Fraud-Prevention Company Stopped Providing Bank Verification to Payday Lenders

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 [e-mail]

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