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'Operation Choke Point': Way Out of Control

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.

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Comments (22)
As a follow-up on the points raised by Coniferous, you might look at today's Dealbook column in the NYT. There are some interesting back story points made regarding on meetings between the DOJ and the OCC - a rare glimpse behind the curtain.

http://dealbook.nytimes.com/2014/04/29/u-s-close-to-bringing-criminal-charges-against-big-banks/?rref=business&module=Ribbon&version=context®ion=Header&action=click&contentCollection=Business Day&pgtype=Blogs
Posted by jpodvin | Wednesday, April 30 2014 at 5:15PM ET
When HSBC was caught red-handed laundering money for Mexican drug cartels, Attorney General Eric Holder testified under oath that these institutions were simply too big to prosecute. So all Chokepoint proves, once again, is that regulatory enforcement is inversely proportionate to wealth and power. They're going after institutions and individuals that they can harass, who aren't even breaking the law, simply because they can.
Posted by Coniferous | Wednesday, April 30 2014 at 2:49AM ET
This is just stupid. They will just go back underground and not be taxed.
How is gov going pay for our $30,000 toilet seats and $5,000 hammers?
Posted by Novawatcher | Tuesday, April 29 2014 at 6:54PM ET
"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?"

...Go ahead and Google "Decker College"... ... no really, go ahead, I'll wait...

Long story short, Decker was THE pioneer in online/brick-mortar hybrid education (a HUGE industry now, but brand new back then). And it was forced into bankruptcy because a bureaucrat named Ralph LoBosco decided he had a bone to pick with the CEO.

Check it. Years later, the case was quietly closed and shoved neatly under the rug. No wrongdoing found. And that just makes things all magically better for the hundreds of employees who lost their jobs, and dozens of execs/managers who used their own personal savings to make sure those employees got paid for three months prior to complete collapse.

Funny, the media was all about this story when it looked like the next Enron. Barely even acknowledged when they closed the case. And you better believe nobody in the DoE is looking down the barrel of the DoJ system.
Posted by Darkmatt | Tuesday, April 29 2014 at 1:36PM ET
Worried - You are correct. Demand will remain. The key is lower rates yielding a "fair" ROI; whatever that is. Tech, competition, a level playing field, underwriting tools, risk arbitrage... will yield a "palatable" lending product and benefit borrowers.
Posted by Jer Trihouse | Saturday, April 26 2014 at 1:44AM ET
The nay-Sayers take an unbelievable position.

What is driving demand for the product? Ice Cream? Gas for a Sunday drive?

What happens when the loan is not granted? Eviction? No Groceries? No Gas? Auto repossessed?

Of course, that question is the elephant in the room. I guess we can all just legislate personal financial responsibility. Yes?

The fact remains that there remains very strong demand for the product. I can find evidence of substantial demand. Demand that is increasing.

And, thankfully (I say thankfully sarcastically), the most responsible lenders, the banks, have been shoved out of this lawful business by regulatory oversight.

Let's say that Justice get's its way. Let's say that Justice does choke the non-bank providers... of course without the support of legislation.

What happens to the demand? What does Sally-needs-a-loan do then? She only has a 425 FICO, is probably single, and trying to feed 3 children... but she happens to have a job and needs $150 to repair her 1996 Ford, or she cant drive to work. Thousands of variations exist.

What happens to the next topic of regulatory scrutiny?
Posted by InTheStands | Saturday, April 26 2014 at 12:38AM ET
So your case for why banks should take enforcement action where the law enforcement folks hold back is to cite examples where either the law enforcement people HAVE taken action or where there is a pending but unresolved lawsuit?
Posted by WayneAbernathy | Friday, April 25 2014 at 3:54PM ET
Hi Bill,

My point is that the industry doesn't have a good track record in telling the truth about their products. Instead of saying "many of our customers are worse off after using our products, they instead suggest things like: "customers need this product for one-time emergencies like car repairs." The data clearly shows otherwise.

