Operation Choke Point: Banks Threatened by FDIC to Kill Payday Loan Industry

By | Dec 9, 2014

Federal Deposit Insurance Corporation’s Involvement in “Operation Choke Point” Staff Report, 113th Congress, December 8, 2014

U.S. House of Representatives, Committee on Oversight and Government Reform, Darrell Issa (CA-49), Chairman

Documents produced to the Committee reveal that senior policymakers in FDIC headquarters oppose payday lending on personal grounds, and attempted to use FDIC’s supervisory authority to prohibit the practice. In emails from February 2013, the Director of FDIC’s Atlanta Region noted he was “pleased we are getting banks out of ach (payday, bad practices, etc). Another bank is gripping [sic] . . . but we are doing good things for them!” Mark Pearce, the Director of FDIC’s Division of Depositor and Consumer Protection, expressed agreement with the sentiment, and noted concern over “failure to be proactive” on the issue.”

Key Findings:

  • FDIC’s explicitly intended its list of “high-risk merchants” to influence banks’ business decisions. FDIC policymakers debated ways to ensure that bank officials saw the list and “get the message.”
  • For example, the committee obtained a jarring account of a meeting between a senior FDIC regulator and a banker contemplating serving a payday lending client. The official told the banker, “I don’t like this product, and I don’t believe it has any place in our financial system. Your decision to move forward will result in an immediate unplanned audit of your entire bank.”
  • “… insisted that Chairman Gruenberg’s letters to Congress and talking points always mention pornography when discussing payday lending.”
  • Documents produced to the Committee reveal that senior FDIC policymakers oppose payday lending on personal grounds, and attempted to use FDIC’s supervisory authority to prohibit the practice. Personal animus towards payday lending is apparent throughout the documents produced to the Committee. Emails reveal that FDIC’s senior-most bank examiners “literally cannot stand payday,” and effectively ordered banks to terminate all relationships with the industry.
  • FDIC Field-level Examiners Ordered Banks to Cease Relationships With Payday Lenders.
  • “In a particularly egregious example, a senior official in the Division of Depositor and Consumer Protection insisted that FDIC Chairman Martin Gruenberg’s letters to Congress and talking points always mention pornography when discussing payday lenders and other industries, in an effort to convey a “good picture regarding the unsavory nature of the businesses at issue.”

Payday Loan Operation Choke Point

Payday Loan Operation Choke Point
Additional documents confirm Director Pearce’s opposition to payday lending, and determination to deploy FDIC’s supervisory power to prohibit or discourage the practice. In an email dated February 22, 2013, a Senior Counsel in the Legal Division’s Consumer Enforcement Unit informed an Assistant General Counsel there is top-level interest in stopping payday lending. The email describes how Director Pearce is interested “in trying to find a way to stop our banks from facilitating payday lending.” The Senior Counsel even describes concern with this approach, noting that other officials cautioned that “…unless we can show fraud or other misconduct by the payday lenders, we will not be able to hold the bank responsible.
Payday Loan Operation Choke Point
On March 8, 2013, the Senior Counsel wrote two FDIC attorneys within the Legal Division and asked about ways the FDIC could “get at payday lending.” The email explains that Consumer Enforcement Unit received a request from Division of Consumer and Depositor Protection to look into “what avenues are available to the FDIC to take action against banks that facilitate payday lending”:

Payday Loan Operation Choke Point
Personal animus towards payday lending is apparent throughout documents produced to the Committee. In one egregious example, the DCP’s Deputy Director for Policy & Research insisted that Chairman Gruenberg’s letters to Congress and talking points always mention pornography when discussing payday lending, in an effort to convey a “good picture regarding the unsavory nature of the businesses at issue.” The email, sent by a Counsel in the Legal Division, outlines a meeting that occurred with the Deputy Director:

Payday Loan Operation Choke Point
“It appears senior officials recognized the inherent impropriety of FDIC’s policy. In an email to DCP Director Mark Pearce, the FDIC spokesman described the basis for congressional oversight of the issue. The spokesman noted that “some of the pushback from the Hill is that it is not up to the FDIC decide what is moral and immoral, but rather what type of lending is legal”:

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“The spokesman continues by stating that the FDIC has denied that they are forcing banks to end relationships with payday lenders. Documents obtained by the Committee prove this statement is false. As late as March 2013, FDIC officials were “looking into avenues by which the FDIC can potentially prevent our banks from facilitating payday lending.” Ultimately, senior officials at FDIC headquarters were successful in choking-out payday lenders’ access to the banking system. As of June 2014, over 80 banks have terminated business relationships with payday lenders as a result of FDIC targeting.”

“FDIC Field-level Examiners Ordered Banks to Cease Relationships With Payday Lenders.”

“Documents produced to the Committee confirm that senior officials are aware that FDIC examiners are injecting personal value judgments into the examination process. In an email to DCP Director Mark Pearce concerning agency policy with respect to payday lending, a DCP Deputy Director observes, “I may have to confront the issue of overzealous examiners (immoral issue). I would do so by making clear that it is not fdic [sic] policy to pass moral judgment on specific products.”

