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."

taberandrew on / CC BY

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.

NEXT: Two Brothers Want to Start a Christmas Tree Farm on Their Own Land. The Township Might Fine Them $450,000.

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  1. Ignoring the true libertarian argument here, that the FDIC and Fed shouldn’t exist the way they do:

    Limiting what/how/when/why banks can borrow stupid cheap money for next to nothing interest rates from the FED isn’t horrible. It should be done through legislated law, not the pen stroke of a bureaucrat.

    1. This is not about any larger issues of banking regulation. Even if you support the FDIC’s regulatory function, this is a complete misuse of those regulations. It is an illegal act. And that is true regardless of your opinion of the FDIC in general.

    2. It should be done through competition – not detailed legislation OR a bureaucracy.

      1. Yes it should be. But if it were done in competition, some very rich and important people might end up just ordinary rich people and not so important. And no one wants that. God forbid important people actually bear the burden of their poor decision making or bad luck. That is what happens to deplorables not important people.

      2. Did I miss the /s from s prior article that was confused about competition for Harvard?

        The fdic should be banned from discriminating against lawful businesses.

  2. The only solution is to get rid of the FDIC entirely. And not just the FDIC but the need for the FDIC. Govt should not be providing an institutional bailout for privately-created money. Nor should it be allowing those private creators of money to have a monopoly over the distribution/pricing of govt-created money.

  3. Unless you can show me that the banking public has any way of knowing which bank is lending to pay day lenders, there is no possibility of there being a reputational risk. Reputational risk is a valid concept. If a bank’s lending practices are known and for whatever reason create the perception that the bank is in trouble, people are less likely to invest their money in that bank and there can be if it is bad enough a real risk of a run on deposits. But the practice has to be known. Moreover, even if it were known, why would the public conclude the bank wasn’t sound because it is loaning to these pay day lenders?

    The whole thing is a complete lie. And it is such a ridiculous lie, I think it is fair to say that no regulator could reasonably believe it such that they are engaging in a fraud upon the court when they and their lawyers claim otherwise.

    1. If a bank’s lending practices are known and for whatever reason create the perception that the bank is in trouble, people are less likely to invest their money in that bank and there can be if it is bad enough a real risk of a run on deposits.

      And why would we allow a monetary system that makes that sort of run a systemic risk rather than simply a bank-going-bankrupt risk? The problem here is that it IS a larger issue because banks don’t end up having to pay customers more for their deposits if the bank is going to turn around and lend riskier. Deposits are not legally the customers money. They are themselves a loan even though banks are really deceitful about making that explicit – in large part because of the FDIC backstop

      1. We should because customers know the risks when they put their money in a bank. You don’t put your money in a bank, you loan it to a bank. And if that bank goes tits up and can’t pay you back, that is no different than any other borrower failing to pay a debt. So, why should banks be able to do that? For the same reason anyone else can borrow money, because someone is willing to lend it to them.

        You are making this much more complex than it is and seeing injustices that do not exist.

        1. And if that bank goes tits up and can’t pay you back,

          The bank that goes bankrupt can pay you back, at least for your deposits and savings. “Insured by FDIC.”

  4. All of this occurred under the Obama administration. The dark cloud of intolerance is always descending upon Republicans but it always turns out to be composed of progressives and Democrats.

    NRA Sues New York for Punishing Financial Institutions Doing Business With Group

    The National Rifle Association on Friday sued the state of New York for fining and coercing financial institutions until they severed their connections to the gun-rights group.

    Democratic Governor Andrew Cuomo and the Department of Financial Services engaged in a “blacklisting campaign” against banks and insurance companies who did business with the NRA, infringing upon the group’s constitutional right to “speak freely about gun-related issues and defend the Second Amendment,”.

    The NRA presented as evidence an April letter from Maria Vullo, the DFS’s superintendent, warning banks about the “reputational risk” of doing business with gun-rights groups. The state also pressured the companies behind the scenes.

    “Directed by Governor Cuomo, this campaign involves selective prosecution, backroom exhortations, and public threats with a singular goal?to deprive the NRA and its constituents of their First Amendment right to speak freely about gun-related issues and defend the Second Amendment,” the complaint states.

    1. Yes it did and they are now being sued over it. As far as I know, it is no longer occurring. Oddly, Doherty never mentions who was President when all of this happened. I wonder why that is? Did he just forget?

  5. I guess this is another example of the “nudging” liberaltarians like to indulge in. Nudging payday lenders, firearm, and ammo businesses out of existence.

    1. Case Sunstein approves of this post.

    2. I have a slight problem with “liberaltarians” — if reading quickly it looks like “libertarians”, which is not what you mean at all.

      Why not just use one of the standard terms: liberals or progressives. If you want to make it more pejorative than it already is, put scare quotes around it: “liberals” or “progressives”.

  6. Huh? I thought the Trump administration was going to cut back on regulation. Why do the payday lenders need to go to court over this? Why has President Trump not simply ordered the FDIC to “cut it out”?

  7. The solution to the Payday Lending Crisis is obvious. Tell the people who think Payday fees are too high to lend their money to the Payday customers in small loans at reasonable rates. The competition will quickly run the evil Payday lenders out of business. Problem solved!

    Easy peasey, right?

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