In terms of why an increased focus is needed on the banks and search engines like google that enable this industry, esp. the bad actors, here's just a few examples:

1) Robosigning scandal in November: Payday lender Cash America fined over claims of robo-signing, gouging military members http://www.washingtonpost.com/business/economy/cfpb-fines-payday-lender-cashamerica-for-robo-signing-gauging-military-members/2013/11/20/23d31f54-520e-11e3-a7f0-b790929232e1_story.html

2) Recent lawsuit about bank facilitating payday lender company going into customer bank accounts: https://eclaim.kccllc.net/caclaimforms/zzm/home.aspx

This Class Action alleges that ZaaZoom Solutions, LLC, Zaza Pay LLC, Discount Web Member Sites LLC, Unlimited Local Savings LLC, Web Discount Club, Web Credit Rpt. Co., MegaOnlineClub LLC, RaiseMoneyForAnything, MultiEcom, LLC, Online Discount Membership, Web Discount Company, Liberty Discount Club, Online Resource Center, LLC, Web Coupon Site, USave Coupon, UClip, and/or any other entity offering discount coupon subscriptions controlled and operated by ZaaZoom Solutions, LLC and/or Zaza Pay LLC (collectively "ZaaZoom") along with FBD and other defendants violated state and federal laws by attempting to withdraw money from consumers' bank accounts for Internet-based Membership Programs without the consumers' authorization.
Posted by SPC | Friday, April 25 2014 at 3:47PM ET
Do people seriously think the DOJ is accountable to anyone? Once Obama is out things will change. Till then it is an exercise in futility.
Posted by jpcap | Thursday, April 24 2014 at 5:25PM ET
Rob -- Fair comment. The name itself, "Operation Choke Point", is colorful description of what is intended. I know a lot of senior bankers, and I am certain that they would not be throwing this long-standing, profitable business out of the bank but for government pressure -- particularly at a time when so many banks are struggling for earnings growth. Among other forms of pressure, the DOJ subpeoned the records from a large number of banks on their banking relationships with payday lenders. Toward what end? Perhaps Congress will be able to shed some light.

Bill Isaac
Posted by billisaac | Thursday, April 24 2014 at 3:52PM ET
Rob - You can file a request under the Freedom of Information Act and see what you can find from this "transparent" agency where every single person who works there makes a sworn oath to uphold the US Constitution. I would not hold your breath waiting for copies of those letters, e-mails or even notes from phone calls (they probably even have the digital recordings).

Finally, I find it ironic that this article comes out on the same day that the Administration is reportedly considering taking over the Oregon state health insurance exchange . . .
Posted by jpodvin | Thursday, April 24 2014 at 3:46PM ET
"The problem with Operation Choke Point is that it would have banks choke off access to finance where there is no enforcement lead, no enforcement action, no charges of illegality."

Perhaps Bill or someone else could kindly explain, for ignorant people like me, the specific methods being used by the DOJ to do this. Are there any letters, emails, or even notes from phone conversations in which DOJ attorneys have told banks "we don't care if no laws have been broken, cut these lenders off... or else"?

Notwithstanding my feelings about payday lenders, I would be very troubled to learn that the DOJ was engaging in selective prosecution or similar abuses of its powers. But for all the heated rhetoric about "out of control" DOJ officials, either on here or on hyper-partisan websites like "Stop The Choke," I'm surprised at the paucity of evidence to substantiate the claim that the DOJ is acting "without color of law and based on a political agenda." Even the letter to "FinCo" quoted by Bill fails to state the claim that unlawful government pressure was behind the decision.

Am I just supposed to take his word for it?
Posted by Rob Randhava | Thursday, April 24 2014 at 3:13PM ET
Masaccio -- I don't know where to begin.

State legislatures have licensed payday lenders and have set various terms such as permissible interest rates and allowable rollovers. Several states prohibit payday lending, which is their right. The states which allow payday lending subject it to regulatory oversight. Congress considered prohibiting payday lending in the Dodd-Frank deliberations and decided not to do so because tens of millions of people want and need the product. Instead it decided to grant the CFPB oversight authority over the industry. The CFPB is studying the industry now to decide how best to regulate it.

My article, as you no doubt know, is not about payday lending. It is about the DOJ and other government agencies pressuring banks to deny access to banking services by lawful businesses because the DOJ doesn't like what they do. Ironicly, the same DOJ is encouraging banks to provide banking services to marijuana growers and distributors who are engaged in a business that is clearly illegal under federal law and the laws of many states.

