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FDIC attempts to pressure banks to deny services to payday lenders violate due process rights, lenders argue – Reason.com


A group of payday loan companies are suing the Federal Deposit Insurance Corporation (FDIC) for practices associated with “Operation Choke Point.”

taberandrew on Foter.com / CC BY

This government scheme is defined in a motion for summary judgment recently filed in the case of Advance America v. FDIC as “a clandestine pressure campaign, carried out by the banking regulators of the FDIC and the OCC [Office of the Comptroller of the Currency] through backroom meetings, threat letters and whispered threats, all in pursuit of a single goal: to present payday lending as a “high risk” “dirty business” and “stop [supervised] banks to facilitate “industry by any” means available “.… by cutting off industry’s access to banking systems, they could” choke “payday loans, without ever regulating them directly, simply by leveraging of their existing supervisory authority over banks. “

According to the motion, the FDIC’s actions included both actual threats of criminal prosecution against bankers or insisting that these companies were “high risk” and imposing greater regulatory burdens on the banks that held them. treated.

The lawsuit claims that the FDIC’s actions specifically harmed the prosecuting lenders:

The plaintiffs saw bank after bank end a long-standing and beneficial relationship with them. In some cases, these layoffs came without any explanation, although a few bank executives later explained that their hand was forced by their regulators, who asked them to leave the entire industry. And in other cases, banks have explained that they can no longer afford to keep payday lenders as customers due to “the scrutiny required by our regulators.”

Since 2011, plaintiffs have lost relationships with dozens of banks, have been denied service by hundreds more, and have spent millions of dollars in bank fees and workarounds such as armored car services in because of their restricted access to the banking system. From the defendants’ perspective, Operation Choke Point was a resounding success. The due process clause does not allow the government to attack law-abiding members of a legal industry in this manner.

Such practices by the FDIC, the payday lenders argue, violate their constitutional rights. They hope, through this lawsuit, to obtain that the American District Court of DC “put an end to [FDIC]direct coercion campaign by prohibiting them, their employees and agents, from exerting informal pressure on banks to end their relationships with payday lenders (both direct customer relationships or indirect relationships with third-party payment processors) or otherwise seek to deny complainants access to the banking system.

The lawsuit says federal authorities have been explicitly targeting their industry for a long time:

In late 2010 or early 2011, senior FDIC officials in Washington… informed regional directors that he had discussed payday loans with the “Sixth Floor” – short for the president and senior management of FDIC – and that regional offices should implement the following approach: “If an institution in their region facilitates payday loans, the regional director should require the institution to submit an exit plan from the FDIC. company.” The message, according to one of the regional directors present at the meeting, was unambiguous: “If a bank became involved in payday lending, someone was going to be fired.”

Regulators have long used the concept of “reputational risk” to determine whether the actual business practices of banks could harm their customers by undermining the commercial soundness of the bank, but payday lenders are considering extending this idea to the reputation of banks. the bank customers goes too far.

The summary judgment motion is chock-full of details on how specific appointed regulators are lobbying specific named banks, and is worth reading in its entirety for those who want to understand just how difficult the government can make life for businesses. that he dislikes through indirect pressure on their bankers, including how “several bank officials, including at Bank of America and Synovus Bank, institutions that have terminated their relations with Advance America – have regretted d ” being forced to end long-standing positive relationships with payday lenders and made it clear that they would restore those relationships if allowed to do so – actions hardly compatible with institutions that made a business decision independent of severing ties with a client. “

The evidence they present, payday lenders insist, clearly proves due process violations caused by the FDIC:

The file shows [FDIC] relentlessly and repeatedly coerced banks across the country to end all relationships with payday lenders or their third-party payment processors. Evidence shows that this was a national campaign imposed by headquarters on the seven regional directors and targeting the entire payday lending industry … the bank’s response undoubtedly shows that the lobbying campaign of the FDIC was a “big factor” in her decision to end the relationship. – protesting that she had concluded after a “risk assessment” that the clients presented “no significant risk to the financial institution”.

The lawsuit admits that “defamation of the government, on its own, does not constitute a violation of the due process clause,” but still insists that “due process is involved when the government (1) stigmatizes a person or an entity, and (2) this stigma causes or is linked to a negative impact on a background freedom or property right “which they believe is the case when it comes to that action. believe that the behavior of the FDIC in Operation Choke Point is constitutionally prohibited under (among other arguments) the so-called “stigma plus” doctrine established in the 1971 Supreme Court case. Wisconsin v. Constantineau.

The motion addresses many similar cases in the past in which federal courts have found such stigmatizing government actions violated the constitutional rights of stigmatized people. Such actions which the lower courts have looked askance on on the basis of this principle include government agencies tampering with the reputations of former employees (Bartel v. FAA, 1984) and an airline classified as dangerous by a government report (Reeve Aleutian Airways, Inc. v. United States, 1993).

Although the parties to this case are not arms dealers, some members of the gun rights community consider the prosecution to be important to them as well. As a separate repository in the case of “statement of undisputed material facts” notes, sales of ammunition and firearms are among the businesses targeted by FDIC practices in the same way as payday lenders do. ‘have been.

Raison on Operation Choke Point and Katherine Mangu-Ward’s 2009 classic feature film about the misguided war on payday loans.