In 2012 the Justice Department came up with what at the time seemed like a good idea. Operation Chokepoint’s stated goal was “…to attack internet, telemarketing, mail, and other mass market fraud against consumers by choking fraudsters’ access to the banking system.” But like most genies, once it was out of the bottle it began running amok.
The operation’s original purpose—to attack illegal online activities—quickly expanded to take on businesses that, while completely legal, were out of political favor. And soon it didn’t matter if the businesses were even online. What mattered was if they were politically approved by the White House.
Take, for example, payday lenders. They make small short-term loans that can help tide over cash-strapped borrowers. But critics say the fees can drive effective interest rates well into three digits and trap borrowers into an endless debt cycle in which they use new payday loans to repay older loans. And yet this segment of consumer finance is totally legal, tightly regulated by state agencies, and provides a much needed service unavailable to a large portion of un-banked and under-banked consumers. Enter the Justice Department and Operation Chokepoint.
Payday lenders have now had to ask a federal judge in Washington, D.C., for emergency relief to stop what they call a coordinated effort by U.S. regulators to stop banks from doing business with them—essentially threatening their very survival. In a filing a two weeks ago, the Community Financial Services Association of America (CFSA), and payday lender Advance America, said a preliminary injunction was needed to end the “back-room campaign” of coercion by the Federal Reserve, the Federal Deposit Insurance Corp, and the Office of the Comptroller of the Currency.
Advance America—one of the largest payday lenders in the U.S. with over 2,100 locations—said its own situation became dire after five banks decided in the last month to cut ties. That included a 14-year relationship with U.S. Bancorp, putting it “on the verge” of being unable even to hold a bank account. Charles Cooper, a lawyer for the CFSA said, “Protecting consumers from credit fraud is, of course, a commendable goal. But the manner in which the defendant agencies have chosen to pursue that ostensible goal betrays that their true intent has always been to eradicate a disfavored industry.”
The CFSA contends that its members operate legal businesses and are not regulated by federal banking authorities, yet those agencies’ pressure on banks to end their relationships has effectively threatened payday lenders very existence. And supporting their case are statements made by many prominent bankers. Take for example the situation between Business Bank of Texas and one of its customers, Power Finance, a payday lender.
Ed Lette, chairman and CEO of Business Bank of Texas said, “The pressure that was brought to bear on our bank by our regulator left us with no choice but to drop Power Finance Texas as a customer and close its accounts. In the absence of this regulatory pressure, we would not have closed Power Finance Texas, accounts.” The regulator Mr. Lette refers to is the comptroller of the currency, and Power Finance had been a valued customer of the Bank for over three years.
But payday lenders aren’t alone in this attack on legally operated, but politically out of favor businesses. Thousands of banks have received “guidance” from their regulators to cease doing business with gun and ammo dealers, coin dealers, and even tobacco sellers. It’s important to note that none of these businesses have ever been involved in, or even accused of fraud or illegal practices. Their “crime” it seems is to be out of favor with the current administration.
As has been a continued practice of the Obama administration, if it cannot get statutory or constitutional authority to pursue its social objectives, it does it with legally questionable executive and regulatory actions. The outcome of the CFSA Federal court action has much more at stake than merely saving payday lenders. It is a stand against over-reaching executive action aimed at pursuing a social agenda neither Congress nor the electorate ever wanted.
Kevin Cochrane teaches business and economics at Colorado Mesa University, and is also a Permanent Visiting Professor of Economics at The University of International Relations in Beijing.
