The Federal Deposit Insurance Corp. did not overstep its regulatory authority when it told banks to not do business with payday lenders, according to a just-released report to Congress.
What's more, the regulator was not in cahoots with the Department of Justice as the latter agency pursued its controversial Operation Choke Point anti-fraud program. Meanwhile, a federal district court judge declined to dismiss a lawsuit claiming the FDIC and other regulators put undue pressure on banks not to do business with payday lenders and thereby depriving them of their constitutional rights to hold bank accounts and engage in their chosen businesses.
The lawsuit was filed against the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency (the three federal agencies that supervise commercial banks) by the Community Financial Services Association of America, a trade association for payday lenders. The group accused regulators of pressuring banks to stop doing business with payday lenders in violation of their constitutional rights. The regulators countered that the group didn't have legal standing to pursue the lawsuit. But a U.S. District Court judge in Washington, D.C., disagreed and ruled on Sept. 25, 2015, that the CFSA could continue with the litigation.
"We are very pleased that the Court has validated our legal theory that the government agencies violate the Constitution when they use regulatory coercion and backroom administrative strong-arming to deprive law-abiding Americans of their bank accounts, their livelihoods and their right to due process of law," Charles J. Cooper, the CFSA's lead counsel, said in a statement following the decision.
However, the FDIC Inspector General's Office (the agency's internal auditor, abbreviated as IG) said its investigation of the agency's role in Operation Choke Point revealed that it had played no real role in the controversial anti-fraud program. The investigation and findings are detailed in a 73-page report, The FDIC's Role in Operation Choke Point and Supervisory Approach to Institutions that Conducted Business with Merchants Associated with High-Risk Activities, which was released earlier in September.
The IG was tasked in 2014 with investigating the agency's role in Operation Choke Point by a group of 35 members of Congress. The lawmakers wanted to know if the FDIC or members of its staff were advancing political or moral agendas by forcing payday lenders out of the financial services space. They also wanted to know how much of a role the FDIC played in Operation Choke Point. "As it pertains to payday lending and related activities, we concluded that the officials acted consistent with a widely held understanding that the highest levels of the FDIC disfavored these types of banking services," the IG concluded.
The CFSA, in a complaint filed in 2014, argued that regulatory concerns about high-risk businesses had led to undue pressure for banks to deny services to payday lenders. Payday loans are controversial small-dollar, short-term credit products designed to help borrowers in temporary financial straits make it until their next paychecks. Regulators, consumer advocates and, in some jurisdictions, lawmakers have argued that the loans, often made at interest rates that translate to double- and triple-digit annual percentage rates, have trapped financially strapped borrowers into cycles of debt, in which they are forced to take out new loans to pay off the old ones.
The FDIC has expressed concerns repeatedly about banks that do business with these and other merchant categories generally considered risky (like porn and gambling websites). It first issued regulatory guidance on banks doing business with payday lenders, in particular, in 2003. That guidance was updated in 2005 to place heightened scrutiny of payday lending-related activities, and by 2006, all FDIC banks seemed to have walked away from payday lending, according to the IG's report.
However, some FDIC officials in recent years expressed concerns that payday lenders were accessing the automated clearinghouse (ACH) network to collect loan payments from borrowers' bank accounts. "We noted two instances in which the FDIC discouraged institutions from providing ACH processing to payday lenders in written communications to the institutions," the IG reported. "In both instances, the FDIC's stated concern was the reputation risk to the institutions due to their potential or existing relationship with a payday lender."
In 2013, FDIC officials determined there were "misperceptions" within the agency regarding its approach to banks doing business with payday lenders and other high-risk merchants, so it made revisions to its supervisory guidance. By this time, the DOJ's Operation Choke Point program was underway. Focused on banks and others involved in related financial transactions, it sought to ferret out scam artists who preyed on consumers.
One tool it used was an informational article the FDIC published in 2011, with a list of potentially high-risk merchant categories that included payday lenders. Also, there were some phone conversations between FDIC and DOJ officials, the IG report noted. "These communications with DOJ generally related to the Corporation's responsibility to understand and consider the implications of potential illegal activity involving FDIC-supervised financial institutions," the IG's report stated. "Overall, we consider the FDIC's involvement in Operation Choke Point to have been inconsequential to the overall direction and outcome of the initiative."
The FDIC is not off the hook just yet, however. The IG's report to Congress said senior management at the agency need to do a better job of communicating policies to field staff and examiners.
Meanwhile, legislation is making its way through Congress that would clip federal regulators' wings with regard to establishing lists of high-risk businesses. Introduced by Rep. Blaine Luetkemeyer, R-Mo., the Financial Institution Customer Protection Act of 2015 has 27 co-sponsors. It was approved by the House Financial Services Committee in July 2015 and is awaiting a vote before the entire House.
It's unclear whether that legislation, if enacted, would apply to the Consumer Financial Protection Bureau, which recently expressed its own concerns about payday loans. The federal consumer watchdog agency said in March that it was considering regulations "that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans."
And in August, the CFPB filed a civil lawsuit against an offshore company that was making payday loans online to U.S. borrowers. NDG Enterprises, the defendant, was a "complex web" of companies that made loans deemed illegal in many state and local jurisdictions, threatened borrowers and in some cases illegally garnished their wages, the CFPB said in its complaint.
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