JPMorgan Chase will make changes to protect consumers who have borrowed money from a rising power on the Internet â€" payday lenders offering short-term loans with interest rates that can exceed 500 percent.
JPMorgan, the nation’s largest bank by assets, will give customers whose bank accounts are tapped by the online payday lenders more power to halt withdrawals and close their accounts.
Under changes to be unveiled on Wednesday, JPMorgan will also limit the fees it charges customers when the withdrawals set off penalties for returned payments or insufficient funds.
The policy shift is playing out as the nation’s biggest lenders face heightened scrutiny from federal and state regulators for enabling online payday lenders to thwart state law. With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or foreign locales like Belize, Malta and the West Indies to more nimbly dodge statewide caps on interest rates.
Bank of America and Wells Fargo said that their policies on payday loans remained unchanged.
At an investor meeting in February, Jamie Dimon, JPMorgan Chase’s chief executive, called the practice, which was the subject of an article in The New York Times last month, “terrible.†He vowed to change it.
While JPMorgan Chase never directly made the loans, the bank, along with other major banks, is a critical link for the payday lenders. The banks allow the lenders to automatically withdraw payments from borrowers’ bank accounts, even in states like New York where the loans are illegal. The withdrawals often continue unabated, even after customers plead with the banks to stop the payments, according to interviews with consumer lawyers, banking regulators and lawmakers.
The changes at JPMorgan, which will go into effect by the end of May, will keep bank customers from racking up hundreds of dollars in fees, generated when the payday lenders repeatedly try to debit borrowers’ accounts. Still, the changes will not prevent the payday lenders from extending high-cost credit to people living in the states where the loans are banned.
It is possible that other lenders could institute changes, especially because rivals have followed JPMorgan’s lead in recent years. In 2009, for example, after JPMorgan capped overdraft fees at three a day, Wells Fargo also changed its policies to reduce the number of daily penalties charged.
The changes come as state and federal officials are zeroing in on how the banks enable online payday lenders to bypass state laws that ban the loans. By allowing the payday lenders to easily access customers’ accounts, the authorities say the banks frustrate government efforts to protect borrowers from the loans, which some authorities have decried as predatory.
Both the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are scrutinizing how the banks enable the lenders to dodge restrictions, according to several people with direct knowledge of the matter. In New York, where JPMorgan has its headquarters, Benjamin M. Lawsky, the state’s top banking regulator, is investigating the bank’s role in enabling lenders to break state law, which caps interest rates on loans at 25 percent.
Facing restrictions across the country, payday lenders have migrated online and offshore. There is scant data about how many lenders have moved online, but as of 2011, the volume of online payday loans was $13 billion, up more than 120 percent from $5.8 billion in 2006, according to John Hecht, an analyst with the investment bank Stephens Inc.
By 2016, Mr. Hecht expects Internet loans to dominate the payday lending landscape, making up about 60 percent of the total payday loans extended.
JPMorgan said that the bank will charge only one returned item fee per lender in a 30-day period when customers do not have enough money in their accounts to cover the withdrawals.
That shift is likely to help borrowers like Ivy Brodsky, 37, who was charged $1,523 in fees â€" a combination of insufficient funds, service fees and overdraft fees â€" in a single month after six Internet payday lenders tried to withdraw money from her account 55 times.
Another change at JPMorgan is intended to address the difficulty that payday loan customers face when they try to pay off their loans in full. Unless a customer contacts the online lender three days before the next withdrawal, the lender just rolls the loan over automatically, withdrawing solely the interest owed.
Even borrowers who contact lenders days ahead of time can find themselves lost in a dizzying Internet maze, according to consumer lawyers. Requests are not honored, callers reach voice recordings and the withdrawals continue, the lawyers say.
For borrowers, frustrated and harried, the banks are often the last hope to halt the debits. Although under federal law customers have the right to stop withdrawals, some borrowers say their banks do not honor their requests.
Polly Larimer, who lives in Richmond, Va., said she begged Bank of America last year to stop payday lenders from eroding what little money she had in her account. Ms. Larimer said that the bank did not honor her request for five months. In that time period, she was charged more than $1,300 in penalty fees, according to bank statements reviewed by The Times. Bank of America declined to comment.
To combat such problems, JPMorgan said the bank will provide training to their employees so that stop-payment requests are honored.
JPMorgan will also make it much easier for customers to close their bank accounts. Until now, bank customers could not close their checking accounts unless all pending charges have been settled. The bank will now allow customers to close accounts if pending charges are deemed “inappropriate.â€
Some of the changes at JPMorgan Chase echo a bill introduced in July by Senator Jeff Merkley, Democrat of Oregon, to further rein in payday lending.
A critical piece of that bill, pending in Congress, would enable borrowers to more easily halt the automatic withdrawals. The bill would also force lenders to abide by laws in the state where the borrower lives, rather than where the lender is.
JPMorgan Chase said it is “working to proactively identify†when lenders misuse automatic withdrawals. When the bank identifies those problems, it said, it will report errant lenders to the National Automated Clearing House Association, which oversees electronic withdrawals.
