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From Banking and Finance Law Daily, August 20, 2014

Regulators seek dismissal of suit challenging “Operation Choke Point” activities

By Richard A. Roth, J.D.

The Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation all have asked the United States District Court for the District of Columbia to dismiss a suit attacking the agencies’ claimed participation in Operation Choke Point. The complaint in Community Financial Services of America, Ltd. v. FDIC, brought by a payday lenders association and the association’s largest member, claims that the regulators threatened banks with longer and more intrusive examinations, reduced supervisory ratings, and other punitive actions in an attempt to coerce them into dropping payday lenders as customers.

The suit alleges 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 (see Banking and Finance Law Daily, June 6, 2014).

Claimed dismissal bases. The three agencies generally are consistent in their arguments for a dismissal of the suit. All three lead with an assertion that the association and lender do not have standing to sue. The regulators also claim that the suit does not satisfy the requirements of the Administrative Procedures Act and that the complaint does not describe any violations of the plaintiffs’ due process rights.

The Fed and the OCC also say that Federal Deposit Insurance Act Section 8(i) (12 U.S.C. §1818(i)) deprives the court of jurisdiction. The FDIC raises an additional argument—that its amendment of earlier guidance to withdraw a list of examples of questionable businesses (see Banking and Finance Law Daily, July 28, 2014) makes the suit moot.

Standing to sue. In order for the association and lender to have standing to sue, they have to show that their injuries can be traced to an action of the regulatory agencies, the Fed, OCC, and FDIC point out. They also must show that the court can order a remedy that is likely to redress those injuries. These criteria cannot be met, the regulators claim, meaning the association and lender do not have standing to sue under the U.S. Constitution.

The regulators point out that the association and lender are complaining of actions that only indirectly caused them harm, since any pressure exerted by the agencies would have been applied to banks, not payday lenders. If the lenders were harmed, it was because of decisions made by the banks. While this does not make it impossible for the plaintiffs to establish standing, it does make it substantially more difficult, the agencies say.

Nothing the agencies did required banks to end their business relationships with payday lenders, the Fed emphasizes. In fact, the termination letters sent by the banks made clear that the banks made their own choices. The FDIC characterizes claims that it caused banks to end business relationships as “bare speculation.”

The Fed points out that the specific regulatory guidance the association and its member are complaining about was issued by the OCC and FDIC. Even if that guidance were to be invalidated by the court, it was not likely that Fed-regulated banks would reinstate the accounts. Also, Operation Choke Point was a Justice Department initiative, and an order against the banking regulatory agencies would not affect what the DOJ did, the Fed and OCC observe.

The FDIC argues that the complaint does not describe any pressure exerted by the agency at all. There is no likelihood that business relationships will be resumed if the Financial Institution Letters in question are invalidated, the FDIC also argues, so there is no likelihood the court could redress the payday lenders’ injuries.

The FDIC raises an additional standing argument—that the payday lenders are not within the zone of interests that federal laws on the regulation of bank safety and soundness are intended to protect.

Mootness. The claim that the FDIC’s clarification of its 2008 through 2012 guidance rendered the payday lenders’ claims moot also is an attack against their standing. Financial Institution Letters issued after FIL-3-2012 make clear there is no categorical prohibition on business relationships with payday lenders, the agency argues. “Invalidation of documents that simply offer banks broad advice about managing risk—risks that the banks are already required to manage—would do nothing to advance Plaintiffs’ interests,” the FDIC says.

FDI Act. According to the OCC, a court order invalidating its guidance would effectively prevent it from examining national banks to decide if an enforcement action is needed to address safety and soundness concerns. Under FDI Act Section 8(i) (12 U.S.C. §1818(i)), a court has no jurisdiction to consider such a request, the OCC says.

The section says that “no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement of any notice or order … or to review, modify, suspend, terminate, or set aside any such notice or order …” The payday lenders are asking the court to enjoin the OCC from implementing OCC 2013-29, from enforcing its definition of “reputational risk,” or from applying pressure on banks to induce them to stop doing business with payday lenders, the agency says. This would enjoin the OCC from enforcing the statutes under which OCC 2013-29 was issued, and such an order was outside of the court’s jurisdiction.

The Fed and FDIC raise the same argument.

Administrative Procedures Act. All of the agencies argue that the suit should be dismissed because the payday lenders are not claiming that there was any final regulatory action or any failure to act. In the absence of a specific statutory review provision, the APA requires that one of these must be present to permit a review.

The OCC and FDIC point out that the guidance they issued is guidance, not final agency action. General statements of policy, such as the challenged guidance documents, do not require a full notice-and-comment rulemaking, they also say. The guidance did not impose any legal obligations and did not change any well-established regulatory principles.

According to the Fed, FDIC and OCC guidance cannot constitute final action by the Board of Governors. The Fed’s decision-making process was not implicated, no rights or obligations of payday lenders were determined, and there would be no legal consequences flowing from Fed examiners’ decisions to raise the other regulators’ guidance during examinations.

The failure to engage in a notice-and-comment rulemaking about bank relationships with payday lenders was not a failure to act for which they could be sued, the agencies also argue. There was no statute requiring such regulations.

Due process. The payday lenders’ due process rights were not violated because banks were not coerced to end their business relationships, and because the payday lenders had no property rights in those relationships, the regulators say. The Constitution’s due process clause does not apply to “the indirect adverse effects of government action,” the FDIC also points out.

Plausible claim. The OCC and Fed finally assert that the payday lenders’ claim fails to state a claim that is “plausible on its face,” as required by Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The complaint’s allegations about pressure on banks and the regulators’ use of the concept of “reputational risk” are conclusory and inaccurate, they say.

The actual language of the challenged guidance should be credited, not the payday lenders’ interpretation of that guidance, according to the OCC. The agency also asserts there are no adequate allegations that it actually was a participant in Operation Choke Point, and it denies that was.

The Fed simply observes that the complaint includes no specific description of any pressure that it exerted on any bank to sever ties with any payday lender. The “bald speculation of ‘back-room arm-twisting’… is the sum total of the ‘factual matter’ alleged in support of plaintiffs’ claims against the Board,” the Fed claims.

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. Katherine H. Wheatley, Associate General Counsel, and Yvonne F. Mizusawa, Senior Counsel, for the Board of Governors of the Federal Reserve System. Amy S. Friend, Chief Counsel, and Peter C. Koch, Counsel, for the Office of the Comptroller of the Currency. Colleen J. Boles, Assistant General Counsel, Duncan N. Stevens, Counsel, and Erik B. Bond, Counsel, for the Federal Deposit Insurance Corporation.

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

MainStory: TopStory ConsumerCredit Loans UDAAP

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