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On May 22, the FDIC announced it resolved a 2014 lawsuit brought by payday lenders that alleged that the FDIC, the OCC and the Federal Reserve abused their supervisory authority during Operation Chokepoint, an Obama Administration DOJ initiative that formally ended in August 2017 (covered by InfoBytes here) and was designed to target fraud by investigating U.S. banks and certain of their clients perceived to be a higher risk for fraud and money laundering. As previously covered by InfoBytes, in 2014, payday lenders filed a lawsuit against the federal banking agencies alleging that they participated in Operation Chokepoint “to drive [the payday lenders] out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships” with such lenders. The payday lenders argued, among other things, that the initiative resulted in over 80 banking institutions terminating their business relationships with law-abiding companies.
Along with the announcement of the tentative settlement between the parties, the FDIC released a statement summarizing the FDIC’s internal policies and guidance for FDIC recommendations to financial institutions to terminate customer deposit accounts. The statement also included a letter written to the plaintiffs’ counsel acknowledging that “certain employees acted in a manner inconsistent with FDIC policies with respect to payday lenders in what has been generically described as ‘Operation Choke Point,’ and that this conduct created misperceptions about the FDIC’s policies.” In the press announcement regarding the resolution of the case, the FDIC emphasized that neither the statement nor the letter represent a change in the FDIC’s policy and guidance, and that all “existing applicable regulations and guidance documents remain in full force and effect.” Further, while the May 21 joint status report filed in the case noted that FDIC senior leadership had not yet reviewed the agreement, the report noted that the FDIC does “not anticipate any objections.”
Additionally, on May 23, the OCC acknowledged it had been dismissed from the litigation as part of the lawsuit’s resolution.
DOJ Formally Ends Operation Chokepoint; Judicial and Financial Services Committee Leaders and Acting Comptroller of the Currency Respond
On August 16, the DOJ sent a letter to House Judiciary Committee Chairman Bob Goodlatte (R-Va.) formally announcing the DOJ’s commitment to end its initiative known as Operation Chokepoint, which was designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering. Assistant Attorney General Stephen Boyd wrote: “All of the [DOJ]’s bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again.” Boyd further reiterated that “the [DOJ] will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms-related activities.” However, criminal activity discovered as a result from responses to subpoenas may continue to be pursued by the DOJ. Additionally, the FDIC also rescinded a list identifying “purportedly ‘high-risk’ merchants” and the DOJ noted that it “strongly agrees with that withdrawal.”
On August 18, Rep. Goodlatte’s office, along with other judicial and financial services committee leaders, issued praise for the DOJ’s decision: “Targeted industries, such as firearms dealers, were presumed guilty by the Obama Justice Department until proven innocent, and many businesses are still facing the repercussions of this misguided program.”
Separately, on August 21, Acting Comptroller of the Currency Keith A. Noreika sent a letter to House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) repudiating Operation Chokepoint and claiming “the [OCC] rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.” Noreika further stated that the OCC “expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”
The DOJ’s announcement comes after years of attempts by Congressional Republicans to end the initiative as well as lawsuits filed by payday lenders over claims that regulator interpretations of “reputational risk” violated their rights to due process. (See previous InfoBytes coverage here.)
On May 25, Rep. Blaine Luetkemeyer (R-Mo.) reintroduced the Financial Institution Customer Protection Act (H.R. 2706), which would prohibit federal agencies from requesting or ordering a financial institution to terminate a banking relationship unless the regulator had material reason. H.R. 2706 would, in effect, seek to end the Department of Justice’s “Operation Choke Point” by requiring termination requests to rely on information other than reputational risk.
Notably, as previously discussed in InfoBytes, last month a group of payday lenders filed a brief with an appellate court claiming a district court judge was wrong to deny their request for a preliminary injunction against regulator activities they claim violate their rights to due process.
