Payday Lending

FDIC Attempts to Pressure Banks into Denying Services to Payday Lenders Violates Due Process Rights, Lenders Argue

Lawsuit wants to curb actions like "Operation Choke Point' in which bank regulators discourage banks from servicing certain customers, including gun and ammo dealers.


A group of payday lending companies are suing the Federal Deposit Insurance Corporation (FDIC) over practices associated with "Operation Choke Point."

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That government scheme is defined in a recently filed motion for summary judgment in the case of Advance America v. FDIC as "a clandestine pressure campaign, carried out by the banking regulators at the FDIC and OCC [Office of the Comptroller of the Currency] through backroom meetings, threatening letters, and whispered threats, all in pursuit of a single-minded purpose: to cast payday lending as a 'high-risk,' 'dirty business,' and to 'stop [supervised] banks from facilitating' the industry by all 'available means.' …by cutting off the industry's access to the banking systems, they could 'choke out' payday lending, without ever regulating it directly, merely by leveraging their existing supervisory authority over the banks."

According to the motion, FDIC actions included both actual threats of criminal prosecution toward bankers or insisting that such businesses were "high risk" and imposing heavier regulatory burdens on banks who dealt with them.

The suit asserts that the FDIC's actions have specifically harmed the suing lenders:

Plaintiffs have seen bank after bank end longstanding, beneficial relationships with them. In some cases these terminations have come without any explanation at all—although a few bank officers have later explained that their hand was forced by their regulators, who instructed them to exit the entire industry. And in other cases, the banks have explained that they could no longer afford to keep payday lenders as customers because of "the heightened scrutiny required by our regulators."

Since 2011, Plaintiffs have lost relationships with scores of banks, have been refused service by hundreds more, and have spent millions of dollars in banking fees and on workarounds such as armored car-services as a result of their restricted access to the banking system. From Defendants' perspective, Operation Choke Point has been a resounding success. The Due Process Clause does not permit the Government to attack the law-abiding members of a lawful industry in this manner.

Such practices from the FDIC, the suing payday lenders argue, violate their constitutional rights. They are hoping via this suit to get the U.S District Court for D.C to "end [FDIC]'s campaign of direct coercion by enjoining them, and their employees and agents, from applying informal pressure on banks to terminate their relationships with payday lenders (both direct customer relationships or indirect relationships with third-party payment processors) or otherwise seeking to deprive Plaintiffs of their access to the banking system."

The suit asserts federal authorities have explicitly had it out for their industry for a long time:

In late 2010 or early 2011, the FDIC's senior Washington officials … informed the Regional Directors that he had discussed payday lending with the "Sixth Floor"—shorthand for the FDIC's Chairman and senior leadership—and that the regional offices were to implement the following approach: "if an institution in their region was facilitating payday lending, the Regional Director should require the institution to submit a plan for exiting the business." The message, according to one of the Regional Directors at the meeting, was unambiguous: "if a bank was found to be involved in payday lending, someone was going to be fired."

Regulators have long used the concept of "reputational risk" to consider whether banks' actual business practices might harm its customers via damaging the bank's business soundness, but the payday lenders believe extending that idea to the reputation of the bank's customers goes too far.

The summary judgment motion is full of details of how specific named regulators put pressure on specific named banks, and is worth reading in full for those who want to understand how hard the government can make life for businesses it doesn't like via secondhand pressure on their bankers, including how "several bank officials—including at Bank of America and Synovus Bank, institutions that terminated relationships with Advance America—have expressed regret at being forced to end long-standing, positive relationships with payday lenders and have made it clear that they would reestablish these relationships if allowed to—actions hardly consistent with institutions that have made an independent business decision to cut ties with a customer."

The evidence they present, the suing payday lenders insist, proves clear due process violations caused by the FDIC:

The record demonstrates [FDIC] doggedly and repeatedly coerced banks across the Nation into terminating any relationships with payday lenders or their third-party payment processors. The evidence shows that this was a national campaign imposed by headquarters on all seven regional directors and targeting the entire payday lending industry…the bank's response shows beyond any doubt that the FDIC's pressure campaign was a "substantial factor" in its decision to end the relationship—protesting that it had concluded after a "risk assessment" that the customers posed "no significant risk to the financial institution."

The suit admits that "government defamation, standing alone, does not amount to a violation of the Due Process Clause" but still insists that "due process is implicated when the government (1) stigmatizes a person or entity, and (2) that stigmatization causes or is connected with an adverse impact on a background liberty or property right" which they argue is the case when it comes to this action. They believe FDIC's behavior in Operation Choke Point is constitutionally disallowed under (among other arguments) what's known as the "stigma plus" doctrine established in the 1971 Supreme Court case Wisconsin v. Constantineau.

The motion discusses many analogous cases in the past in which federal courts have concluded that such stigmatizing government actions violated the constitutional rights of the stigmatized. Such actions lower courts have looked askance at based on this principle include government agencies traducing the reputation of past employees (Bartel v. FAA, 1984) and an airline being slammed as unsafe by a government report (Reeve Aleutian Airways, Inc. v. United States, 1993).

While the suing parties in this case are not weapons dealers, some in the gun-rights community see the suit as important to them as well. As a separate filing in the case of "statement of undisputed material facts" notes, ammunition and firearms sales are among the businesses targeted by FDIC practices the same way payday lenders have been.

Reason on Operation Choke Point and Katherine Mangu-Ward's classic 2009 feature on the misguided war on payday lending.