I have no problem with a healthy debate about payday lending -- should it be allowed and if so under what restrictions and regulations? That debate should be held in the halls of Congress and/or the state legislatures, not behind the closed doors of a government agency. In fact, this debate has already been held on many occasions and the outcome is that payday lending has been authorized, subject to regulation, in most states.

Bill Isaac
Posted by billisaac | Thursday, April 24 2014 at 2:48PM ET
There is nothing that keeps Congress from passing a law to make something illegal that it determines should be illegal. But where does an agency of government get the authority to choke off financial access to firms that the agencies have been unwilling to take enforcement action against? If the Bureau thinks that some firm is acting against the law, then let the Bureau take action, rather than force a bank to take action that the Bureau is unwilling to take.
Posted by WayneAbernathy | Thursday, April 24 2014 at 2:37PM ET
There is nothing that prevents Isaac and his clients from getting Congress to pass laws authorizing them to extract usurious interest from the poor, except that no one wants to get their hands dirty.

The CFPB has compiled evidence that Isaac and his payday lender clients are cheating their customers. Let them deal with experts, the people Congress has directed to deal with this sleazy business.
Posted by Ed Walker | Thursday, April 24 2014 at 2:23PM ET
Where there is illegal activity, then the enforcement agencies should take enforcement action, and banks have shown that they are ready and willing to provide the information that they have in order to support those efforts. The problem with Operation Choke Point is that it would have banks choke off access to finance where there is no enforcement lead, no enforcement action, no charges of illegality.
Posted by WayneAbernathy | Thursday, April 24 2014 at 2:17PM ET
SPC -- What's your point? Who proclaimed payday lending to be a "one-time use" product? The fact that a loan needs to be rolled over suggests a true emergency financial need. If it keeps getting rolled over, we need to come up with a longer-term, less expensive solution for the borrower, if there is one.

You are ignoring entirely the point of the article. The DOJ, with a little help from its friends, is driving lawful state-licensed businesses out of the banking system without any color of law -- and this is AFTER Congress debated payday lending in the Dodd-Frank deliberations and decided it is a product much needed by millions of people that should not be banned but regulated by the CFPB. I can't imagine why any citizen would not be alarmed by the DOJ's behavior.

Bill Isaac
Posted by billisaac | Thursday, April 24 2014 at 2:03PM ET
@Commobanker -- We always appreciate your passionate comments but please be judicious when making historical analogies. Operation Choke Point raises troubling questions about prosecutorial and regulatory zeal and due process, as Bill Isaac ably describes. Comparing it to Nazi Germany is a little over the top, though, and potentially offensive to Holocaust survivors, who endured much worse than petty bureaucrats. One can criticize without demonizing. Regards, MH
Posted by Marc Hochstein, Editor in Chief, American Banker | Thursday, April 24 2014 at 2:00PM ET
It takes a lot of gall to write something like this just a few weeks after the CFPB confirmed that 80% of payday loans are being rolled over within 14 days, and more than half of these loan sequences are at least 10 loans long.

Sorta knocks the industry's "one-time emergency use" argument off its feet, huh?
Posted by SPC | Thursday, April 24 2014 at 1:45PM ET
Thank you Mr. Isaac for going on the record. If only these bureaucrats would get on the receiving end of phone calls from consumers in desperate need of emergency financial help - fixing their car, paying a utility bill, filling a prescription for their medicine - they would allow Congress and the States and their constituents to determine the best course of action in regards to small dollar lending availability.
Posted by Jer Trihouse | Wednesday, April 23 2014 at 4:32PM ET
Thanks for standing, Bill Isaac. Defacto law making by out of control, politically oriented regulatory agencies must have the bright light of due process intensely focused on the abuse of power and position at its core.
Posted by AllThingsUnderbanked | Wednesday, April 23 2014 at 9:08AM ET
Bravo Bill Isaac. While Bill and I often disagree on issues, he nails it on this one and we are of one accord. DOJ's "Operation Choke Point" is more appropriate to 1930's Germany than to 2014 America. The only thing this DOJ operation is choking is the freedom of millions of Americans. More thought leaders need to stand up to this dangerous and misguided policy.
Posted by commobanker | Wednesday, April 23 2014 at 8:23AM ET
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