Source: New York
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Chattanooga payday lender and philanthropist Carey V. Brown has been forced to shut his payday loan websites in the wake of a letter from New York regulators urging banks to choke off access for so-called "illegal lenders."
The letter, sent to major U.S. banks in early August, asked banking officials to stop Brown and other lenders from accessing the nationwide automated clearing house system -- the lifeblood of online payday lenders. This private banking network, known as ACH, allows employers to deposit paychecks directly into workers' accounts, provides for checks written at one bank to be deposited at another, and enables Brown's companies to deposit or withdraw funds to and from consumers' personal bank accounts.
"The department has uncovered dozens of out-of-state lenders who have used the Internet to solicit and provide illegal payday loans to consumers in New York," wrote Benjamin Lawsky, superintendent of financial services for the state. "We are interested in the steps you are able to take now, and what changes are necessary both within your bank and at the ACH network level to stop these illegal loans."
The Chattanooga Times Free Press first reported in 2011 that Brown's websites, which include DiscountAdvances.com, MyCashNow.com and PayDayMax.com, were charging fees in excess of the legal limit in Tennessee and other states and were operating in Tennessee without a license.
But Brown contends that his payday websites are technically operated from offshore computer servers, and therefore need not comply with state law. There is also the unsettled legal question of where an Internet loan actually takes place -- at the user's computer, or on the server offshore. If it takes place offshore, as Brown's legal team claims, then there is no need for him to pursue a license or comply with the rules of the states, he has said.
Even so, Brown eventually stopped lending in Tennessee, as well as a number of other states where attorneys general had filed cease-and-desist letters against his businesses. Brown also took steps to set up his lending businesses inside an Indian reservation, which courts have found is a "sovereign nation" and not subject to state law. But that strategy only works if Brown can maintain his access to the banking system through his intermediary company, ACH Federal -- which won't happen if New York has its way.
"Access to the ACH system is the foot in the door that online payday lenders need to prey on vulnerable New Yorkers," Lawsky wrote. "And banks have proven to be -- even if unintentionally -- an essential cog in the vicious machinery that these purveyors of predatory loans use to do an end-run around New York law."
Brown did not respond to requests seeking comment, and officials with his companies also declined to comment.
Brown, either directly or indirectly, employs hundreds of workers in Chattanooga at a number of legally separate entities that work in concert to service his payday loan websites. The payday websites, which once displayed images of happy families alongside legal disclosures and loan forms, now show a simple message informing visitors that they are temporarily unavailable.
Some of Brown's competitors, such as Cleveland, Tenn.-based Check into Cash, say they have stayed within the law by tailoring their online offerings to the rules in the state where the customer lives, rather than using the one-size-fits-all approach favored by Brown. However, due to the high-risk nature of payday loans -- many of which are never paid back by customers -- Brown's officials have said that the higher rates he charges are necessary to make up for the increased risk over a typical bank loan, which is usually secured by a person's home or automobile
But with banks now under pressure by the powerful New York regulator, it may be too late to change. In his letter, Lawsky delivered a subtle with-us-or-against-us message to banks that may have been on the fence about cooperating in the fight against payday lenders.
"Doing so is not only in the interest of your customers who will be better protected from these predatory loans," Lawsky wrote. "It is also in your bank's long-term interest to take appropriate action to help ensure that it is not serving as a pipeline for illegal conduct."
Reporters were turned away from Brown's businesses Thursday, and requests for comment were not returned. Regulators also declined comment on the shutdown.
Contact Ellis Smith at email@example.com or 423-757-6315.