NEW YORK — Federal prosecutors are trying to thwart the easy access that predatory lenders and dubious online merchants have to Americans’ bank accounts by going after banks that fail to meet their obligations as gatekeepers to the US financial system.
The Justice Department is weighing civil and criminal actions against dozens of banks, sending out subpoenas to more than 50 payment processors and the banks that do business with them, according to government officials.
In the new initiative, “Operation Choke Point,” the agency is scrutinizing banks big and small over whether they, in exchange for handsome fees, enable businesses to illegally siphon billions of dollars from consumers’ checking accounts, according to state and federal officials briefed on the investigation.
The critical role played by banks largely plays out in the shadows, because they typically do not deal directly with Internet merchants. What they do is provide banking services to third-party payment processors, financial middlemen that, in turn, handle payments for their merchant customers.
Yet the crackdown has already come under fire from congressional lawmakers, including Representative Darrell Issa, Republican of California, who heads the House Oversight Committee. The legislators have accused the Justice Department of trying to covertly quash the payday lending industry.
In the first action under “Operation Choke Point,” Justice Department officials brought a lawsuit this month against Four Oaks Bank of Four Oaks, N.C., accusing it of being “deliberately ignorant” that it was processing payments on behalf of unscrupulous merchants — including payday lenders and a Ponzi scheme.
As a result, prosecutors say, the bank enabled the companies to illegally withdraw more than $2.4 billion from the checking accounts of customers across the country.
The new, more rigorous oversight could have a chilling effect on Internet payday lenders, which have migrated from storefronts to websites where they offer short-term loans at interest rates that often exceed 500 percent annually. As a growing number of states enact interest rate caps that effectively ban the loans, the lenders increasingly depend on the banks for their survival.
With the banks’ help, the lenders who typically work with a third-party payment processor that has an account at the banks are able, authorities say, to automatically deduct payments from customers’ checking accounts, even in states where the loans are illegal.
Short-term lenders argue that the loans, when used responsibly, can provide vital credit for borrowers largely frozen out of traditional banking services, while state law enforcement officials say the lenders still have to abide by state restrictions.
And the payday industry has its defenders. Issa has begun an investigation into Operation Choke Point, according to a letter addressed to Attorney General Eric Holder.
In the January letter, Issa accused the Justice Department of trying to “eliminate legal financial services to which the department objects.”
Some victims of unscrupulous payday lenders are pointing fingers at banks, arguing that without the aid of Four Oaks and banks like it, they never would have been plunged deep into debt by the pricey loans.
Bankers shrugged off evidence, even direct warnings from law enforcement officials, that their lender clients were violating state law, prosecutors say.