expectation that banks providing payment processing for such merchants will perform appropriate risk assessments and conduct due diligence and monitoring adequate to ascertain whether the merchants are operating in accordance with applicable law.  However, while not expressly mentioning payday lending, the guidance clarified that banks are not prohibited from assisting payday lenders who have adopted a “state-by-state” model of operation and comply with the laws of the states where their borrowers reside. 

Regulators should proceed cautiously since new burdensome requirements could result in banks cutting off access to the payments system for many legitimate businesses.  Regulators also need to be mindful of the high costs involved in doing the level of due diligence and monitoring sought by consumer advocates.  Those costs will ultimately be borne by the consumers to whom the users of bank payment services will pass on such costs.