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Vindication for Victims of Operation Choke Point

Post Categories: Blog

By: Dan Frechtling, SVP of Marketing and Chief Product Officer

 

By the time the FDIC Inspector General largely cleared the FDIC of claims it coerced banks to “de-risk” certain high-risk businesses, alleged victims of Operation Choke Point were used to being on the losing end of judgments. But then something unexpected happened a few days later.

Judge Gladys Kessler of the US District Court in Washington, DC, decided on September 25 that a lawsuit by the Community Financial Services Association (CFSA), which represents the payday loan industry, could move forward. The plaintiffs say the defendants, namely the FDIC, OCC and Federal Reserve, overreached their mandate by compelling banks to cease serving payday lenders.

 

Operation Choke Point rematerializes

Operation Choke Point, whereby the FDIC and DOJ purportedly pressured banks to halt business with certain legally operating industries, has been gradually disappearing from news coverage since first quarter 2015.  Now it’s suddenly relevant again.

Observers thought the issue was moot after both Congress and the regulators acted to curtail the “choking off” of whole business categories. The House Financial Services Committee passed a bill, sponsored by Rep Blaine Luetkemeyer (R-Mo.), that prevents regulators from pressuring banks to withdraw services from legitimate businesses. Earlier in the year, the FDIC published a FIL recommending banks take a risk-based approach to assessing business customer risk, “rather than declining to provide banking services to entire categories of customers.”

So why isn’t the matter closed? It’s because the CFSA persisted and prevailed (at least so far). Court language is normally dull, but this one is exceptional.

 

Deprived of their “liberty interests”

The plaintiffs said the defendants exercised “improper regulatory overreach to shut down lawful industries.” The defendants said regardless of the guidance they issued, the banks were to be blamed if they took any action because they chose to follow the guidance. This begs the question, if a boss suggests a subordinate do something, can he or she deny culpability when the subordinate adheres?

In other words, the FDIC et al said they didn’t directly cause damage, and even if they did, the court couldn’t fix it. Specifically, the defendants argued the CFSA couldn’t prove causation, or a link between the regulators’ actions and harm to payday loan providers. They also claimed any victory by the CFSA wouldn’t satisfy redressability, or righting the prior wrongs.

Judge Kessler said no, and no again. There was enough evidence for causation and redressability that she could not dismiss the lawsuit.

In her ruling, she writes: “the Plaintiffs have sufficiently alleged that their liberty interests are implicated by Defendants’ alleged actions and that the alleged stigma has deprived them of their rights to bank accounts and their chosen line of business.”

 

Are payroll lenders the lone victors?

Going back to the FDIC Inspector General’s report, there is some irony. It didn’t fully clear the FDIC. It stated (emphasis added): “bank executives that we spoke with indicated that, except for payday lenders, they had not experienced regulatory pressure to terminate an existing customer relationship with a merchant on the high-risk list.”

Further, “FDIC personnel contacted institutions and used moral suasion to discourage them from adopting payday lending products or providing ACH processing for payday lenders….We noted two instances in which the FDIC discouraged institutions from providing ACH processing to payday lenders in written communications to the institutions.”

Payday lenders have some reason to feel vindicated. However, the CFSA has quite a journey ahead despite the favorable ruling. Judge Kessler remarked the “third-party” theory that regulators forced banks to deny services to lenders carries a high burden of proof.

The case now moves to discovery, which begins October 22.

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