JPMorgan Chase will make changes to protect consumers who have borrowed money from a growing power on the Internet – payday lenders offering short-term loans with interest rates up to 500 percent.
JPMorgan, the country’s largest bank by assets, will give customers whose bank accounts are operated by online payday lenders more power to stop withdrawals and close their accounts.
Based on the changes to be unveiled on Wednesday, JPMorgan will also limit the fees charged to customers when withdrawals result in penalties for returned payments or insufficient funds.
The policy change is playing out as the nation’s largest lenders come under scrutiny from federal and state regulators for allowing online payday lenders to defeat state law. With 15 states banning payday loans, a growing number of lenders have set up online operations in more hospitable states or foreign countries like Belize, Malta, and the West Indies to more deftly dodge interest rate caps. statewide.
At an investor meeting in February, Jamie Dimon, CEO of JPMorgan Chase, called the practice, which was the subject of a New York Times article last month, “terrible.” He vowed to change it.
Although JPMorgan Chase has never made the loans directly, the bank, along with other major banks, is a vital link for payday lenders. Banks allow lenders to automatically withdraw payments from borrowers’ bank accounts, even in states like New York where lending is illegal. Withdrawals often continue unabated, even after customers begged banks to stop payments, according to interviews with consumer lawyers, bank regulators and lawmakers.
The changes at JPMorgan, which will take effect by the end of May, will prevent bank customers from racking up hundreds of dollars in fees, generated when payday lenders repeatedly attempt to debit borrower accounts. Still, the changes will not prevent payday lenders from extending high-cost credit to people living in states where lending is prohibited.
It is possible that other lenders will institute changes, especially as competitors have followed JPMorgan’s lead in recent years. In 2009, for example, after JPMorgan capped overdraft fees at three per day, Wells Fargo also changed its policies to reduce the number of daily penalties charged.
The changes come as state and federal authorities focus on how banks allow online payday lenders to bypass state laws that prohibit lending. By allowing payday lenders easy access to customer accounts, authorities say banks are thwarting government efforts to protect borrowers from loans, which some authorities have called predatory.
The two Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining how banks allow lenders to sidestep restrictions, according to several people with first-hand knowledge of the matter. In New York City, where JPMorgan is headquartered, Benjamin M. Lawsky, the state’s principal banking regulator, is investigating the bank’s role in enabling lenders to break state law, which caps rates on 25% interest on loans.
Faced with restrictions across the country, payday lenders have migrated online and abroad. There is little data on the number of lenders who have moved online, but in 2011 the online payday loan volume was $ 13 billion, up more than 120% from 5.8 billion. dollars in 2006, according to John Hecht, analyst at investment bank Stephens. Inc.
By 2016, Hecht expects internet lending to dominate the payday lending landscape, accounting for about 60% of total payday loans issued.
JPMorgan said the bank will only charge for one returned item per lender in a 30-day period when customers do not have enough money in their account to cover withdrawals.
This change is likely to help borrowers like Ivy Brodsky, 37, who were charged a fee of $ 1,523 – a combination of insufficient funds, service fees, and overdraft fees – in a single month after six internet lenders attempted to withdraw money from his account 55 times. .
Another change at JPMorgan aims to address the difficulties that payday loan clients face when trying to pay off their loans in full. Unless a customer contacts the lender online three days before the next withdrawal, the lender automatically renews the loan by withdrawing only the interest owed.
Even borrowers who contact lenders days in advance can find themselves lost in a dizzying internet maze, according to consumer lawyers. Requests are not being honored, callers are accessing voice recordings and withdrawals are continuing, lawyers say.
For the frustrated and harassed borrowers, banks are often the last hope of stopping direct debits. Although under federal law customers have the right to stop withdrawals, some borrowers claim their banks are not honoring their demands.
Polly Larimer, who lives in Richmond, Virginia, said she pleaded with Bank of America last year to stop payday lenders from eroding the little money she had in her account. Ms Larimer said the bank had not honored her request for five months. During that time, she was billed more than $ 1,300 in penalty fees, according to bank statements reviewed by The Times. Bank of America declined to comment.
To combat such issues, JPMorgan said the bank will provide training to its employees so that stop payment requests are honored.
JPMorgan will also make it easier for customers to close their bank accounts. Until now, bank customers could not close their checking accounts until all pending charges were paid. The bank will now allow customers to close accounts if pending charges are deemed “inappropriate.”
Some of the changes at JPMorgan Chase echo a bill introduced in July by the Senator Jeff Merkley, Democrat of Oregon, to further restrict payday lending.
A key part of this bill, pending in Congress, would make it easier for borrowers to stop automatic withdrawals. The bill would also require lenders to obey the laws of the state where the borrower lives, rather than the state where the lender is located.
JPMorgan Chase said he was “working to proactively identify” when lenders are abusing automatic withdrawals. When the bank identifies these issues, she said, it will report stray lenders to the National Automated Clearing House Association, which oversees electronic withdrawals.