On the eve of the inauguration, many industries and businesses await the changes a new administration will bring. In particular, payday lenders are hoping that they will once again be able to enjoy unrestricted banking access, as for the past several years their banking relationships have slowly been severed as a result of a government initiative known as “Operation Choke Point.”
Operation Choke Point began—without any Congressional approval or even knowledge—as a product of President Obama’s 2009 executive order to eliminate fraudulent and illegal businesses. Not surprisingly, however, the initiative quickly expanded. By 2013, the Department of Justice (DOJ) had started quietly launching the now-infamous federal initiative unconstitutionally cutting off countless legitimate businesses from banking services.
What exactly is “Operation Choke Point”? It is a series of actions led by DOJ and carried out by the Federal Deposit Insurance Corporation (FDIC) and other bank examiner agencies to choke off companies considered “high risk” by strongly incentivizing—i.e. bullying—banks into ending their relationships with these lawful businesses. The House Committee on Oversight and Government Reform issued a report, which found that in classifying “high risk” businesses, FDIC grouped together legal businesses, such as coin dealers, firearms and ammunition sellers, and payday lenders, with illegal businesses such as Ponzi schemes, debt-consolidation scams, and drug paraphernalia sellers. The report found that the primary objective of this initiative was to put an end to the payday-lending industry, regardless of the legitimacy of affected businesses.
In an ongoing lawsuit initiated in June 2014, Community Financial Services Association (an association of payday lenders) and Advance America (a payday-lending company) filed suit against various governmental banking regulatory agencies, including FDIC, alleging that these government agencies, led by DOJ, forced banks to terminate their relationships with legally-run payday lenders. The complaint alleges that the government sent informal “guidance documents” to the banks and pressured them to sever their long-standing relationships with payday lenders. These guidance documents asserted that continuing to provide banking services to such businesses exposed the banks to reputational risks arising from negative public opinion or publicity. The defendant agencies, however, never distinguished between businesses engaged in lawful practices versus businesses engaged in unlawful or fraudulent practices.
In the event that the banks refused to terminate their relationships with payday lenders, these government agencies warned “them that continuing their relationships with payday lenders will result in harsh and prolonged examinations, reduced examination ratings, and/or other punitive measures.” At the inception of this lawsuit, the complaint stated that over 80 banks had already cut ties with payday lenders.
Elimination of their banking relationships has a negative impact on payday lenders because payday lenders rely on the banks’ services to stay in business. When a prospective customer requests a short-term loan from a payday lender, the customer usually provides a post-dated check or an electronic-debit authorization for the value of the loan. In the event that the customer does not repay the loan, the payday lender relies on a bank to deposit the check or execute the debit authorization. So without a bank, the payday lender has no way to ensure that it will be reimbursed for the loans it issues and cannot properly conduct its business.
The district court has dismissed all of the plaintiffs’ claims except those that allege a violation of their Fifth Amendment due process rights: no person shall be “deprived of life, liberty, or property, without due process of law.” The plaintiffs allege that the government arbitrarily exercised its power when it “stigmatized them, deprived them of their bank accounts, and threatened their ability to engage in their chosen line of business, all without notice and opportunity to be heard.”
Instead of ferreting out fraud and illegal behavior, government officials have used the 2009 executive order to target payday lenders simply because they do not like the industry. According to the House Report, Mark Pearce, the Director of FDIC’s Division of Depositor and Consumer Protection, stated that FDIC needs “to find a way to stop our banks from facilitating payday lending.” One FDIC attorney even stated that payday lending is a “particularly ugly practice.” But conspicuously absent from the report is any mention of fraud or illegality present by the targeted lenders. In fact, the Senior Counsel even understood that this was a problem, at least with regard to banks: “unless we can show fraud or other misconduct by the payday lenders, we will not be able to hold the bank responsible.”
FDIC, however, seems unfazed by the constitutional implications of pursuing the elimination of an entire lawful industry, as it continues to force banks to sever their relationships with payday lenders. The government is using the banks to regulate behavior that it deems unsavory, but it has no authority to end the banking relationships of lawful businesses. Right now, the government is trying to put an end to the payday-lending industry, but next up could be firearms and ammunition sellers or other “high-risk” lawful businesses. If this type of action by the government is allowed to continue, there is no telling what other industries are in danger of being “choked off.” Only time will tell what the result of this lawsuit will be or whether the new DOJ will end Operation Choke Point, but legal businesses ought to be able to enjoy the freedom to use banks without facing unethical extortion threats from federal banking regulators.