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From Banking and Finance Law Daily, June 6, 2014

Payday loan industry group, lender sue to block “Operation Choke Point”

By Richard A. Roth, J.D.

Charging that the federal banking regulatory agencies are “engaged in a concerted campaign to drive them out of business by exerting back-room pressure on banks,” an association representing the payday lending industry and the association’s largest member have joined in a suit that attempts to put an end to what has become known as “Operation Choke Point.” The suit principally targets what it characterizes as efforts by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to pressure banks to end banking relationships with payday lenders due to risk to the banks’ reputations (Community Financial Services of America, Ltd., v. FDIC, June 5, 2014).

The payday lenders allege that the regulators have threatened banks with longer and more intrusive examinations, reduced ratings, and other punitive actions in efforts to coerce them into dropping payday lenders as customers. This has been done without regard to the legality of the lenders’ business practices. According to the complaint, more than 80 banking institutions have ended business relationships with payday lenders due to the regulatory agencies’ pressure.

Plaintiffs. The association, Community Financial Services of America, Ltd., describes itself as a Maryland-based “national membership organization for businesses offering small-dollar, short-term loans and other financial products and services.” It says it has members with locations in more than 30 states and that its members are required to comply with a code of industry best practices.

Advance America, the lender, is described in the complaint as a CFSA member that operates more than 2,400 locations in 29 states. According to the complaint, six banks and one payment processor have severed business relationships with Advance America as a result of Operation Choke Point, and the company also has had difficulty finding replacement financial service providers. CFSA says that Advance America is its largest member.

Challenges to regulators’ activities. At a more detailed level, the association and lender complain that the regulators have, under the guise of overseeing safety and soundness, used “informal guidance”—Financial Institution Letters, OCC Bulletins, and other types of guidance—to steer banks away from activities or customers said to pose reputation risk. Payday lenders are among these customers. This guidance, which is issued without the notice and public comment process that is used for regulations, provides no objective way to measure reputation risk and no way for banks to distinguish between acceptable and dangerous customers, the plaintiffs assert.

The complaint relies heavily on a report generated recently by the House Oversight and Government Reform Committee. The report claims that Operation Choke Point was intended to eliminate businesses that are deemed to be undesirable, even though they are legal, and that it involves close cooperation between the three banking regulatory agencies and the Department of Justice.

Broader effects. The complaint could be seen as a broad-based attack on the use of guidance, as opposed to regulations and staff comments, to set banking standards. It alleges that three Financial Institution Letters and one issue of the FDIC’s Supervisory Insights created new legal obligations for banks without complying with a notice and comment process. This exceeds the FDIC’s statutory authority, the complaint says.

The FDIC has acted arbitrarily and capriciously, the complaint continues, by attempting to prohibit activities without providing objective standards banks can use to distinguish between honest and questionable customers.

Similar claims are raised against the OCC and the Fed.

The complaint asks the court to enjoin the regulatory agencies from taking any actions under the three challenged FILs, one OCC Bulletin, and theSupervisory Insights issue. However, if such an injunction were granted, it would bring into question the agencies’ continuing ability to act through guidance rather than through more formal rule-making procedures.

The case is No. 14-953.

Attorneys: Charles J. Cooper (Cooper & Kirk, PLLC) for Advance America, Cash Advance Centers, Inc., and Community Financial Services Association of America, Ltd.

Companies: Advance America, Cash Advance Centers, Inc.; Community Financial Services Association of America, Ltd.

MainStory: TopStory ConsumerCredit Loans UDAAP

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