“Documents produced to the Committee justify these concerns: internal emails reveal that FDIC examiners were actively engaging in measures to prohibit or discourage relationships with payday lenders. In response to request for guidance on payday lending from the president of an unnamed bank, an FDIC Field Supervisor in the Atlanta Region wrote, “Even under the best circumstances, if this venture is undertaken with the proper controls and strategies to try to mitigate risks, since your institution will be linked to an organization providing payday services, your reputation could suffer.”

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“In a far more glaring abuse of the examination process, a senior FDIC official effectively ordered a bank to terminate all relationships with payday lenders. On February 15, 2013, the Director of the Chicago Region wrote to a bank’s Board of Directors and informed them the FDIC has found “that activities related to payday lending are unacceptable for an insured depository institution.”

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There is evidence examiners’ campaign against payday lending even extended to threats. At a hearing before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the House Judiciary Committee, Chairman Bob Goodlatte revealed that senior FDIC regulators went as far as threatening a banker with an immediate audit unless the bank severed all relationships with payday lenders. Chairman Goodlatte explained in his opening statement:
For example, the committee obtained a jarring account of a meeting between a senior FDIC regulator and a banker contemplating serving a payday lending client. The official told the banker, “I don’t like this product, and I don’t believe it has any place in our financial system. Your decision to move forward will result in an immediate unplanned audit of your entire bank.”

“VI. Conclusion

The practical impact of Operation Choke Point is incontrovertible: legal and legitimate businesses are being choked off from the financial system. Confidential briefing documents produced to the Committee reveal that senior DOJ officials informed the Attorney General himself that, as a consequence of Operation Choke Point, banks are “exiting” lines of business deemed “high-risk” by federal regulators.

The experience of firearms and ammunitions dealers – one of the most heavily regulated businesses in the United States – is a testament to the destructive and unacceptable impact of Operation Choke Point. TomKat Ammunition, a small business selling ammunition in the state of Maryland, holds a Type 06 Federal Firearms License from the Bureau of Alcohol, Tobacco, Firearms and Explosives, two Maryland State Licenses for Manufacturing and Dealing in Explosives, and a local business license.80 Notwithstanding the extraordinary complexity of this regulatory regime, over the past year TomKat Ammunition has been systemically denied access to the financial system. One bank refused to provide payment processing services due to their “industry.” A large online payment processor informed TomKat that they “could not offer that service due to [their] line of work.” Another credit card processor stated it would no longer allow businesses to process gun or ammunition purchases.

Media accounts record similar experiences. In South Carolina, Inman Gun and Pawn’s longstanding checking accounts were terminated after the company was deemed a “prohibited business type.”In Wisconsin, Hawkins Guns LLC opened an account at a local credit union. The credit union terminated the account the very next day, informing the company that “they do not service companies that deal in guns.” In all three of these cases, the financial institutions and payment processors made no reference to the merchants’ creditworthiness, individual risk profile, or due diligence findings. The sole basis for the terminations is their participation in an industry deemed “high risk” by federal regulators.

Recognizing the irreparable harm to legal and legitimate industries, even fellow regulators have taken the extraordinary step of criticizing the impacts of Operation Choke Point. In a major speech at a joint conference of the American Bar Association and the American Bankers Association on November 10, 2014, David Cohen, the Under Secretary for Terrorism and Financial Intelligence at the Treasury Department, warned of the dangers of “de-risking.” Mr. Cohen explained that de-risking occurs when a financial institution terminates or restricts business relationships simply to avoid perceived regulatory risk, rather than in response to an assessment of the actual risk of illicit activity.84 The Under Secretary went as far as to characterize de-risking as “the antithesis of an appropriate risk-based approach,” warning that the practice can “undermine financial inclusion, financial transparency and financial activity, with associated political, regulatory, economic and social consequences.”

At a minimum, Operation Choke Point is little more than government-mandated de-risking. FDIC, in cooperation with the Justice Department, made sure banks understood – or in their own language, “got the message” – that maintaining relationships with certain disfavored business lines would incur enormous regulatory risk.86 The effect of this policy has been to deny countless legal and legitimate merchants access to the financial system and deprive them of their very ability to exist. Accordingly, Operation Choke Point violates the most fundamental principles of the rule of law and accountable, transparent government.”

Read the entire report, issued by Federal Deposit Insurance Corporation’s Involvement in “Operation Choke Point” here.

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1 Comment so far
  1. Ken December 9, 2014 10:45 pm

    Banks use the FDIC and the DOJ as an excuse to close MSB and PDL company bank accounts. Small operators with less than $10M PDL portfolios and check cashers are not worth the hassle. In their ideal world, banks would provide lines of credit and operating accounts to the huge lenders, offer their own version of a payday loan to their captured customers, and kiss-off the little guys.

    The lender incumbents desire the very same scenario. They take market share and are the only ones left capable of dealing with all the FED and state regulations.

    Regulatory friction helps the incumbents maintain their position.

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