Both federal and state regulators continue to increase the pressure on payday lenders. New announcements last week demonstrate the ability of regulators to further battle the industry on multiple fronts. Public statements by federal and state regulators alike appear to equate certain legal online lending practices with fraud and other illicit activity.

Late last week, it was reported widely that both the Consumer Financial Protection Bureau and the Justice Department have sent subpoenas to dozens of financial institutions, including online lenders. These activities continue the CFPB’s focus on the industry, which began in early 2012. The federal government appears to be taking a multi-faceted approach, in which it not only targets the payday lenders directly, but also puts pressure indirectly on the industry, through fact-finding efforts levied on the banks and other financial institutions that provide the financial pipeline for the online payday lending industry. In addition to seeking information on this front, other federal and state agencies also are taking action.

CFPB spokeswoman Moira Vahey would not confirm any pending enforcement action, but advised that the CFPB is “looking at a wide range of issues involving payday lending and potential consumer harm, including the growing presence of online payday loans.” She further advised that the CFPB, “will continue to oversee the market and if we find small dollar lenders engaged in unfair, deceptive, or abusive practices, the Bureau will hold those institutions accountable.”

The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency also are scrutinizing their regulated institutions by reviewing their relationships with all lenders, but particularly online payday lenders, using implements such as anti-money laundering laws, books and records requirements, reputational risk, and controls and knowledge of the financial institutions’ customers.

All of these ramped-up efforts appear to be led and coordinated by the President’s Financial Fraud Enforcement Task Force, which is headed up by the Justice Department, and includes representation, resources and personnel from some two dozen federal departments and agencies, in addition to state regulators. While much of the Task Force’s prior work involved fraud, this new effort appears to represent a significant commitment of resources to probing and challenging an industry that operates legally in many jurisdictions.

In addition to the federal efforts, state regulators also continue to take action against payday lenders, and last week, the New York Department of Financial Services demanded that 35 online lenders cease and desist from offering payday loans to New York consumers.

The Impact

Payday lenders should be aware of these enforcement initiatives targeting their industry, both directly and indirectly, and must continue to be proactive in responding to the regulators’ efforts and ensuring that their compliance programs meet the requirements and expectations of the federal and state regulators, including the CFPB. The CFPB continues to investigate the payday industry by wielding its UDAAP sword.

This is a reposting of the August 12, 2013 Troutman Sanders Advisory written by David N. Anthony, Philip “Duke” de Haas, Paige S. Fitzgerald.