The Obama administration is being accused by short-term lenders of attempting a last-minute effort to crack down on their industries by using Operation Choke Point. This has caused an emergency situation where businesses are not able to perform their basic functions, such as paying their employees.
Following a loss of more than dozens of banking relationships over the past few weeks, payday lenders asked for emergency relief from the program of the government from a federal judge in the District of Columbia. The program has been severely criticized for incorrectly targeting businesses that are legitimate.
CEO of Community Financial Services Association of America (CFSA), a trade association representing about nine thousand short-term lenders, Dennis Shaul, said that immediate relief is more important than ever. He believes that some members of the CFSA will be coerced to dramatically retrench their operations and others might have to shut down altogether without an injunction against Operation Choke Point.
The Justice Department designed Operation Choke Point in 2012 for attacking telemarketing, Internet, mail and other such mass market scam against the end-users by restraining swindlers’ access to the banking system.
The Justice Department believed that by partnering up with federal regulators including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, they will be able to crack down on scams by utilizing federal regulators to pressurize the banks out of offering their services to businesses that are fraudulent.
However, critics of the program including several Republicans in Congress said that the program was being used to put financial pressure on legal industries that the Obama administration did not like, payday lenders and firearms sellers.
The Justice Department was contacted by the Daily Signal for an update, but they did not respond.
In April, a former official of President Barack Obama’s Justice Department said that the program has unintentional, but collateral consequences on the US consumers and banks. The complaints regarding the program damaging legal business owners have not stopped since then.
Operation Choke Point: A Shadow Campaign
A spokesperson for Advance America, the largest payday lending agency, Jamie Fulmer, said that the program is a shadow campaign against the businesses that abide by the law. To eliminate short-term lending, backdoor tactics are being utilized by regulators.
In a lawsuit filed in 2014 against the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve for their participation in the program, the CFSA and Advance American are co-plaintiffs.
The chief financial officer for Advance America, Christian Rudolph, said that at least twenty-one banks have sent the organization notifications for termination since 2013.
When requesting an emergency injunction against the program, he said that recently the terminations of the bank have reached a point where it has significant begun to restrain the ability of Advance America to carry out its business operations and it is on the verge of being refused to even hold a bank account.
Payday loans are typically small-dollar, 2-week loans that are meant to be given back when end-users receive their paycheck. Payday lenders usually charge a fee of $15 for every $100 borrowed.
Critics are worried that borrowers are going to struggling with repaying the loans leading to higher fees and eventually leaving the consumers in a cycle of debt. Supporters are of the opinion that industry offers a much-needed service to the Americans in financial bind or lack accessibility to the bank. They even argue that paying late fees on a credit card or the costs of bounced checks are much higher.
The case, Federal Deposit Insurance Corp. VS CFSA, is still going on and last year, the court granted it to move forward on the basis that the federal government might have breached the clause of the Fifth Amendment.
As per this clause, the lawyers for CFSA argued in court documents that the stigma established by the government against their industry under the program has been deprived of their right to having bank accounts and there selected business line. The negative effects of the program have been spoken out by the victims since the program was launched in 2013. A number of accounts have been documented by the Daily Signal.
But, the bank officials neither confirmed nor denied the theories of the federal regulators.
When a judge was asked for an emergency relief by CFSA and Advance America, however, the lawyers incorporated a written statement from the chairman of the Business Bank of Texas, Ed Lette.
Lette traced out how federal regulators from the Office of the Comptroller of the Currency coerced him to put a stop to a mutually advantageous relationship with a Texas-based payday lender, Power Finance Texas.
An expert in financial regulations at the Heritage Foundation and a critic of Obama’s program, Norbert Michel, said that it is very unusual for bankers to be discussing their problems publicly with their regulators.
The Office of the Comptroller of the Currency does not comment on any open litigation, but they did point to a testimony by Daniel Stipano, the agency’s deputy chief counsel, in 2014. Stipano had said that the agency does not direct banks to matters of individual accounts or even encourage banks to be engaged in termination of customer accounts. In case the bank is unable to manage the risks presented by a customer or the customer is related in any suspected illegal or criminal activity, the agency may direct the bank, via enforcement action to discontinue a customer’s account.
Stipano even confirmed that some of the requests that they had received during 2013 from the Justice Department were associated to Operation Choke Point.
The Program Reaches Beyond Payday Lenders
Payday lenders are not the only industry complaining about the program. The chief operating officer of Western Shamrock, a Texas-based installment loan corporation, Tom Hudgins, said that his industry also felt the pressure. Their sources of funding continue to be pressurized and their banking relationships at the local level continue to be discontinued. Hudgins operates three hundred locations in nineteen different states.
Installment loans are repaid over time and they have been around for much longer than payday loans. It differs from payday loans in the sense that they are fully underwritten and need strict verifications of the customers’ ability to repay the loan.
CEO of Banner Finance, an installment loan business with thirty-seven branch offices in 4 different states, Randy Dalton, said that there have been at least been 3 instances over 2 years where he had had to change banks because of terminations. He said that he has lost some bank relationships that his company had cherished for more than 50 years.
He said analyzing the current situation is of utmost importance and he is scared to think what will happen next.
A New Administration Brings Hope
Both installment and payday lenders agree that they have reasons to be hopeful, regardless of the uncertainties. Even though Donald Trump, the President-elect, has not made any comments on the Operation Choke Point, attempts have been made on multiple occasions by the Republicans in the Congress to terminate the program.
Sens. Ted Cruz, R-Texas, and Mike Lee, R-Utah, presented legislation aimed at deciphering Operation Choke Point, and the 2 are regular allies of Trump’s nominee for attorney general, Jeff Sessions.
The administration of Trump has not said much about the program, except that it is going to change very soon.