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From Banking and Finance Law Daily, May 22, 2017

Payday lenders argue case for Operation Choke Point injunction

By Richard A. Roth, J.D.

A group of payday lenders have told the Court of Appeals for the District of Columbia that a U.S. district court judge was wrong to deny their request for a preliminary injunction against Federal Deposit Insurance Corporation activities they claim are intended to drive them out of business. The lenders’ appellate brief argues that they are likely to succeed in their attack on the FDIC’s Operation Choke Point-related activities and that the agency is causing them irreparable harm. A preliminary injunction while the suit is fully litigated is necessary, the lenders assert (Advance America v. FDIC).

The lenders’ suit claims that federal agencies, including the Department of Justice and FDIC, began as early as June 2008 to take steps to drive payday lenders out of the financial system. Their tool was an expanded interpretation of reputation risk. According to the lenders, reputation risk originally referred to risk to a bank’s reputation that arose from its own actions; however, the regulators expanded that to apply to risks that could arise from activities of a bank’s customers. This became a justification to pressure banks to sever their banking relationships with payday lenders.

According to the payday lenders, the FDIC’s activities violated their rights to due process. However, the judge refused to issue a preliminary injunction because, in her mind, the lenders had not shown that banking services were unavailable or that any lenders had closed because they could not secure the services they needed to operate (Banking and Finance Law Daily, March 16, 2017).

Due process violation claims. The lenders claim they can show a violation of their due process rights under three theories: "stigma-plus," "reputation-plus," and "broad preclusion."

  • The lenders describe the "stigma-plus" theory as requiring them to show they were stigmatized in connection with a change in their underlying legal rights without any due process protections. They can prove this occurred, the lenders claim, because they were labeled as high-risk customers and denied access to the banking system with no legal protections.
  • The "reputation-plus" theory would require a deprivation of banking services in connection with defamatory statements that harmed their reputation, the lenders say. The lenders contend this can be proved because each lost a relationship with at least one bank due to false regulator claims that the relationships could threaten the bank’s stability.
  • The "broad preclusion" theory also applies, the lenders assert, because the regulators’ statements to banks have prevented them from engaging in their chosen legal trade or business.

Loss of services. In the process of raising their arguments, the lenders take issue with the judge’s position that they are required to show they lost all access to banking services in order to show a due process violation. They also argue that a loss of their constitutional right to due process is a sufficient irreparable injury to justify a preliminary injunction.

The case is No. 17-5045.

Attorneys: Charles J. Cooper (Cooper & Kirk, PLLC) for Advance America, Cash Advance Centers, Inc., Check Into Cash, Inc., NCP Finance Limited Partnership, NCP Finance Ohio, LLC, Northstate Check Exchange, PH Financial Services, LLC.

Companies: Advance America; Cash Advance Centers, Inc.; Check Into Cash, Inc.; NCP Finance Limited Partnership; NCP Finance Ohio, LLC; Northstate Check Exchange; PH Financial Services, LLC

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