Credit card processors agree to serve up fraudulent payday lenders

A group of credit card payment processors says it's willing to help the government find fraudulent payday loan companies, in the hopes of avoiding scrutiny itself as the government targets these fraudulent lenders.

The Electronic Transactions Association (ETA) announced new guidelines this week designed to weed out fraudulent payday lenders from those that operate within the law, and turn over the fraudulent lenders to the authorities.

"We would like to help you find fraudulent merchants, but let's go after the merchants, not their payment companies," ETA CEO Jason Oxman said in an interview.

"We think we are a better partner than target, and we want to work with them to end fraud," Oxman added.

This comes as the Justice Department has drawn criticism from Republicans for its Operation Choke Point, which cuts off payments to certain payday lenders that it believes are operating outside the law.

Payday lending is a controversial business. These short-term loans of generally $500 or less are aimed at helping borrowers meet their most immediate financial needs, from rent payments to medical bills, but critics say they often leave consumers worse off in the long run.

Borrowers are usually required to repay the entire loan just two weeks later when they get their next pay check, along with a hefty fee of 15 percent. For many, that isn't enough time to get their finances together, so they end up rolling the loan over and getting even further into debt.

While payday lending is not illegal in most states, federal regulators have been keeping a close eye on these companies.

The ETA said it is upset that federal regulators are using payment processors to go after payday lenders. Oftentimes, the feds will subpoena these processors for information about their clients, which raises "enormous" legal consequences and compliance costs, Oxman said.

"It also posses reputational costs, because no company wants to be the subject of a Justice Department investigation," he said.

Rather than deal with this hassle, many payment processors are dropping payday lenders from their networks, which Oxman speculated was the point of the Justice Department's Operation Choke Point.

"We're the choke point in Operation Choke Point," he said.

Oxman said his group wants to take a proactive approach by working with law enforcement agencies to spot fraud, rather than being the subject of their investigations.