March 18, 2014 Articles

Liability for Banks for Payday Lending: Risks to Consider

Banks acting as ODFIs should be aware of the increased risk and scrutiny they will face.

By Kevin F. Meade – March 18, 2014

In the aftermath of the financial crisis, a number of lawsuits were filed relating to “payday” lending. Payday loans are short-term, high-interest loans that are generally due on the consumer’s next payday after the loan is taken out. These loans often carry annual percentage rates exceeding several hundred percent. Although payday lending can serve a legitimate purpose, these loans are illegal in many states, whose usury laws criminally prohibit loans exceeding a specified interest rate (25 percent in New York). Lawsuits involving payday lending initially targeted the payday lender itself. These lenders were often affiliated with Native American tribes, and argued that they were entitled to sovereign immunity. This argument has succeeded with courts in California and Colorado (among others) concluding that the lender was entitled to sovereign immunity.

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