Payday Lenders Argue Case for Operation Choke Point Injunction, Claim Regulator Activities Violate Their Rights to Due Process
On May 19, a group of payday lenders filed a brief with the Court of Appeals for the District of Columbia claiming a U.S. district court judge was wrong to deny their request for a preliminary injunction against regulator activities they claim violate their rights to due process. (See Advance America v. FDIC, et al, 2017 WL 2212168 (C.A.D.C.).) As previously discussed in InfoBytes, the lenders claim the DOJ’s “Operation Choke Point” initiative—designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering—is a threat to their survival. The lenders’ brief alleges that federal agencies, including the DOJ and the FDIC, began as early as June 2008 to expand the interpretation of “reputation risk.” According to the lenders, reputation risk originally referred to risk to a bank’s reputation that arose from its own actions; however, the regulators expanded that to apply to risks that could arise from activities of a bank’s customers, which meant “bank servicing businesses identified as ‘high risk’ would be required to incur significant additional regulatory compliance costs and face the risk of increased regulatory scrutiny.” This, the lenders assert, became a justification to pressure banks to sever their banking relationships with payday lenders.
Notably, the U.S. district court judge refused to issue a preliminary injunction and was not persuaded that the lenders would be able to prove that these regulatory actions caused banks to deny services the lenders needed to operate.
However, the lenders claim in their brief that they can show a violation of their procedural due process rights under three theories: “stigma-plus,” “reputation-plus,” and “broad preclusion.”
- The lenders describe the “stigma-plus” theory as requiring them to show they were stigmatized in connection with an “alteration of their background legal rights” without any due process protections. They believe they can prove this occurred because they were labeled as high-risk customers and denied access to the banking system with no legal protections.
- The “reputation-plus” theory would require a deprivation of banking services in connection with defamatory statements that harmed their reputation, the lenders claim. The lenders contend this can be proved because the “’stigmatizing charges certainly occurred in the course of the termination of the accounts, which is all that is required for a reputation-plus claim to succeed.” Each lender claims to have lost a relationship with at least one bank due to false regulator claims that the relationships could threaten the bank’s stability.
- The “broad preclusion” theory also applies, the lenders assert, because the regulators’ statements to banks have prevented them “pursuing their chosen line of business.”
Furthermore, the lenders take issue with the U.S. district court judge’s position that they are required to show they lost all access to banking services in order to show a due process violation. They also argue that a loss of their constitutional right to due process is a sufficient irreparable injury to justify a preliminary injunction.
On February 23, a U.S. District Court for the District of Columbia issued a Memorandum Opinion denying a request for injunctive relief sought by a group of payday lenders to stop “Operation Choke Point” – a DOJ initiative targeting fraud by investigating US banks and the business they do with companies believed to be a higher risk for fraud and money laundering including, but not limited to, payday lenders. Payday lenders have called the initiative a coordinated effort by federal regulators to stop banks from doing business with them, thereby threatening their survival. See Advance America v. FDIC, [Memorandum Opinion No. 134] No. 14-CV-00953-GK (D.D.C. Feb. 23, 2017). According to the lenders, the Fed, FDIC, and OCC have adopted DOJ guidance on bank reputation risk and then used that guidance to exert “backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders.” The government has rejected this characterization, asserting that banks can do business with payday lenders as long as the risks are managed properly.
Evaluating the request under the due process “stigma-plus rule,” the Court focused on whether the payday lenders could show they were likely to succeed on the merits of their case and whether or not they were likely to suffer irreparable harm without the injunction.
Ultimately, the payday lenders were unable to convince the Court that they were likely to suffer the harm central to a “stigma-plus” claim. The Court reasoned that (i) the closure of some bank accounts would not be enough to constitute the loss of banking services, and that the lenders needed (and failed) to show that the loss of banking services had effectively prevented them from offering payday loans; and (ii) nearly all of the lenders were still in operation; and (iii) because the lenders were still able to find banks to work with, evidence of the possibility of future loss of banking services was too speculative to support an injunction.
The Court was also not persuaded that the lenders would be able to prove that regulatory actions caused banks to deny services to petitioners. Specifically, the Court determined that the lenders were “unlikely” to be able to set forth evidence of the “campaign of backroom strong-arming” underlying petitioners’ request for injunctive relief. Specifically, the Court noted that the lenders relied on “scattered statements,” some of which the Court characterized as “anonymous double hearsay,” to support their claims. The only direct evidence, according to the Court, was actually just “evidence of a targeted enforcement action against a single scofflaw.”
