The Justice Department's "Operation Choke Point" is said to be targeted at online payday lenders that lend into states that prohibit payday lending. But the operation is being pushed far beyond its stated objective of targeting online payday lenders violating state laws and is having potentially devastating impact on lawful check cashing and small loan businesses. This in turn will cut off tens of millions of people from much needed access to money to meet emergency needs.
According to the Washington Post ("Banks to payday lenders: Quit the business or we'll close your account," Danielle A. Douglas, April 11, 2014), one large bank informed a small financial firm in Minneapolis to get out of the payday lending business within 30 days or the bank would discontinue providing banking services to the firm.
Another much larger diversified financial firm — let's call it "FinCo" to protect the innocent — received the following letter from another large bank earlier this month:
Providing quality service to our clients has been one of the keys to our success at [Gotham Bank]. Toward that end, we are committed to understanding, and satisfying, the needs of our clients. Unfortunately, difficult decisions are sometimes necessary in order to accomplish these important goals. Gotham Bank has made the decision to exit the business of providing commercial banking services to check cashers and related businesses. ...
Based on the foregoing, please be advised that we are exercising our right ... to terminate your account relationship, effective July 30, 2014.
Please make arrangements to close the accounts listed on the attached schedule, and have any direct deposits and/or automatic debits re-directed, by the Termination Date. ...
Also, in conjunction with the above, we are hereby notifying you [that the Treasury Master Service Agreement between your company and Gotham Bank] shall be terminated as of the Termination Date.
The Gotham Bank officer signing the letter added a personal handwritten note to the chief executive officer of FinCo: "[John] — I am so sorry that we have made this change. I have always enjoyed working with all the folks at FinCo. ..."
No matter what your personal view may be of payday lending or check cashing services, Operation Choke Point should be both alarming and repugnant. It is a direct assault on the democratic system and free-market economy that have made the United States the most powerful and prosperous nation in world history.
Without color of law and based on a political agenda, unelected bureaucrats at the Department of Justice are coordinating with some bank regulators to deny essential banking services to companies engaged in lawful business activities. Bankers operating under the yoke of an oppressive regulatory regime are being cowed into compliance.
If lawful payday lenders and check cashers can be driven out of the banking system because someone in the government doesn't like them or what they do, what lawful businesses are next?
Thankfully, 23 members of Congress (Democrats and Republicans alike) have co-signed a letter to the Department of Justice expressing their deep concerns about Operation Choke Point driving lawful businesses out of the banking system. According to American Banker, state banking commissioners are adding their voices in opposition to federal agencies attempting to deny essential banking services to lawful, state-licensed firms.
It's time for the rest of us to get involved in this battle before we lose the freedoms that have made our country the most successful nation — with the strongest and most vibrant banking system — in the world. The place to debate whether payday lending or any other business should be allowed to operate and have access to the banking system is in the halls of Congress and state legislatures, not in the backrooms of government bureaucracies.
It doesn't seem to count for anything at the Justice Department, but Congress debated payday lending during the Dodd-Frank deliberations and concluded it is a service utilized and needed by millions of people, so it should not be eliminated and should be regulated by the Consumer Financial Protection Bureau.
William M. Isaac, a former chairman of the Federal Deposit Insurance Corp., is senior managing director and global head of financial institutions at FTI Consulting. Mr. Isaac and his firm provide services to many clients, including some short-term lenders.