Probe Has Potential
Greater transparency from all financial regulators could result from a congressional probe involving the payday lending industry's fight with the FDIC, credit union industry attorneys said.
The House Committee on Oversight and Government Reform has issued a report on Operation Choke Point, a Justice Department effort that involved banking regulators trying to cut off access to bank accounts and loans for businesses deemed to be high risk, including payday lenders.
That was supposed to force them out of business, critics said, and that industry's largest trade group has sued.
According to the May 29 report from the Oversight Committee, the Justice Department enlisted federal banking regulators in the operation and eventually determined that 30 categories of business were so risky banks should not do business with them.
Some of the 30, such as Ponzi schemes and escort services, appeared to clearly be on questionable legal grounds.
However, other groups targeted, such as payday lenders, coin dealers, dating services and the sales of firearms, tobacco and fireworks, were licensed and legal businesses.
“Operation Choke Point rendered the FDIC's policy announcements extremely significant,” the House report said. “The initiative is predicated on a radical reinterpretation of the [Financial Institutions Reform, Recovery, and Enforcement Act of 1989] – that merely providing normal banking services to certain merchants creates a ‘reputational risk’ that is an actionable violation under Section 951.38 As a consequence of this reformulation, Operation Choke Point effectively transformed the FDIC guidance into an implicit threat of a federal investigation.”
The report also indicated that this tactic worked, citing copies of bank letters that payday lenders and others submitted showing that their access to banking services had been cut off.
“During recent reviews of the payday lending industry, we have determined that the services provided by clients in this industry are outside of our risk tolerance. As such, we will no longer be able to provide financial services to businesses that operate in that industry,” read one letter Fifth Third Bank sent to a payday lending firm in March.
The Community Financial Services Association of America, the trade association for the payday lending industry, and its largest member, Advance America, sued the FDIC and other regulators over the participation in the program in early June. The Oversight Committee sent the FDIC a letter on June 9 requesting more material.
The June 9 letter also challenged the testimony of acting FDIC General Counsel Richard Osterman at a hearing in May, who said the FDIC had little to no involvement in the program.
“Documents produced to the committee by the Department of Justice call into question the sincerity and truthfulness of Mr. Osterman's testimony,” the Oversight Committee wrote. “In fact, the FDIC has been intimately involved in Operation Choke Point since its inception.”
Lawyers for CUNA and NAFCU stressed they could not know how the CFSA lawsuit would go, but said it could help their efforts to bring more transparency to the regulatory supervision of credit unions.
The NCUA has said it played no role in Operation Choke Point and CFPB Director Richard Cordray told the Senate Committee on Banking, Housing and Urban Affairs on June 9 that the CFPB had played no role in the program either.
“From what I have read so far, I think this is an issue that should worry all financial institutions, no matter what sort of charter they have,” said CUNA General Counsel Eric Richard. “When you have terms as ambiguous and undefined as some of these are, the problem is in determining the boundaries for what is or is not allowed.”
For example, who decides what is a high risk for a financial institution and how is that defined and why, he asked.
Richard described what he called a “necessary balance” between prudent actions by a regulator and the open, public process of drafting and promulgating regulations.
A system too much out of balance toward granting regulator latitude for prudent action would run the risk of the regulator acting in an unaccountable way, he said.
But a system that relied only on a public regulatory process would be slow to react to developing situations and would add compliance costs, the CUNA lawyer said.
“There's a slide with regulatory latitude on one side and publicly drafted regulations on the other,” Richard said. “The argument is over how far the needle should move toward one side or the other, and right now regulators have a lot of latitude. It will be interesting to see where this [controversy] pushes the needle.”
Carrie Hunt, general counsel for NAFCU, noted that her organization has been raising concerns about the relative lack of transparency about NCUA operations for some time and said NAFCU would track the Operation Choke Point investigation.
Hunt didn't comment on the possible fate of the payday lenders’ lawsuit, but suggested the controversy could result in legislation mandating greater levels of disclosure from financial regulators, including the NCUA.