‘Operation Choke Point’ under Fire

by Ballard Spahr LLP
Contact

"Operation Choke Point," the coordinated multiagency federal effort to choke off banking services to alleged fraudsters (according to its defenders) or politically unpopular industries (according to its detractors), has come under fire from Congress and a payday lending industry lawsuit. The lawsuit was brought in Washington, D.C., federal court against the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Fed), and the Office of the Comptroller of the Currency (OCC).

While the role of the U.S. Department of Justice (DOJ) was the focus of the House Oversight and Government Reform Committee’s staff report criticizing the program, and the Consumer Financial Protection Bureau (CFPB) has also reportedly played an important role in Operation Choke Point, the DOJ and CFPB were not named as defendants in the lawsuit.

The congressional report concluded that it is necessary to dismantle Operation Choke Point in light of its impact on lawful businesses. It cited a DOJ document that acknowledged "the possibility that banks… may have decided to stop doing business with legitimate lenders." The same document said that "solving that problem—if it exists—should be left up to the legitimate lenders themselves." The report sharply criticized the attitude that, "'if they are legitimate, they can prove it,"' calling it "patently absurd" and "reminiscent of the formulation that 'if one is not a witch, then they will sink rather than float.'" While the staff report was sharply critical of Operation Choke Point, congressional concerns about the operation have been expressed on both sides of the aisle.

The industry lawsuit was brought by the Community Financial Services Association, the leading payday lending trade group, and the largest payday lender in the country. The suit charges that, in an effort to eliminate the payday lending industry, the defendant agencies have subjected banks to various "pressure tactics," including "warning them that continuing their relationships with payday lenders will result in harsh and prolonged examinations, reduced examination ratings, and/or other punitive measures."

According to the complaint, the agencies have used "reputation risk" as the basis for their attack on the industry. But, the complaint says: "Several guidance documents… draw a distinction between 'reputation risk' and 'compliance risk,' which is the risk to the bank of doing business with customers that engage in fraudulent, deceptive, or otherwise unlawful practices. … The regulatory distinction between reputation and compliance risk makes clear that the former, if it is to have any independent function, is meant to deter banks from dealing with law-abiding merchants who, in the judgment of regulators, are held in low public esteem."

The complaint adds: "By unmooring 'safety and soundness' regulation from actual risk-taking or wrong-doing by the bank or its merchant customers, FDIC is claiming and exercising sweeping and boundless discretion to deploy its regulatory powers to deny banking services to lawful industries based on its own subjective judgments about which industries are (or, in its view, should be) unpopular with the public." It also includes similar allegations against the OCC and the Fed. The regulatory pressure by the federal banking agencies has caused numerous members of the plaintiff trade association to lose their bank relationships, according to the complaint.

The complaint claims that:

  • The agencies have failed to follow the notice and comment requirements of the Administrative Procedure Act in adopting reputation risk rules.
  • The "vague and subjective" reputation risk standard created by the agencies exceeds their statutory authority to set safety and soundness standards.
  • The guidance and communications represent arbitrary and capricious action by the agencies because they "bestow on all payday lenders the stigma of illegitimacy."
  • The agencies have violated the due process rights of the plaintiff trade association's members by depriving them of their right to pursue their lawful business free from unreasonable government interference.

The complaint seeks a declaration that the agencies have acted unlawfully in issuing the guidance and an injunction that bars them from taking any action in reliance on the guidance or informally pressuring banks to terminate their relationships with payday lenders.

Even though the DOJ is not named as a defendant, the complaint alleges that it has “acted in concert” with the agencies through the use of its investigatory authority, having served more than 50 subpoenas on banks as part of Operation Choke Point. Earlier this year, the DOJ settled its first Operation Choke Point lawsuit, which it filed against a bank that processed ACH transactions for payday lenders through an arrangement with a third-party payment processor.

In addition to requiring the bank to pay $1.2 million in monetary relief, the consent order significantly limits the bank’s dealings with third-party processors and payday lenders and other companies raising regulatory concerns. (Our prior legal alert contains a detailed discussion of the DOJ lawsuit.)

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.