Though the Court explained that the two other factors—the balance of equities and the public interest—were of less significance in this situation, it noted in closing that “enjoining an agency’s statutorily delegated enforcement authority is likely to harm the public interest, particularly where plaintiffs are unable to demonstrate a likelihood of success on the merits.”
On July 28, the FDIC issued FIL-41-2014 to clarify its supervisory approach to bank relationships with third-party payment processors (TPPPs). In short, the letter removes the FDIC’s list of examples of merchant categories from its existing guidance and informational article. That list, which identified potential “high-risk” businesses, including firearms and ammunition merchants, coin dealers, and payday lenders, among numerous others, has been scrutinized and challenged by members of Congress in recent months. The new guidance explains the “lists of examples of merchant categories have led to misunderstandings regarding the FDIC’s supervisory approach to TPPPs, creating the misperception that the listed examples of merchant categories were prohibited or discouraged.” The FDIC’s letter continues to defend the list as “illustrative of trends identified by the payments industry at the time the guidance and article were released” and reasserts that it is the FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law.
On June 23, the DOJ released a transcript of a message delivered by Attorney General Eric Holder in which he pledged to continue investigations of financial institutions “that knowingly facilitate consumer scams, or that willfully look the other way in processing such fraudulent transactions.” These investigations are part of the DOJ’s “Operation Choke Point,” which has faced criticism from financial institutions and their advocates on Capitol Hill, and which payday lenders recently filed suit to halt. Opponents of the operation assert that the DOJ investigations, combined with guidance from prudential regulators, are targeting lawful businesses and cutting off their access to the financial system. In his remarks, the AG promised that the DOJ will not target “businesses operating within the bounds of the law,” but vowed to continue to pursue “a range of investigations into banks that illegally enable businesses to siphon billions of dollars from consumers’ bank accounts in exchange for significant fees.” Mr. Holder stated that he expects the DOJ to resolve some of these investigations in the coming months.
On June 5, the Community Financial Services Association and one of its short-term, small dollar lender members filed a lawsuit in the U.S. District Court for the District of Columbia claiming the FDIC, the OCC, and the Federal Reserve Board have participated in Operation Choke Point “to drive [the lenders] out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders.” The complaint asserts that the operation has resulted in over 80 banking institutions terminating their business relationships with CFSA members and other law-abiding payday lenders. The lenders claim that the regulators are using broad statutory safety and soundness authority to establish through agency guidance and other means broad requirements for financial institutions, while avoiding the public and judicial accountability the regulators would otherwise be subject to if they pursued the same policies under the Administrative Procedures Act’s (APA) notice and comment rulemaking procedures. The lenders assert that in doing so, the regulators have violated the APA by (i) failing to observe its rulemaking requirements; (ii) exceeding their statutory authority; (iii) engaging in arbitrary and capricious conduct; and (iv) violating lenders’ due process rights. The lenders ask the court to declare unlawful certain agency guidance regarding third-party risk and payment processors and enjoin the agencies from taking any action pursuant to that guidance or from applying informal pressure on banks to encourage them to terminate business relationships with payday lenders.
On June 9, Darrell Issa (R-CA), Chairman of the House Oversight Committee, and Jim Jordan (R-OH), an Oversight subcommittee chairman, sent a letter to FDIC Chairman Martin Gruenberg that seeks information regarding the FDIC’s role in Operation Choke Point and calls into question prior FDIC staff statements about the agency’s role. The letter asserts that documents obtained from the DOJ and recently released by the committee demonstrate that, contrary to testimony provided by a senior FDIC staff member, the FDIC “has been intimately involved in Operation Choke Point since its inception.” The letter also criticizes FDIC guidance that institutions monitor and address risks associated with certain “high-risk merchants,” which, according to the FDIC, includes firearms and ammunition merchants, coin dealers, and payday lenders, among numerous others. The letter seeks information to help the committee better understand the FDIC’s role in Operation Choke Point and its justification for labeling certain businesses as “high-risk.” For example, the letter seeks (i) all documents and communications between the FDIC and the DOJ since January 1, 2011; (ii) all FDIC documents since that time that refer to the FDIC’s 2012 guidance regarding payment processor relationships; and (iii) all documents referring to risks created by financial institutions’ relationships with firearms or ammunition businesses, short-term lenders, and money services businesses.