Payday loans — the short-term, high-interest cash loans — are under fire, and justifiably so. The deceptive loans often come with extortionate interest rates that trap unwitting borrowers in a cycle of debt. Some states have outright banned the short-term funds, but still, the lenders, and now especially the banks accused of enabling the lenders to make the illegal loans, continue to find their way around the rules and avoid answering the borrowers' charges that laws were violated.

Then there is the underbelly of the payday loan machine: the banks that assist illegal payday lenders by granting them access to borrowers' debit bank accounts and helping them to process payments. Consumer advocates and federal officials are concerned. The U.S. Justice Department has issued reminders that banks must stay away from schemes with lenders and other institutions that engage in consumer fraud and result in illegal deduction of funds from customers' bank accounts.


Despite this, it is increasingly difficult for consumers to force lenders and the banks that lenders work with to account for wrongdoing that causes harm. Buried in the payday loan contracts are provisions that deprive borrowers of court access and instead force them to resolve disputes in private arbitration proceedings controlled by the banks and lenders. In some cases, the banks have benefitted from the terms of the payday loan contracts that lenders have with the borrowers, even though the banks were not party to it.

Take Jacinta Elder, a borrower of short-term loans from payday lenders, who filed claims in Maryland against these banks. She claimed that the lenders charged annual interest rates on her loans in excess of 400 percent, in violation of state law. She sued BMO Harris Bank and other financial institutions, alleging that the banks granted the lenders access to the U.S. financial network to debit funds from her bank account despite the lenders' potential illegal activity. She sought class-action status for her lawsuit so she could help other payday borrowers harmed by the banks.

However, the payday loan contracts that Elder signed required that disputes over the loans be heard in private arbitration instead of in open court. BMO Harris and other financial institutions did not sign the payday loan contract. But the federal court held that the payday lenders' activities were closely linked with the banks' activities. Nevertheless, the court permitted the banks, non-signors to the contract, to force the borrowers into arbitration to resolve the dispute.

Borrowers like Elder around the country, charged excessive and abusive interest rates on payday loans, have sued the banks that were aiding the possibly illegal withdrawals from their accounts. However, payday borrowers' ability to fight back against the banks that are enabling the lenders' conduct has been hampered by unfair fine print limiting their ability to take the banks to court.

Borrowers have alleged that banks give payday lenders access to a nationwide electronic payment system. They contend that the banks knew that lenders were charging illegal interest rates and knowingly participated in the payday loan enterprise by helping lenders to collect illegal debt in violation of federal racketeering laws.

In a setback for borrowers, courts, in a flurry of recent decisions, have required that these disputes with the banks be resolved in arbitration according to payday loan terms.

Not only do arbitration clauses cut off consumers' legal options, but the arbitrations are private and costly, and provide little chance for consumers to appeal decisions. As a result, the payday lending industry rarely has to answer to their customers and their potentially illegal actions can continue unabated.

The scenario is all too familiar for consumers in the financial marketplace. Forced arbitration clauses in payday loans and more conventional financial and loan products leave consumers essentially powerless to protect themselves from losses caused by unscrupulous financial industry practices.

The Consumer Financial Protection Bureau can intervene on this underlying issue, much as they have around the payday problem itself. The financial reform law of 2010 requires the federal agency to study the use of arbitration in consumer financial products and services. After the study's release, the agency will have the authority to give consumers back their right to seek compensation in court for financial injuries caused by payday lenders and other financial institutions.

This action may not level the playing field entirely for consumers doing business with sophisticated corporations that are always a step ahead, but it will be a significant move in the right direction to stop corporations from coordinating their shady activities and evading justice.

Gilbert is the director, and Hines is the consumer and civil justice counsel, of Public Citizen's Congress Watch division.