Compliance Blog

Written by Brandy Bruyere, Regulatory Compliance Counsel

In a move aimed at cracking down on payday lenders, the Department of Justice (DOJ) launched an investigation last year called “Operation Choke Point.” DOJ is probing whether banks allowed third-party payment processors working on behalf of payday lenders to illegally access billions of dollars from consumer checking accounts.

In essence, Operation Choke Point is an attempt to cut off some payday lenders’ “back door” entrance to traditional banking services. Like many merchants, payday lenders often use third-party payment processors to debit their customers’ checking accounts. The third-party payment processors, in turn, establish relationships with financial institutions. This allows payday lenders to indirectly access the Automated Clearing House (ACH) network to receive payments.

So what happens when a bank has an agreement with a third-party payment processor, but that third-party does business on behalf of a payday lender who is breaking the law? As it turns out, without proper due diligence, these agreements could be quite expensive for targeted financial institutions.

In its first Operation Choke Point action, DOJ filed a lawsuit against Four Oaks Bank (Four Oaks) of North Carolina. The various allegations included violations of Customer Identification Program requirements under the Bank Secrecy Act and allowing improper access to the ACH network. According to the complaint, Four Oaks worked with a third-party payment processor called TPPP-TX, which primarily represented payday lenders. Some of these payday lenders had rates of returned transactions that exceeded 30%, over 21 times higher than the national average of 1.38%. DOJ claimed that the Bank went so far as to design its internal policy for third-party payment providers to accommodate TPPP-TX despite these “extraordinarily high” return rates. Four Oaks was also accused of failing to properly identity foreign payday lenders accessing customer accounts via TPPP-TX.

Reports indicate that DOJ and Four Oaks already reached a tentative $1.2 million settlement in this case. Two members of Congress sent a letter to Attorney General Eric Holder expressing concerns about the investigation’s impact on legitimate payday lending business operations. While many credit unions do not work with third-party payment processors, this is a good reminder that third-party relationships come with additional compliance concerns. Here are some resources about managing risks stemming from relationships with third-parties including payment processors:

• NCUA Letter to Credit Unions, “Evaluating Third Party Relationships,” 07-CU-13
• NCUA's Third Party Relationships Questionnaire
• FFIEC’s BSA/AML Examination Manual, “Third-Party Payment Processors Overview”
• FinCen Advisory, “Risk Associated with Third-Party Payment Processors,” FIN-2012-A010
• FDIC Financial Institution Letter, “Payment Processor Relationships,” FIL-3-2012

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Eye on the Olympics. Speaking of choking, I don’t know about the rest of you, but I’m a bit of a sucker for the Olympics. Maybe it’s the combination of patriotism and pageantry. Or maybe it’s that I experience a strange sense of joy watching people careen down a mountain headfirst on a tiny sled. Anyway, while figure skating is not normally my personal favorite, 19-year-old Jason Brown is an athlete to watch. Here is Jason’s impressive performance that helped earn him a trip to Sochi.