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Payday Lenders Bring Lawsuit against Regulators to Stop Choke Point

Adam Rust's picture

Posted June 10, 2014

The Community Financial Services Association ("CFSA") and Advance America have filed a lawsuit in the US District Court for the District of Columbia which challenges the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency over Operation Chokepoint.

The filing, delivered on June 5th, is available here.

CFSA represents the policy interests of many different payday lenders, both large and small. According to the CFSA, Choke Point is having the effect of pushing law-abiding short-term lenders out of business.

"The Defendant agencies, under the guise of protecting the safety and soundness of banks, are waging a covert war against certain legitimate businesses that rely on banking services to function. What started as a set of diverse sorties has now coalesced into a coordinated campaign, known as "Operation Choke Point," designed by Defendant agencies and the DOJ to eliminate certain lawful businesses that they disfavor, by using their regulatory and enforcement authorities to quietly coerce banks to terminate their relationships with the disfavored businesses." 

Mark Twain once said that his books were "mostly true, some stretchers." Under the latter category is CFSA's veiled critique of DOJ's action against Four Oaks Bank. If you remember, Four Oaks was penalized for a lack of internal safeguards with regard to the frequency of returned checks routed through some of its payment processor relationships. Some processors were seeing return rates of as high as forty percent. CFSA argues that a regulator risks ignoring the possible presence of a "legitimate explanation (s)" when asserting that such rates of return could likely be associated with fraud. 

A key assumption in the argument is that businesses have the right to access the banking system. This presents an interesting contradiction, as the industry generally claims to serve clients who are themselves unable to access the banking system. 

The Banks that Have Dropped Payday Lending Clients

The suit describes how instances where four CFSA members were dropped by their respective banks. Here are four lenders and the respective banks that they say have ceased to do business with them: 

  • Xpress Cash Management: Fifth Third
  • Cash Tyme: Regions, Fifth Third
  • Speedy Cash: Bank of America
  • Advance America: Hancock Bank, Whitney Bank, Synovus Bank, Umpqua Bank, Cadence Bank

Advance America later says that six banks and one payment processor have terminated their relationships. Since then, it says that AA has been unable to find successor banks. 

In other instances of severed relationships, the suit cites a bank but does not indicate the name of the payday lender. Those banks mentioned in the suit that have terminated unnamed relationships: JPMorgan Chase, Bank of Kentucky, Associated Bank, Bank Independent, Capital One, First Financial Bank, FirstMerit Bank, and KeyBank. 

CFSA argues that it been harmed by a subsequent loss of membership dues and the use of their resources in seeking to protect the interests of its members in the face of Choke Point. Advance contends that its operations have become substantially more costly.

Then there is this anecdote: 

"Despite incurring the cost of hiring a dedicated employee to set up new banking relationships, the lender has thus far been unsuccessful and currently relies on costly armored cards to transport money." 

Payday lenders are now the new unbanked. But there is an alternative to armored cars. These payday lenders can still get a ride on a stage coach.