States Splitting with Feds on 'Operation Choke Point'
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LOS ANGELES The federal crackdown on online payday lenders is sparking a backlash among state regulators.
Banking regulators in states that allow payday loans have become concerned that legally operating lenders are losing their banking relationships as a result of the multipronged federal effort, according to Margaret Liu, senior vice president at the Conference of State Bank Supervisors.
The worry is that banks in the face of growing pressure from federal banking agencies and the Department of Justice, which is operating an investigation known as Operation Choke Point are severing ties even with licensed payday lenders, Liu said Saturday.
"This is a troubling development," she said during a panel discussion at the spring meeting of the American Bar Association's business law section.
"It is one thing to be ensuring that a business partner, the client of a bank, is operating legally," she said. But a line is crossed when a payday lender "is being denied banking services because of concern about a federal agency advancing its own policy agenda, beyond appropriate supervisory responsibilities," she added.
The grievance will likely be the topic of future discussions between state and federal regulators, Liu said.
For many months, financial industry trade groups have been arguing that the crackdown on online payday lenders, some of which operate in violation of state laws, is also hurting state-licensed payday loan stores. But there has been little public evidence to back up those assertions.
On Saturday, though, the owner of a state-licensed payday lender in Minnesota, told the Washington Post that Wells Fargo (WFC) recently forced him to choose between staying in the payday loan business and maintaining his relationship with the San Francisco bank.
In a follow-up interview Monday, Alan LePage, the owner of Al'$ Check Cashing in Blaine, Minn., said that Wells Fargo offered him a choice in mid-February.
"They essentially issued it as an ultimatum, that I was not allowed to continue with my payday loan business if I wanted to keep my account with them," he told American Banker. "It was very, very direct."
Payday lending accounted for only about 10% of the revenue at LePage's store, which also offers check cashing, he said. He decided to exit the payday loan business in order to maintain his business relationship with Wells Fargo.
"What we're finding is that most of the banks now don't want you to have payday lending," LePage said. "They're just not interested in the relationship if you do the payday lending."
Wells Fargo spokesman Jim Seitz said the bank cannot discuss specific customer relationships due to customer confidentiality and privacy issues.
"To the extent that we do business with payday lenders, we recognize the need for an extra level of review and monitoring to ensure these customers do business in a responsible way," Seitz said in an email. "Due to the level of resources required to serve this industry and the complexity of businesses in this sector, we are very selective about the companies we serve."
"We consider applicable regulatory guidance in our evaluations, yet it's one of many factors," he added.
The Conference of State Bank Supervisors, based in Washington, represents banking regulators in all 50 states. Some of the state bank regulators that are members of the group also oversee payday lenders. The multistate organization has a separate membership category for banks.
It is unclear how many states are raising concerns about the federal crackdown; payday lending is legal in 36 states, according to the Pew Charitable Trusts. Some states, including New York, which does not allow payday lending, either in stores or online, are supportive of the federal government's efforts.
Agencies involved in the federal push, including the Justice Department and the Federal Deposit Insurance Corp., say they are not targeting payday lenders that operate in accordance with applicable state laws. Rather, they maintain that their goal is to prevent fraudsters from using the electronic payment system to access consumer bank accounts.
In a lawsuit filed in December, the Consumer Financial Protection Bureau alleged that an online lender, CashCall, Inc., violated the federal law that bans unfair, deceptive and abusive practices when it collected debts from borrowers who live in states that ban payday lending.
In response, attorneys for CashCall have argued that the CFPB is wading into areas reserved for the states.
But Christopher Peterson, a senior enforcement lawyer at CFPB, sent a warning shot Saturday to online payday lenders that lend money in states where they don't hold a license.
He said efforts to collect on those loans are "abusive" partly because the borrowers frequently don't know that their debts are legally void.
"Consumers don't understand, and it takes unreasonable advantage of their situation," Peterson said.