Director Cordray’s remarks to the Clearing House yesterday should unsettle bankers and payday lenders alike. In his talk, Director Cordray challenged bankers to bow to the inevitable. He suggested that sooner, rather than later, the industry should invest the billions of dollars required to build a payment system with “faster and even real-time payments” where “the interests of consumers remain at the top of [bankers’] minds.” The system envisioned by Director Cordray would be guided by four principles:

First, faster payments should bring with them faster access to the funds that a consumer deposits…. Second, a faster payment system should include real-time access to information about the status of an account as well as protections from hair-trigger assessments of fees…. [Director Cordray does not favor a “model based on ‘bounced check’ fees.” Get ready for a tough overdraft fee rule.] Third, faster payments must be accompanied by robust consumer protections with respect to fraudulent or otherwise unauthorized transactions and erroneous debits…. Fourth, and finally, a faster payment system should be accessible to all consumers and not just to the most privileged.

Director Cordray admonished banks that accept as customers for payment services “unscrupulous lenders and their payment processors.” Also, he criticized banks on the other side of payment transactions, observing that “consumers expect their own bank or credit union to be on their side.” All too often, he said, these institutions fail to honor stop payment orders, revocation orders and requests to close accounts to halt the abuse.

So who are the “unscrupulous lenders” of concern to Director Cordray? First, of course, are out-and-out fraudsters. Citing a case of a consumer who was cheated by an online payday lender that bilked consumers for over $100 million, Director Cordray noted that electronic payment systems “can be misused to victimize consumers unless banks and the system administrators work to police and enforce safeguards.”

But non-fraudulent payday lenders also came in for criticism. Director Cordray pointedly contrasted ACH return rates for credit cards, mortgage loans, and auto loans, pegged by JP Morgan Chase at less than 1 percent on average, to a “staggering” 25 percent return rate on payments for payday loans. He went on to criticize “fishing expeditions” to collect payments and the “particularly common and troublesome … practice of some online lenders [of] repeatedly sending automatic debits to collect payments.” Citing a few egregious examples, he added that, surely, “the financial institutions that accept these unscrupulous lenders and their payment processors as clients need to do a better job of ensuring that they are honoring the protections afforded consumers under the Electronic Fund Transfer Act.”

Director Cordray noted that the EFTA, TILA and NACHA rules are designed to protect consumers and merchants alike. “But even if these rules were all that they should be, merely having rules and safeguards is not enough – they need to be policed and enforced aggressively if they are to have their intended effect of actually protecting consumers.” Payday lenders should take heed of the continuing pressure on their banks: Steps need to be taken to taken to reduce return rates, potentially including new limits on repeat submissions of rejected payments. Director Cordray does not sound like a regulator who thinks Operation Choke Point has gone too far.