Banks have started to rid themselves of ties to industries that regulators deem unsavory, from pornography to gun sales to payday loans. But it may not be enough to fully cleanse banks of legal liabilities.
A recent spate of judicial rulings suggests that banks' next worry may stem from a potentially costly group of related lawsuits filed on behalf of consumers. These plaintiffs make a core argument that should send a chill down many bank executives' spines: the banks should have known that their payday-lender customers were doing illegal things and thus were helping them break the law.
Consumers have sued 10 banks and a credit union for allegedly helping online payday lenders break usury and other laws by processing transactions for those companies. As banking lawyers have described the cases, they are "nearly identical" in their allegations and seek class-action status.
The lawsuits, all filed last year in federal court, recently survived critical hurdles in the judicial process, such as judges dismissing banks' motions to throw out the cases. Most of the suits name multiple banks as defendants.
Financial institutions on the hook range from Bank of Montreal's $91 billion-asset BMO Harris Bank to the $342 million-asset North American Banking Co. in Roseville, Minn. BMO Harris is named as a defendant in eight pending cases, the most among the 11 financial institutions.
Four Oaks Bank & Trust is also a named defendant in three pending cases filed by the consumer plaintiffs, who seek class-action status. A federal judge last month approved a settlement between the $820 million-asset company, in Four Oaks, N.C., which was sued by the Justice Department in a separate case as part of Operation Choke Point.
U.S. Bancorp (USB) had also been sued in federal court in Minnesota, but a judge dismissed the case on April 21 and ordered the $91 billion-asset company to enter arbitration with the plaintiffs.
Despite the ruling in the U.S. Bancorp case, one of the plaintiffs' lawyers says he expects his clients' arguments will prevail. The banks are playing an essential role in allowing payday lenders to charge egregiously high interest rates, Steve Six, a Kansas City, Mo.-based attorney for plaintiffs, said in an interview.
"Payday lenders know that if they had to collect their debts by check, debit card" or another method that allowed the customer to first approve the payment, "they would not be able to maintain their illegal activity," says Six, a former Kansas attorney general.
"These banks play a key link in the scheme," Six says.
The financial institutions, according to Six's court filings, have violated federal anti-racketeering laws; federal banking regulations; and industry standards and rules established by Nacha (formerly known as the National Automated Clearing House Association).
Nacha's rules "put the gatekeeper responsibilities on the banks to vet the originators they allow into the ACH network and to ensure that all the entries are in compliance," Six says.
Nacha has already suggested that banks should be more vigilant about customers that use the ACH network. The industry-owned group last year proposed new rules designed to prevent fraud.
The banks have denied the claims in legal briefings and in public statements.
"The allegations have no merit and we strongly deny the claims that are being alleged," Jim Kappel, a spokesman for BMO Harris in Chicago, said in an email.
The $563 million-asset Missouri Bank & Trust, in Kansas City, believes the claims are without merit and that the bank's activities were in full compliance with all laws and regulations, a bank spokesman said.
The seven other defendant banks in active litigation did not return calls seeking comment: North American Banking; Four Oaks Bank; the $1.4 billion-asset First Premier Bank in Sioux Falls, S.D.; the $1.6 billion-asset First International Bank & Trust in Watford City, N.D.; the $343 million-asset National Bank of California in Los Angeles; the $530 million-asset Bay Cities Bank in Tampa, Fla.; and the $6.4 billion-asset Mutual of Omaha Bank in Nebraska.
The number of banks that illegally process transactions for payday lenders is limited, Six says.
"Why do only 12 out of 10,000 banks [in the Automated Clearing House network] elect to process for payday lenders?" Six says.
Although Six and the plaintiffs argue that the illegal transaction processing for online payday lenders is confined to these institutions, the credit union involved in the litigation disagrees.
"We can't even count the number of financial institutions that do this," says Ashley Harris, a spokeswoman for $519 million-asset Generations Federal Credit Union in San Antonio, Texas.
Generations is a defendant in one pending case in the U.S. District Court for the Middle District of North Carolina. On April 23, U.S. District Judge Catherine Eagles ruled that the case could proceed, denying some motions to dismiss and other motions to transfer the case to a different court.
"The ACH originations we make comply with federal and state regulations and all Nacha rules and regulations as well," Harris says. "We very much look forward to this case being thrown out."
"When our business members call us and ask for our ACH originations service, we reach out to Nacha and [credit union regulators] and they put it through the paces to make sure it's compliant," Harris says.
The complaints seek funds collected by the banks in repayment of any unlawful loans some of which could be tripled under the RICO Act and the return of transaction fees, Six says.
"We expect damages to be significant," he says.
The banks have filed with the court highly detailed defenses to the plaintiffs' arguments. A primary defense is that the payday lenders should be the defendants and that banks are simply performing a "back-office" function in these transactions.
"Rather than assert a claim against the lender that she claims to have charged her usurious interest rates, she has instead decided to sue one of the several parties that play a back-office function in transmitting electronic payments from bank account to bank account," attorneys for Missouri Bank & Trust wrote in a Dec. 23 motion to dismiss in a case filed in U.S. District Court for the District of Columbia.
The plaintiff "is not a Missouri Bank customer and Missouri Bank was not the lender. All Missouri Bank did was transmit the plaintiff's instruction to debit her account," the bank's lawyers wrote.