Beware the tidy narrative about Operation Choke Point

For the past half-decade, payday lenders have complained about being blackballed under an Obama-era crackdown known as Operation Choke Point.

As the narrative goes, hostile banking regulators in the Obama administration strong-armed banks into cutting ties with payday lenders, which made it hard for the stigmatized companies to access critical banking services.

The reality may be more nuanced.

While few people know exactly why various banks decided to close payday lenders’ accounts, there is reason to suspect that some institutions took action for reasons that had little obvious connection to the personal animus of individual regulators.

To be sure, high-level officials at the Federal Deposit Insurance Corp. did express hostility to payday lending. Emails and testimony that the payday lenders released last month also indicate that FDIC officials’ distaste for high-cost lenders impacted how the agency did its job. Payday lenders sued the FDIC and other federal banking agencies in 2014, and that litigation is still ongoing.

One FDIC official recalled that he attended a meeting during the Obama administration where Christopher Spoth, then the senior director in the FDIC’s division of supervision and consumer protection, indicated that there would be harsh consequences for employees who did not fall in line.

“And the comment was, if any regional director, if a bank was found to be involved in payday lending, someone was going to be fired,” Anthony Lowe, the FDIC’s former Chicago regional director, said during a deposition.

Spoth, who has since left the FDIC, and Lowe, who is now the agency’s ombudsman, did not respond to requests for comment. An FDIC spokesperson declined to comment on the litigation.

In a letter Wednesday to recently confirmed FDIC Chair Jelena McWilliams, Republicans on the Senate Banking Committee sought assurances that lawful businesses will not be targeted simply because they operate in a disfavored industry.

In the lawsuit, payday lenders have pointed to dozens of banks that severed ties with one or more payday lenders during the Obama administration.

“In some cases these terminations have come without any explanation at all,” the payday lenders wrote in a recent court filing, “although a few bank officers have later explained that their hand was forced by their regulators, who instructed them to exit the entire industry.”

In January 2017, an expert witness hired by the payday lenders filed a 32-page report that explored the question of what accounted for the spate of bank terminations.

The expert, Columbia Business School professor Charles Calomiris, concluded that regulatory actions played a key role. He noted that payday lenders tend to be profitable customers, and suggested that banks would not cut them off for business reasons.

In a follow-up report, Calomiris stated that terminations of payday lenders happened suddenly, which is not typically how bankers tend to end relationships when they decide to do so for independent business reasons.

But there is another scenario that Calomiris did not explore in his reports. That is the possibility that a different kind of regulatory pressure — one that was connected to anti-money laundering rules, rather than the personal beliefs of individual government officials — drove the decision-making at certain banks.

Consider the cases of U.S. Bancorp and Capital One Financial.

In April 2014, Capital One said that it was terminating its accounts with check cashers and payday lenders. And between 2014 and 2016, U.S. Bank severed its relationships with numerous payday lenders, according to the plaintiffs.

When Capital One and U.S. Bank made those decisions, officials at the two banks did not offer much insight into their thinking.

But in the years since, new information has emerged about scrutiny that both banks were facing with respect to their compliance with anti-money laundering rules.

In July 2015, McLean, Va.-based Capital One entered into a consent order with the Office of the Comptroller of Currency over deficiencies in its anti-money laundering program. Then last month, Capital One was hit with a $100 million civil money penalty for failing to satisfy the terms of the three-year-old consent order.

In an Oct. 23 statement, Capital One said that the penalty stemmed primarily from prior banking relationships with certain check cashers, and noted that the company had exited that business in 2014.

Did Capital One end its relationships with payday lenders and check cashers because of regulators’ ill regard for those industries? Or was it because Capital One officials knew that the bank’s anti-money laundering compliance was under a microscope? A spokesman for the $362.9 billion-asset bank declined to comment.

In October 2015, U.S. Bank entered into its own consent order with the OCC regarding deficiencies in its anti-money laundering compliance. Then in August 2016, the Minneapolis bank disclosed that the U.S. Attorney’s office in Manhattan was investigating its relationship with an indicted payday loan baron named Scott Tucker.

Tucker eventually went to prison. In February 2018, U.S. Bank entered into a deferred prosecution agreement and agreed to pay $613 million in penalties. The bank acknowledged that it had been aware of various red flags but continued to do business with Tucker, who had generated millions of dollars in profits.

A U.S. Bank spokesman declined to comment on why the company severed ties with some payday lenders between 2014 and 2016.

The OCC is the primary regulator of both Capital One and U.S. Bank, though the FDIC insures their deposits. While the payday lenders have focused their ire mostly on the FDIC, there is also evidence that OCC examiners saw relationships with payday operators as a potential risk to a bank’s reputation.

The OCC was also kept in the loop about Operation Choke Point, a Justice Department initiative that aimed to identify high-risk bank customers and cut them off from the payment system.

When Calomiris, the expert witness for the plaintiffs, was asked about U.S. Bank and Capital One, he said in an email that he would rather not speculate about particular situations based on limited information.

David Thompson, a lawyer at Cooper & Kirk who represents the payday lenders, said: “The evidence overwhelmingly proves that the federal government attempted to cut off the entire payday lending industry from the banking system. It is hardly surprising that the government would choose different pressure points for different banks to accomplish its unlawful scheme.”

Perhaps the full story will never be told, though additional documents that could shed more light remain under seal in the litigation. But in light of how events have unfolded at Capital One and U.S. Bank, the tidy narrative espoused by the payday industry warrants skepticism.

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